AP Microeconomics: Unit 1

Basic economic concepts

Scarcity

Economic problem of having unlimited human wants in a world of limited resources. Leads to the need for choices and prioritization in resource allocation.

Resources

Inputs used to produce goods and services, which are limited.

Inputs

Used in production process to create goods and services, including land, labor, capital, and entrepreneurship.

Four Factors of Production

Crazy: capital

Leopards: labor

Envy: entrepreneurship

Narwhals: natural resources/land

Labor

The human effort, both physical and mental, used in the production of goods and services.

Human Capital

The skills, knowledge, and experience possessed by an individual, contributing to their ability to perform work and drive economic value.

Physical Capital

The tangible assets used in the production of goods and services, such as machinery, buildings, and equipment.

Entrepreneurship

The ability to combine resources and take risks to create and manage new ventures, driving innovation and economic growth.

Natural Resources/Land

The raw materials and natural assets used in the production process, such as water, minerals, forests, and land.

Economics

The social science that studies how individuals, businesses, and governments make choices about allocating scarce resources to fulfill their needs and wants.

Positive Economics

Economic analysis that describes the way things are. “ie. the unemployment rate hit a three-year high.”

Normative Economics

Addresses the way things should be. “ie. The Fed should lower the federal funds rate.”

Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

Trade-Offs

What we must give up as the cost for another decision we have made. We trade it off for another outcome.

Production-Possibilities Frontier (PPF)

A curve that illustrates the trade-offs between two goods that a country can produce given limited resources. It shows maximum potential output combinations.

Efficiency

A condition where resources are allocated in a way that maximizes production and minimizes waste, ensuring that output is at its highest possible level.

Consumer Goods

Products for sale in any typical retain or consumer market and used directly by consumers. (ie. food, personal use technology, clothing, home appliances, books)

Capital Goods

Goods produced and purchased to produce other goods. (ie. industrial software, delivery trucks, factory equipment)

Specialization

Focusing on producing a specific good or service where one has a comparative advantage, leading to increased efficiency and productivity.

Productivity

The measure of the efficiency of production, typically expressed as the ratio of outputs to inputs.

Division of Labor

The separation of tasks in a production process, allowing workers to specialize in specific tasks, which increases efficiency and output.

Absolute Advantage

One entity is the most efficient at making that product in the world.

Comparative Advantage

One entity is more efficient at producing something in relation to another entity.

Consumption-Possibilities Frontier

A curve that represents the maximum combination of goods and services that can be consumed by an economy, given its resources and technology, illustrating trade-offs and opportunity costs.

Terms of trade

The ratio of a country’s export prices to its import prices.

Cost-benefit analysis

Deciding something based off of the advantages of what you put into it vs. how much you’ll get out of it

Distributive efficiency

Where resources are allocated so the distribution of goods and services is maximized for societal benefit, ensuring everyone receives the goods and services they need.

Efficiency in exchange

The degree to which goods and services are exchanged at prices that reflect their opportunity costs, ensuring optimal resource allocation between parties.

Utility

The satisfaction or pleasure derived from consuming goods and services, influencing consumer choices and demand. Is it used and enjoyed?

Marginal Utility

Additional satisfaction gained when one more unit of that product is used.

Marginal Rate Substitution

The amount of money required to purchase a good or service, reflecting its value, production costs, and demand.