AP Microeconomics U1

Basic economic concepts

Economics

the study of people and choices

Opportunity cost

choosing something where the benefits outweigh the costs

scarcity

We must make a choice because we dont have enough goods

Utility

Why you do things, “satisfaction”

Marginal

next or addition

Cost

How much it is to make a good

Price

What consumers pay for a good

4 factors of production

1. Land

2. Labor

3. Capital

4. Entrepreneurship

Trade-offs

is when you make a decision that requires trading off one goals with another

Command economy

communism, government owns all of the resources

Free market

little government intervention

Mixed economics

free market with some government intervention

Law of increasing cost

As a firm produces more output in the short run, marginal cost of producing each additional unit will eventually increase

Resources

Resources are limited, therefore we must make choices

Marginal benefit

addition benefit a consumer receives from consuming one more unit of a good or service

Marginal cost

addition cost of producing one more unit of a good or service.

MC= change in total cost/change in quantity

Absolute advantage

when a producer can produce a good using fewer resources or in less time than another producer

Comparative advantage

a producer can produce a good or service at a lower opportunity cost than another producer

Specialization

when the focus is on producing the good or service in which they have the comparative advantage in

Cost and benefit

the gain received from an action, what must be given up to take on that action

Points on ppc curve

efficient production

Points inside ppc curve

inefficient/unemployment

Points outside ppc curve

Unattainable with current resources

Diminishing marginal return

As more units of a variable input are added to a fixed input, the additional output produced by each new unit eventually decreases

Ex. A factory has 5 machines, adding 1 worker increases output by 10 units, but adding 5th only increases output by 2 units because they get in each others way

Utility maximizing rule

Marginal utility/price

Whichever has the highest marginal utility when divided by price, is the one where you should spend more on

Capital good

product used to make another product

Ex. Screwdriver