unit 1: basic economic concepts

12th grade ap economics

economics

how an individual in society experiences limitless wants, and chooses to allocate its limited resources to satisfy wants

microeconomics

study of individual decisions and markets

macroeconomics

study of national and global economies

economic resources

- means of producing goods and services
- all natural, human, and manufactured resources that go into the production of goods and services

utility

any good or service that gives pleasure/satisfaction/usefulness

fundamental economic questions

- FOR WHOM will it be produced?
- WHAT will be produced?
- HOW will it be produced?

market economies/capitalism

- no government regulation
- decisions of individual producers and consumers largely determine what, how, and for for whom to produce
- problem: unequal distribution of power and wealth

command economies/communism

- total government regulation
- industry is publicly owned and a central authority makes production and consumption decisions

mix economies/free enterprise

government regulation and private business control the factors of production

karl marx

favored government control (command economy//communism)

john maynard keynes

favored a mixed economy

adam smith

favored a market economy (lassiez-faire)

positive statements

- objective (non-opinionated) statements that can be tested even if not true
- economists use this

normative statements

subjective (opinions) statements that can't be tested

ceteris paribus

all things stay constant

factors of production

- capital: capital goods and human capital
- entrepreneurial ability: decision maker
- land: natural resources
- labor: physical and mental talents

circular flow diagram

- product market: firms sell, households buy
- factor/resource/labor market: firms buy, households sell

households

consumers

firms

businesses/producers

powers of economic thinking

- decisions/resources cost more than you think
- all decisions are made at the margin (MC=MB)
- all decisions are rational
- the answer to most economic questions is "it depends"
- all people/businesses are maximizers

opportunity cost

- the second best option
- what one sacrifices in order to obtain what one wants

production possibility curve

- illustrates the tradeoffs facing an economy that produces only two goods
- recessions and depressions does not affect curve

productive efficiency

- producing goods and services for the lowest cost
- no resources unused
- on the curve

allocative efficiency

- more concerned with the distribution and allocation of resources among society's wants/needs
- below curve

shifters of the PPC

- resources (more=outward)
- technology
- change in trade
- investments

increasing opportunity cost

- resources are not balanced between two goods
- producing more of one good requires giving up an increasing amount of production of the other good

constant opportunity cost

- resources are balanced between two goods
- resources are easily adaptable for producing either good

absolute advantage

- ability to producing a good with fewer resources than another producer
- input/labor/factor market: smallest #
- output/goods/product market: largest #

comparative advantage

- ability to produce a good with the lowest opportunity cost
- input/labor/factor market: cross-add/smallest #
- output/goods/product market: cross-add/largest #

output opportunity cost

Other goes Over (OOO)

input opportunity cost

Other goes Under (IOU)

theory of consumer choice

- consumer is rational
- consumer is affected by diminishing marginal utility
- consumer faces constraints of income

utility maximizing rule

- should be equal to obtain greatest utility/happiness
- inequality: buy less of product with lower MUx/Px and more of product with higher MUx/Px

total utility

total amount of satisfaction obtained from consumption of a good or service

marginal utility

satisfaction or usefulness obtained from acquiring one more unit of a product

factor/resource market

where resources (capital and labor) are bought and sold

product market

goods and services are bought or sold

capital goods

goods that produce other goods for future use

consumer goods

products and services that satisfy human wants directly

marginal analysis

involves comparing marginal benefits and marginal costs