AP Microeconomics: Scarcity, PPC, and Trade-Offs

Economics

The study of scarcity.

Scarcity

Unlimited wants but limited resources.

Four Factors of Production

Land, Labor, Capital, Entrepreneurship.

Utility

Satisfaction.

Price

Amount the buyer pays.

Consumer Goods

Created for direct consumption.

Productivity

A measure of efficiency that shows the number of outputs per unit of input.

Microeconomics

The study of smaller units such as individuals, firms, and markets.

Macroeconomics

The study of the large economy as a whole or economic aggregates.

Trade-Offs

All the alternatives that we give up when we make a choice.

Marginal Cost

Additional cost.

Capital Goods

Created for indirect consumption.

Opportunity Cost

The most desirable alternative given up when you make a choice.

Allocate

Distribute.

Profit

Total Revenue - Total Costs.

Investment

Money spent by businesses to improve their production.

Three Economic Questions

What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

Centrally Planned Economy

Government owns all the resources and answers all the questions.

Free Market Economy

Individuals own all the resources and answer all the questions.

Economic System

The method used by a society to produce and distribute goods and services.

Mixed Economy

A system with free markets but also some government intervention.

Production Possibilities Curve (PPC)

A model that shows alternative ways that an economy can use its scarce resources.

Ceteris Paribus

Assume all other conditions remain the same.

Constant Opportunity Cost

Resources are easily adaptable for producing either good.

Increasing Opportunity Cost

As you produce more of any good, the opportunity cost will increase.

Absolute Advantage

The producer that can produce the most output or requires the least amount of inputs.

Comparative Advantage

The producer with the lowest opportunity cost.

Explicit Costs

The traditional out-of-pocket costs associated with making a decision.

Implicit Costs

The opportunity costs of making a decision.

Marginal Analysis

Making decisions based on increments.

Marginal Utility

The additional satisfaction you get by consuming additional units of goods or services.

Terms of Trade

The agreed upon conditions that would benefit both countries.

Cost-Benefit Analysis

The process used to measure the benefits of a decision minus the costs associated with making that decision.

Law of Diminishing Marginal Utility

As you consume anything, the additional satisfaction that you receive will eventually start to decrease.

Utility Maximizing Rule

The consumer's money should be spent so that the marginal utility per dollar of each good equals each other.

Marginal Benefit = Marginal Cost

When you stop consuming

Three PPC Shifters

Change in resources, technology, and trade