AP micro u1

based on ppt

What is the economizing problem at the individual level?

The individual's economizing problem is the combination of limited income and unlimited wants, requiring choices on how to spend resources.

Why does society's economizing problem exist?

For the economy as a whole, the economizing problem exists because resources are scarce.

What are resources in an economic context?

Resources, also known as factors of production, refer to inputs used in the production of other goods and services.

What are the four categories of resources (Factors of Production)?

1. Land: All natural resources.
   2. Labor: Physical actions and mental activities of people.
   3. Capital (Investment): Manufactured aids used in production.
   4. Entrepreneurial Ability: Human resource distinct from labor that combines the other factors.

Is money considered a resource in economics?

No. Money is not considered a productive resource because it does not produce goods or services directly; it is a medium of exchange.

What are the four assumptions of the Production Possibilities Model (PPM)?

1. Full employment: All available resources are being used.
   2. Fixed resources: Quantity and quality are constant.
   3. Fixed technology: State of methods is constant.
   4. Two goods: The economy only produces two products (Consumer and Capital goods).

In the Production Possibilities Model, what is the difference between consumer goods and capital goods?

Consumer goods satisfy wants directly (present satisfaction), while capital goods satisfy wants indirectly by providing the means to produce more in the future (future satisfaction).

What does producing anywhere along the Production Possibilities Curve (PPC) imply?

It means the economy is producing the maximum amount of goods possible given its resources, implying the economy is efficient.

What does a point inside the Production Possibilities Curve (PPC) represent?

It represents inefficiency. This means the economy has idle resources or resources are not being used to their full capacity.

What does a point to the right of/outside the PPC represent?

It represents a combination of goods that is unattainable to create with current resources and technology.

Why is the Production Possibilities Curve (PPC) typically concave (bowed-out)?

The PPC is concave because of the Law of Increasing Opportunity Costs.

What is the Law of Increasing Opportunity Costs?

As more of a particular good is produced, its marginal opportunity cost increases because resources are not perfectly adaptable to alternative uses.

Under what condition would the PPC be a straight line?

The PPC would be a straight line if opportunity costs were constant, meaning resources are perfectly interchangeable between the two goods.

What is the rule for optimal output regarding Marginal Benefit (MB) and Marginal Cost (MC)?

The optimal amount of a good is produced where Marginal Benefit (MB) equals Marginal Cost (MC) [ ( MB = MC ) ].

How is economic growth illustrated on a PPC diagram?

Economic growth is shown as a shift to the right of the Production Possibilities Curve, making previously unattainable points attainable.

How does the choice between present goods and future goods affect economic growth?

Choosing more future goods (capital, education, R&D) results in greater future growth and a larger rightward shift of the PPC compared to choosing more present goods (consumer goods).

How does international trade affect a country's PPC?

It allows countries to specialize in what they produce most efficiently and take advantage of foreign resources, leading to a rightward shift in the consumption possibilities of the curve.

What is Absolute Advantage?

The ability of an individual, firm, or country to produce more of a good or service than others using a given amount of time and resources.

What is Comparative Advantage?

The ability to produce a good or service at a lower opportunity cost than others.

What is the Principle of Comparative Advantage?

Total output will be greatest when each good is produced by the entity that has the lower opportunity cost for that good.

What is the "Other Over" formula for the Output Method of calculating opportunity cost?

When dealing with Outputs, the formula is:

Opportunity Cost of 1 A=𝐵/𝐴 of B

What is the "It Over" formula for the Input Method of calculating opportunity cost?

When dealing with Inputs, the formula is:
[ \text{Opportunity Cost of 1 A} = \frac{A}{B} \text{ of B} ]

For mutually beneficial trade to occur, where must the terms of trade fall?

The trade agreement/rate of exchange must fall between the opportunity costs of the two trading parties.

What are the primary gains of trade?

Trade allows people/nations to get more of what they want than they could if they were self-sufficient, effectively allowing them to consume beyond their own PPC.

What is Marginal Analysis in terms of choice?

The process of weighing marginal benefits and marginal costs. A rational actor chooses an action if marginal benefit is greater than marginal cost (( MB > MC )).

How is utility defined in economics?

Utility is a measure of satisfaction a consumer derives from the consumption of goods and services; it is a subjective notion.

What is Total Utility (TU) and how is it measured?

Total Utility is the overall satisfaction from consuming a certain quantity of a good, measured in utils.

What is Marginal Utility (MU)?

Marginal Utility is the change in total utility generated by consuming one additional unit of a good or service.

What is the formula for Marginal Utility (MU)?

MU = ΔTU / ΔQ

additional satisfaction (change in total utility, ΔTU) gained from consuming one more unit (change in quantity, ΔQ) of a good or service

What is the Principle of Diminishing Marginal Utility?

As a consumer increases the consumption of a good, the additional satisfaction (MU) derived from each successive unit decreases.

At what point should a consumer stop consuming a good if it is free?

The consumer should continue to consume as long as MU is positive (( MU >= 0 )). Total utility is maximized when ( MU = 0 ).

What is a budget constraint?

A budget constraint limits the cost of a consumer's consumption bundle to be no more than the consumer's income.

What is a budget line?

A downward-sloping line showing the combinations of two goods available to a consumer who spends all of their income.

What is the optimal consumption bundle?

The consumption bundle that maximizes a consumer's total utility given their budget constraint.

What is Marginal Utility per Dollar?

The additional utility received from spending one more dollar on a good or service.

What is the formula for Marginal Utility per Dollar?

[ \frac{MU}{P} \text{ (where P is the price of the good)} ]

What is the Utility Maximization Rule (Optimal Consumption Rule)?

To maximize utility, a consumer should spend all income such that the marginal utility per dollar is equal for all goods:

𝑀𝑈𝑥/𝑃𝑥=𝑀𝑈𝑦/𝑃𝑦

If ( \frac{MUx}{Px} > \frac{MUy}{Py} ), how should the consumer adjust their spending?

The consumer should buy more of good X and less of good Y. As they buy more of X, its ( MU ) will diminish until the ratios are equal.

In a budget line graph, what does inside the line and outside the line represent?

Inside the line: Affordable but income is not fully spent.
Outside the line: Unaffordable given current income and prices.

What happens to Total Utility (TU) when Marginal Utility (MU) becomes negative?

Total Utility decreases.