AP Microeconomics - Unit 1

Scarcity

Scarcity

The fundamental economic problem arising from limited productive resources (land, labor, capital, entrepreneurship) needed to meet unlimited wants.

Economic Resources

Four types include land, labor, capital, and entrepreneurship, all of which are scarce.

Land

Natural resources used in production; payment for land use is called rent.

Labor

Human effort in production; payment for labor is called wages.

Capital

Machinery, tools, and equipment used in production; payment for capital is called interest.

Entrepreneurship

The ability to innovate and create ideas; payment for entrepreneurship is called profit.

Opportunity Cost

The value of the next best alternative that is forgone when making a decision.

PPC (Production Possibility Curve)

A graph illustrating all production options given current resources, showing efficiency and opportunity costs.

Market Economy

An economic system where production and distribution decisions are made by individuals based on supply and demand.

Command Economy

An economic system where the government makes all production and distribution decisions.

Mixed Economy

An economic system that combines elements of both market and command economies, with decisions made by both the government and individuals.

Law of Demand

The principle that there is an inverse relationship between price and quantity demanded.

Determinants of Demand

Factors that influence demand, including tastes and preferences, number of consumers, price of related goods, and income.

Law of Supply

The principle that there is a positive relationship between price and quantity supplied.

Determinants of Supply

Factors that influence supply, including prices of resources, number of producers, technology, government intervention, and expectations of future profits.

Double Shift Rule

A principle stating that when two curves (supply and demand) shift simultaneously, either price or quantity will be indeterminate.

O.O.O Rule

A method for calculating per unit opportunity cost for output questions by placing the opposite number on top.

I.O.U Rule

A method for calculating per unit opportunity cost for input questions by placing the opposite number on the bottom.

Comparative Advantage

The ability of a country to produce a good at a lower opportunity cost than another country, leading to specialization and trade.

Increasing Opportunity Cost

A situation represented by a curved PPC, indicating that as production of one good increases, the opportunity cost of producing additional units rises.