AP Econ Micro Unit 1

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Basic economic questions

What goods and services will be produced?

Whom will these goods and services be produced for?

How will these goods and services be produced?

Factors of production

Land, labor, capital (human/physical), entrepreneurship

Investment

Money spent by a firm to increase capital

Consumer goods

Created for consumption

Capital goods

Created for production

Productivity

Measure of efficiency that shows number of output per unit of input

Trade-off

When you give something up in order to have something else

Scarcity

When there is not enough of a resource available to satisfy all the various ways a society wants to use it

Marginal cost

Additional expense incurred to produce one more unit of a good or service

Marginal benefit

Cost of doing something one more time

If MC > MB, the activity should…

stop

Opportunity cost

Value of the next best alternative that you must give up when you make a particular choice

Positive economics

Economic analysis that is used to answer questions about the way the economy works → have definite right/wrong answers

Normative economics

Economic analysis that involves saying how the economy should work

Traditional economy

Production and distribution of traditional goods and services using methods passed down for generations

The Amish are an example of a _______ economy

traditional

(Free) Market economy

Production and consumption are the result of decentralized decisions made by many firms and individuals → factors of production are owned by private households rather than by the government

Singapore is an example of a _______ economy

(free) market

Command economy

Factors of production are publicly owned and central authorities make production and consumption decisions

North Korea is an example of a _______ economy

command

(Free) Market economies are commonly associated with…

capitalism

Command economies are often associated with…

communism

Efficiency

When there is no way in an economy to make some people better off without making other people worse off (doing the best it can)I

Inefficiency

When there is a way to make some people better off without making anyone worse off

Specialization

Division of tasks that allows gains from trade; allows each person to engage in a task that they are particularly good at performing

Comparative advantage

When an individual in production has the lowest opportunity cost among the producers

Absolute advantage

When an individual in production can produce more of a good with a given amount of time and resources, regardless of opportunity cost

Any price per good _______ the opportunity cost of the good producer and the opportunity cost of the good buyer will make both sides better off than in the absence of trade

between

Rational agents

consumers, producers, and others who behave rationally and make optimal decisions by incorporating opportunity costs into the decision-making process (whether explicit or implicit)

Explicit costs

Direct, out-of-pocket monetary payments for the use of resources → wages, rent, supplies, utilities, etc

Implicit costs

The opportunity costs of using resources already owned by a firm, representing the value of the next best alternative → time, assets, land

Utility

Measure of consumer satisfaction; used to understand consumer behavior but not measured explicitly in practice

Utility is sought by…

consumers

Profit

Difference between the total amount of money received in exchange for goods and services and the total cost

Profit is sought by…

firms/businesses

Revenue

Total the money a firm receives, before expenses

Sunk costs

Money that has already been spent and cannot be recovered; should be ignored in making decisions because they have no influence on future costs and benefits

Marginal analysis

Considering our decisions at the margin, or next additional unit

What is the optimal relationship between MB and MC

MB = MC

Law of diminishing marginal utility

The more of one thing we consumer, the less utility/benefit you get with each additional unit (loses value the more you get)

Marginal utility per dollar

NEEDS to be considered when comparing 2 things/products in marginal analysis

Utility maximizing rule

To maximize satisfaction, the consumer should purchase goods in the order so that the last dollar spend gives the most marginal utility