AP Microeconomics U1

Production possibilities curve (PPC)

model that displays the trade-offs of a simplified economy that produces only two goods
shows the maximum quantity of one good that can be produced given the quantity of the other good produced if all resources are fully and efficiently utilized

Trade-off

alternatives that are given up whenever a course of action is taken over others

Efficient

when there is no way to make some people better off without making other people worse off
efficiency for an entire economy requires both efficiencies in production and allocation

Productive efficiency (efficient in production)

condition in which average total cost is lowest of all alternatives and requires positive economic analysis
economy produces at a point that is on its PPC

Allocative efficiency (efficient in allocation)

condition in which resources are used in a way that maximizes social satisfaction or social welfare and requires normative economic analysis

Inefficient

missing the opportunity to produce more of both goods

Opportunity cost

item that must be given up to obtain some other item

Economics

study of human decision making and the role of scarcity in choice

Marginal analysis

study of the additional cost and the additional benefit of a decision
if MB \> MC, continue the behavior/activity
if MB \= MC, last decision was rational but take no further action
if MB < MC, last decision was irrational and should NOT be repeated

Marginal

"additional" or "change in"
existing conditions change when humans take an action, which is an opportunity for marginal analysis

Marginal benefit (MB)

additional benefit received from the consumption of the next unit of a good or service

Marginal return

change in output/benefit as a function of changing (production) inputs

Marginal utility

change in satisfaction as a function of incremental consumption

Marginal revenue

additional revenue or change in total revenue derived from producing one more unit of output

Marginal cost (MC)

additional cost or change in total cost derived from producing one more unit

Resources

anything used to produce something (good, service, or structure)

Land resources

natural resources that are used to produce goods and services

Labor

effort a person devotes to a task for which that person is paid

Physical capital

resource (including technology) used to produce other goods and services

Entrepreneurship

leaders that combine the factors of production and takes the initiative, innovates, and bears risk for profit

Human capital

skills and knowledge gained by a worker through education and experience

Production point

specific quantity of output that may or may not be possible given available resources (on or inside PPC)

Production possibilities

expression of the trade offs associated with the decision to do one thing rather than another thing

What does it mean to shift out the PPC

more can be potentially produced as the PPC extends the outer bounds of what is theoretically possible

What causes a country's PPC to shift

changes in technology, efficiency, resources (land, labor, or capital), and management (government regulations or restrictions)

Consumption possibilities curve (CPC or trading possibilities curve)

model that shows the increases the amount of goods that are available for each country to consume

Specilization

concentrating on one specific good or service

Comparative advantage

producer with the lowest per-unit opportunity cost

Absolute advantage

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

Trade

exchange of goods and services

Gains from trade

people can get more of what they want through trade than they could if they tried to be self-sufficient

Microeconomics

decisions made by individuals (consumers & producers) in product and resource markets

Macroeconomics

aggregate effect of ALL decisions made by consumers, firms, and institutions

Scarcity

when human desires (unlimited) is greater than resources (limited) and is the reason why decisions are made

What is the role of money in an economy

used as a claim on resources and outputs; can help facilitate (simplify) exchange
NOT a resource

What are the three production questions

WHAT to produce
HOW to produce
FOR WHOM to produce

Traditional economy

production is based on customs and traditions and economic roles are typically passed down from one generation to the next

Command economy

government controls a country's economy

Market economy

economic decisions are made by individuals or the open market

Mixed economy

private enterprise exists in combination with a considerable amount of government regulation and promotion

When does system efficiencies improve

when there are many buyers and sellers (no monopolies), symmetrical information (buyers and sellers are well-informed), competition, and no external costs

Decreasing

measurement that signifies "less than before"

Diminishing

slowing rate of increase (total is increasing, but increasing slower than before)

Principle of increasing opportunity cost

once all factors of production (land, labor, capital, and entrepreneurship) are at maximum output and efficiency, producing more will cost more than average

Principle of diminishing returns

adding more of one factor of production, while holding all others constant will at some point yield lower incremental per-unit returns

Principle of diminishing marginal utility

as an individual consumes more of a good, the marginal benefit of each additional unit of that good decreases

Normative economics

judgments are opinion based, so they cannot be proved or disproved

Positive economics

judgments must be able to be tested and proved or disproved

Fallacies of composition

when one infers that something is true of the whole

Fallacies of causation

when one infers causation from correlation

Specialization and division of labor

when different people in society take on specific roles or jobs that require unique skill sets

Mutually beneficial terms of trade

range of acceptable exchange rates

Mutually beneficial exchange rate

specific, agreed upon exchange rate

Exports

goods and services sold to other countries

Imports

goods and services purchased from other countries

"Invisible hand"

describes the process that turns self-directed gain into social and economic benefits for everyone

Circular flow of economic activity

model that shows the relationship between households and businesses in a free market economy

Product market

market in which households purchase the goods and services that firms produce

Resource market (factor market)

markets in which the services of factors of production are bought and sold

Households

consuming units in an economy

Businesses (firms)

entities that purchase resources and provide goods and services to the economy

Corporation

business owned by stockholders who share in its profits but are not personally responsible for its debts

Sole proprietorship

business owned and operated by one person

Partnership

business in which two or more persons combine their assets and skills and agree upon a division of profit and responsibilities

Cooperative

business that is owned by the members it serves and is managed in their interest

Government sector

part of the economy that collects taxes and provides and manages public services

International trade sector

part of the economy that deals with trade with other nations

Autarky

situation in which a country does not trade with other countries and is therefore economically self-sufficient

Interdependence

relationship between countries in which they rely on one another for resources, goods, or services

Private property

property owned by individuals or companies, not by the government or the people as a whole

Distribution of income

spread of different incomes among individuals and different income groups in the economy

Voluntary exchange

situation when both the buyer and the seller of a product are made better off by the transaction

Price

amount the consumer pays to acquire a good/service

Cost

amount a business pays to produce or acquire a good/service to sell to consumers

Shortage

temporary situation where producers will not or cannot offer goods/services at a given price

Investment

money spent by businesses to improve their production

Technology

shifts PPC and increases output

Ceteris Paribus

all other things stay the same except the things being studied

Input PPC

PPC that uses the least amount of resources to produce a product

Output PPC

PPC that produces the most amount of products given an amount of resources