AP micro - unit 1 vocab

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Economics
the science of scarcity
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Scarcity
we have unlimited wants but limited resources
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What is economics the study of?
the study of choices
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Textbook definition of economics
Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants
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Microeconomics
**Study of small economic units such as individuals, firms, and industries (ex: supply and demand in specific markets, production costs, labor markets, etc.)**
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Macroeconomics
**Study of the large economy as a whole or economic aggregates (ex: economic growth, government spending, inflation, unemployment, international trade etc.)**
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How is economics used
Economists use the scientific method to make generalizations and abstractions to develop theories **(theoretical economics)**
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Policy economics
These theories that they developed are then applied to fix problems or meet economics goals
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Positive Statements
Based on facts/Avoids value judgements (**what is**)
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EX of Positive Statements
**gallon of gas at mobil is 3.70**
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Normative Statements
Includes value judgements (what ought to be/what people wish/what people think)
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EX of Normative Statements
**gas price are too high**
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5 Key economic assumptions

1. Society has unlimited wants and limited resources (scarcity)
2.  Due to scarcity, choices must be made. Every choice has a cost (a trade-off)
3.  Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest”
4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice
5.  Real-life situations can be explained and analyzed through simplified models and graphs 
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What does marginal mean in economics
additional
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marginal (additional) analysis:
**making decisions based on increments (thinking on the margin)**
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What will you do when the marginal benefit is greater than the marginal cost?
**You will continue to do something as long as the marginal benefit is greater than the marginal cost**
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what does ceteris paribus mean?
Hold everything else constant
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Trade-offs:
**ALL the alternatives that we give up when we make a choice**
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Opportunity Cost:
**most desirable alternative given up when you make a choice**
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Definition of Utility in economics:
Satisfaction/happiness
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definition of allocate in economics:
**Distribute**
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What is price?
**Amount buyer (or consumer) pays**
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What is cost?
**Amount seller pays to produce a good**
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Investment meaning
the money spent by BUSINESSES to improve their production
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What are consumer goods?
**created for direct consumption (example: pizza) - economy depended on one good is bad**
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What are capital goods?
created for indirect consumption (oven, blenders, knives, etc)
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Land (four factors of production):
**All natural resources that are used to produce goods and services (Ex: water, sun, plants, animals)**
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Labor (four factors of production):
**Any effort a person devotes to a task for which that person is paid (Ex: manual laborers, lawyers, doctors, teachers, waiters, etc.)**
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Physical Capital (four factors of production):
**Any human-made resource that is used to create other goods and services ( Ex: tools, tractors, machinery, buildings, factories, etc.)**
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Human Capital (four factors of production):
**Any skills or knowledge gained by a worker through education and experience** 
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Entrepreneurship (four factors of production):
**ambitious leaders that combine the other factors of production to create goods and services**
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What do Entrepreneurs do?
**Entrepreneurs:**


1. ==**Take The Initiative**==
2. ==**Innovate**==
3. ==**Act as the Risk Bearers**==

**So they can obtain ____Profit_____.**
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How to calculate profits?
Revenue - Costs
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What are the three questions every society must answer?

What do the answers to these questions determine?

1. **What goods and services should be produced?** 
2. **How should these goods and services be produced?** 
3. **Who consumes these goods and services?**

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**The way these questions are answered determines the economic system.**
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What is an economic system?
**An** __**economic system**__ **is the method used by a society to produce and distribute goods and services.**
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What are the three economic systems?

1. **Centrally-Planned (Command) Economy**
2. **Free Market Economy**
3. **Mixed Economy**
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What does the government do in a centrally-planned (communist)?

1. **owns all the resources**
2. **answers the three economic questions**
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Why do centrally planned economies face problems of poor-quality goods, shortages, and unhappy citizens?
**There is little incentive to work harder and central planners have a hard time predicting preferences.**
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**What is GOOD about Communism?**

1. **Low unemployment - everyone has a job**
2. **Great Job Security -  the government doesn’t go out of business**
3. **Less income inequality**
4. **“Free” Health Care**
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What is BAD about communism?

1. **No incentive to work harder**
2. **No incentive to innovate or come up with good ideas**
3. **No Competition keeps quality of goods poor.**
4. **Corrupt leaders**
5. **Few individual freedoms**
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Characteristics of a Free Market (Capitalism):

1. **Little government involvement in the economy. (Laissez Faire = Let it be)**  
2. **Individuals OWN resources and answer the three economic questions.**
3. **The opportunity to make PROFIT gives people INCENTIVE to produce quality items efficiently.**
4. **Wide variety of goods available to consumers.** 
5. **Competition and Self-Interest work together to regulate the economy (keep prices down and quality up).**
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Example of how the free market regulates itself:
**If consumers want smartphones and only one company is making them…** 

* **Other businesses have the INCENTIVE to start making smartphones to earn PROFIT.** 
* **This leads to more COMPETITION….**
* **Which means lower prices, better quality, and more product variety.** 
* **We produce the goods and services that society wants because “resources follow profits”.**

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==**The End Result: Most efficient production of the goods that consumers want, produced at the lowest prices and the highest quality.**==
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Example of why communism failed:
**If consumers want smartphones and only one company is making them…** 

* **Other businesses CANNOT start making computers.** 
* **There is NO COMPETITION….**
* **Which means higher prices, lower quality, and less product variety.** 
* **More phones will not be made until the government decides to create a new factory.**

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==**The End Result: There is a shortage of goods that consumers want, produced at the highest prices and the lowest quality.**==
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How do producers and consumers act in a capitalist society?
**Producers and consumers act in their own self-interest and make adjustments automatically**
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The Invisible Hand
**The concept that society’s goals will be met as individuals seek their own self-interest**
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EX of The Invisible Hand:
**Society wants fuel efficient cars…**

* **Profit seeking producers will make more.**
* **Competition between firms results in low prices, high quality, and greater efficiency.** 
* **The government doesn’t need to get involved since the needs of society are automatically met.** 

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==**Competition and self-interest act as an invisible hand that regulates the free market.**==
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What is a Mixed Economy?
**A system with free markets but also some government intervention.** 

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==**(Almost all countries, including the US, have mixed economies)**==
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Does Productivity create Wealth?
**Yes, countries with free markets, property rights, and The Rule of Law, have historically seen greater economic growth because they are more productive**
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What do we use economic models for?
**Step 1: Explain concept in words**

**Step 2: Use numbers as examples**

**Step 3: Generate graphs from numbers**

**Step 4: Make generalizations using graph**
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What is a production possibilities curve?
**A** __**production possibilities curve**__ **(or frontier) is a model that shows alternative ways that an economy can use its scarce resources**
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What does a production possibilities curve demonstrate?
**This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency**
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4 Key Assumptions of a production possibilities curve:

1. **Only two goods can be produced** 
2. **Full employment of resources**
3. **Fixed Resources (*****Ceteris Paribus*****)**
4. **Fixed Technology**
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What does each point on the **Production “Possibilities” Table represent?**
**Each point represents a specific combination of goods that can be produced given full employment of resources.**
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What does it mean if the point is inside the graph?
It is inefficient/unemployment
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What does it mean if the point is on the graph?
It is efficient
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What does it mean if the point is outside the graph?
Impossible/unattainable (given current resources)
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Constant Opportunity Cost
**Resources are easily adaptable for producing either good**
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How does a Constant Opportunity Cost graph look like?
Result is a straight line PPC (not common)
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Law of Increasing Opportunity Cost and why
As you produce more of any good, the opportunity cost (forgone production of another good) will increase because **Resources are NOT easily adaptable to producing both goods.**
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How does a Law of Increasing Opportunity Cost graph look like
**Result is a bowed out (Concave) PPC**
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Productive Efficiency

1. **Products are being produced in the least costly way.** 
2. **This is any point ON the Production Possibilities Curve**
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Allocative Efficiency
* **The products being produced are the ones** ***most desired by society.***
* **This** ***optimal*** **point on the PPC depends on the desires of society**
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3 Shifters of the PPC

1. **Change in resource quantity or quality**
2. **Change in Technology**
3. **Change in Trade**
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Why do people trade?

it is mutually beneficial and are able to get things you don’t produce yourself

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What does more access to trade mean?

It means more choices and a higher standard of living

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What would life be like if cities couldn’t trade with cities or states couldn’t trade with states?

Limiting trade would reduce people’s choices and make people worse off

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What is specialization?

country only making one thing they are good at one thing

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What does Per Unit Cost equal to?

Opportunity cost/units gained

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Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt?

$10 per shirt

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What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up? (Instead of producing 5 shirts you could have made 10 hats)

1 shirt costs 2 hats

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What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up? (Instead of producing 5 shirts you could have made 10 hats)

1 hat costs half a shirt

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Absolute Advantage

The producer that can produce the most output OR requires the least amount of inputs (resources)

EX: Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20.

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Comparative Advantage

The producer with the lowest opportunity cost

EX: Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost.

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How to do Output Questions

OOO (Output: Other goes Over)

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How to do Input Questions

IOU (Input: Other goes Under)

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What does Inside the Curve mean?

Inefficient/unemployment

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What would happen if technology improves in pizza oven in a society where they produce pizza and computers

the production of computers would stay the same but the production of pizza would increase

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what if there is new computer making technology in a society where they produce pizza and computers

Increase in production of computers but pizza stays the same

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What if there is a decrease in the demand for pizza in a society where they produce pizza and computers

The Curve doesn’t shift! A change in demand doesn’t shift the curve


(If you see demand, it’s movement among the curve)

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What if madcow kills 85% of the population of cows in a society where they produce pizza and computers

A shift inward only for Pizza

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what if there was a Destruction of power plants in a society where they produce capital goods and consumer goods?

decrease in resources and decrease in production

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What if there was faster computer hardware in a society where they produce capital and consumer goods?

Quality of a resource improves shifting the curve outward

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what if many people were unemployed in a society where they produce capital and consumer goods?

The curve doesn’t shift! Unemployment is just a point inside the curve

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What if there was an increase in education in a society where they produce capital and consumer goods?

The quality of labor is improved. Curve shifts outward

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The Product Market

The “place” where goods and services produced by businesses are sold to households

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The Resource (Factor) Market

The “place” where resources (land, labor, capital, and entrepreneurship) are sold to businesses

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Private Sector

Part of the economy that is run by individuals and businesses

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Public Sector

Part of the economy that is controlled by the government

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Factor Payments

Payment for the factors of production, namely rent, wages, interest, and profit

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Transfer Payments

When the government redistributes income (ex: welfare, social security)

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Subsidies

Government payments to businesses

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Do individuals supply or demand?

Both, they demand products and supply resources

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Do business supply or demand?

Both, the supply products and demand resources

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Who demands in the product market?

Individuals and the government

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Who supplies in the product market?

Businesses