AP Micro Unit 1 review

Scarcity

Limited availability of resources

All scarce items

land, labor, capital, entrepreneurship. They are finite and we need them to produce goods and services. Our wants are unlimited

Fundamental problem in economics

scarcity

Land

all of the resources found in nature. Payment for use of land is called rent

Labor

human effort. Payment for the use of labor is called wages

Capital

machinery, tools, equipment. Payment for the use of capital is called interest

Entrepreneurship

innovation, ideas, Payment for entrepreneurship is called profit

All types of income

Rent, wages, interest, profit

NOT an economic resource

Consumer goods, waste, money, stocks and bonds

The fact of scarcity means that every economy faces critical decisions about…

1. What to produce

2. How to produce

3. How to allocate the goods and services

Command economy

economic system where government plans and controls the production and distribution of goods and services

Market economy

Economic system in which production and prices are determined by the interactions of citizens and businesses in the marketplace.

mixed economy

private enterprises operate in a market environment, while the government plays a role in regulating certain sectors and providing public goods and services

Characteristics that define market economies

1. private ownership of resources

2. Market prices direct resource use

3. income depends on individual resources and is an incentive. Unemployment and inequality are tolerated.

4. International specialization promotes competition and holds costs/prices down

5. Prices fluctuate with supply and demand in markets

Opportunity cost

The value of the foregone (next best) option

Absolute Advantage

The ability to produce more of a good/service than someone else, in the same amount of time

Comparative advantage

the ability to produce something at a lower opportunity cost than someone else, given the same resource