AP Econ Unit 1 Vocab

Positive Economics

Economic statements that are testable through empirical evidence.

Normative Economics

Subjective opinions that cannot be proven true or false.

Product Market

“Place” where goods and services produced by businesses are sold to households.

Resource (Factor) Market

“Place” where resources (land, labor, capital, entrepreneurship) are sold to businesses.

Economics

The science of scarcity - the study of choices.

Scarcity

The limitedness of resources - unlimited wants, limited resources - forces us to make choices.

Microeconomics (mostly US)

Study of small economic units such as individuals, firms, and markets - how they work/coexist

Macroeconomics (US and Global)

Study of large economy as a whole - more headline and government stuff

Tradeoff

The entire list of alternatives to a decision

ALL decisions involve trade-offs

Opportunity Cost

Most desirable alternative given up when you make a choice

Price

Amount buyer/consumer pays (consumer perspective)

Cost

Amount seller pays to produce a good (producer perspective)

Investment

The money spent by businesses to improve their production

Consumer Goods

Created for direct consumption (ex: pizza)

Capital Goods

Created for indirect consumptions (ex: oven)

5 Key Economic Assumptions:

1. Society has unlimited wants and limited resources (scarcity exists)

2. Due to scarcity, choices must be made. Every choice has a cost (a tradeoff)

3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self interest” (rational actors)

4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice (cost/benefit analysis)

5. Real-life situations can be explained and analyzed through simplified models and graphs (makes easier to understand with a tradeoff of absolute accuracy)

4 Factors of Production

1. Land - All natural resources used to produce goods and services

2. Labor - Effort a person devotes to a task for which that person is paid

3. Capital - Physical: human made resources used to create other goods and services. Human: skills or knowledge gained by a worker through education and experience.

4. Entrepreneurship - Ambitious leaders that combine the other factors of production to create goods and services.

Economic System

Method used by society to produce and distribute goods and services

3 Economic Questions

1. What goods and services should be produced?

2. How should these goods and services be produced?

3. Who consumes these goods and services?

Command Economy

Government owns all resources and answers the 3 economic questions (Ex: North Korea)

Free Market Economy

Little to no government involvement in the economy, individuals own resources and answer the 3 economic questions

Laissez Faire

Let it be (relates to free market economies)

Mixed Economies

A system with free markets but also some government intervention (almost all countries)

Private Sector

Part of the economy that is run by individuals and businesses

Public Sector

Part of the economy run by the government

Factor Payments

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

Transfer Payments

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

Subsidies

Government payments to businesses (Ex: agricultue, airlines)

Production Possibilities Curve (PPC)

A model that shows alternative ways that an economy can use its scare resources

Concave PPC

Shows increasing opportunity costs

Constant Opportunity Cost PPC

Resources are easily adaptable for either good

Convex PPC

Decreasing opportunity cost, specialization

3 Shifters of PPCs

1. Change in resource quantity or quality

2. Change in technology

3. Change in trade

Per Unit Opportunity Cost

Opportunity costs / Units gained

Productivity

A measure of efficiency that shows the number of outputs per unit of input

Absolute Advantage

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

Comparative Advantage

The producer with the lowest opportunity cost of production

Terms of Trade

The agreed upon conditions that would benefit both countries

What are the advantages of specialization and trade?

Being able to specialize in 1 item and trade for another allows for higher production and overall more products gained

Why do businesses and countries work to improve their productivity?

Since all resources are scarce, improving productivity allows us to produce more stuff with fewer resources

Output Question

Amount of input is the same for both countries, only the OUTPUT is different.

OOO = Output: Other goes Over

Input Question

The amount of output is the same for both countries, only the INPUT is different.

IOU = Input: Other goes Under

How should absolute and comparative advantage be used to inform decisions about specialization and trade?

Countries should specialize and trade when they see a relatively lower opportunity cost

How do you find the terms of trade?

The terms of trade has to be in between the 2 countries opportunity costs

Explicit Costs

The traditional out of pocket costs associated with making a decision

Implicit Costs

The value of the opportunity costs of making a decision

Utility

The amount of satisfaction or enjoyment consumers receive from the goods or services they consume

Total Benefits

The total amount of satisfaction people receive from all the goods and services they use

Total Costs

Include the time, effort, and expense spent to obtain the goods and services

Optimal Choice

The level at which you receive the greatest benefit for the least cost

Total Net Benefits

Total benefit - Total costs

Marginal Analysis

Making decisions based on increments

Marginal Benefit

The amount of satisfaction people receive from increasing their consumption by 1 unit of the good or service

Marginal Cost

The time, effort, and expense spent to obtain 1 additional unit of the good or service

Law of Diminishing Marginal Utility

As you consume anything, the additional satisfaction that you’ll receive will eventually start to decrease

Utility Maximization Rule

Consumers money should be spent so that the marginal utility per dollar of each goods equal each other

Utility Maximization Rule Equation

MUx/P_x = MUy/P_y