AP Microeconomics Unit 1: Scarcity, PPC, Trade & Marginal Analysis

What is the core problem of economics?

Scarcity: human wants are unlimited, but resources are finite.

What are the four factors of production?

Land, Labor, Capital, and Entrepreneurship.

Define 'Land' in the context of factors of production.

All natural resources provided by nature, such as water, crude oil, and agricultural land.

What does 'Labor' refer to in economics?

The human effort, work, and time devoted to the production process.

Differentiate between Physical Capital and Human Capital.

Physical Capital: man-made durable goods used in production; Human Capital: knowledge and skills accumulated by workers.

What is 'Entrepreneurship' in economic terms?

The effort that innovates, takes risks, and combines land, labor, and capital to create businesses.

What is opportunity cost?

The value of the next-best alternative given up when a choice is made.

What are Explicit Costs?

Direct, out-of-pocket monetary payments made for resources or goods.

What are Implicit Costs?

The monetary value of forgone opportunities when a resource is used in its current capacity.

What is the formula for Economic Profit?

Economic Profit = Total Revenue − (Explicit Costs + Implicit Costs).

What does Marginal Analysis involve?

Evaluating small, incremental changes in decision-making.

What is the Optimal Decision Rule?

Continue an activity as long as Marginal Benefit (MB) ≥ Marginal Cost (MC).

What does the Law of Diminishing Marginal Utility state?

Additional satisfaction from consuming more units decreases with each successive unit.

What is the Utility Maximization Rule?

Consumers allocate spending such that marginal utility per dollar spent is equal across all goods.

What does the Production Possibilities Curve (PPC) illustrate?

The trade-offs, efficiency, and scarcity of an economy producing two goods.

What does a point on the PPC represent?

Efficient use of resources and maximum productive efficiency.

What does a point inside the PPC indicate?

Inefficient use of resources or unemployment.

What does a point outside the PPC signify?

An unattainable production level given current resources and technology.

What is the difference between Constant and Increasing Opportunity Cost?

Constant: resources are easily adaptable; Increasing: resources are specialized and not easily interchangeable.

What causes an outward shift of the PPC?

An increase in the quantity or quality of resources or advances in technology.

What are the three fundamental economic questions every system must answer?

What to produce? How to produce it? Who gets to consume it?

Define a Command Economy.

An economy where the central government owns resources and controls planning.

Define a Market Economy.

An economy driven by individual incentives, profit, and decentralized decision-making.

What is Absolute Advantage?

The ability to produce more of a good using the same quantity of resources.

What is Comparative Advantage?

The ability to produce a good at a lower opportunity cost than another producer.

How do you calculate Opportunity Cost in output problems?

Opportunity Cost of Good A = Good B / Good A.

How do you calculate Opportunity Cost in input problems?

Opportunity Cost of Good A = Good A / Good B.

What must the terms of trade lie between for trade to be mutually beneficial?

The agreed terms must lie strictly between the opportunity costs of the two trading partners.