AP Micro - Unit 1

economics

• science concerning the efficient use of scarce resources to achieve the maximum satisfaction of unlimited wants

Scarcity

• Limited

• Desirable

• TINSTAAFL (There Is No Such Thing As A Free Lunch)

  • Even if no money is spent, you are still spending time, which is scarce!

  • what is being given up with this decision?

Goods and services

• Goods = tangible

• Services = nontangible

• Why do we buy these? » Utility!

Rational behavior

• People make choices that maximize their utility

  • Companies maximize profit

Marginal Analysis

• Marginal = extra, additional, one more

• What’s the effect of one more unit?

• Comparison of marginal benefit and cost

• You act on a decision if MB >= MC

Trade-offs

• All choices not taken

Opportunity Cost

• Cost of the second best choice (sum of explicit cost and implicit cost)

• explicit - what was spent on the choice you made

• implicit - what did you lose by not choosing the second best option (what could you have potentially received?)

Factors of Production

• Land

  • Any structures, property, etc. used in production

• Labor

  • Workforce

• Capital

  • Tools that labor uses in production

• Entrepreneurs

  • Make business decisions

  • Create something new (company, product, process)

  • Innovate (improve on the above)

  • Risk-bearers

Factor Payments (for all four)

• Land = rent

• Labor = wages

• Capital = interest

  • Company may borrow money to buy expensive tools, and interest on that loan is the “price” of that money

• Entrepreneur = profit (or losses)

What are two questions regarding economic systems?

• Who owns factors of production?

• Who makes economic decisions?

Command economics

• Decisions = central planning

• Ownership of resources = government

• No private property

Mixed economics

• Market aspects

  • Entrepreneurs earn profit

  • Free enterprise

  • Private Property

• Command aspects

  • Taxation

  • Regulations

  • Government assistance

Market economics

• Private Property

• Freedom (of enterprise)

• Self-Interest

• Competition

• Markets and Prices

• Active but Limited Government

• Reliance on Tech and Capital goods

What is a negative outcome of technology?

• Creative Destruction

  • When new tech destroys an old industry (cars destroy carriage industry, cellphones destroy camera industry, etc.)

“the invisible hand”

• Self-interested, mutually interdependent individuals promote the general benefit of society

• Thus, need limited government

Three basic questions of market economics

• What goods and services will be produced? (those that are profitable)

• How produced? (In the most efficient manner that uses least resources / least cost)

• Who gets them? (Those willing to pay, the market)

absolute advantage

• if two countries focused solely on producing one good with the same amount of resources, the country that can produce the most has the absolute advantage

comparative advantage

• whichever country is most efficient

• country with the lower opportunity cost

specialization

• with data on resources needed to produce, Inner divided by Outer to get opportunity cost

• with data on production, Outer over Inner

• Country with lower opportunity cost will specialize in that good, and trade with another to get the other good

terms of trade, and why is this beneficial

• Acceptable when the exchange ratio lies between both country’s opportunity costs

  • Seller will turn a profit, compensate for the OC by making more than it

  • Buyer will reduce their OC by paying less for a good

• increases total production and consumption in both nations

  • On a PPC, a higher trade possibility line will be formed

  • Both nations can now consume outside of their PPC

what is the best ‘ratio of production’ on a PPC?

• where MB = MC

utility maximization (and what trend is associated with it)

• where utils is the greatest, or where marginal utility is = 0

• Diminishing Marginal Utility: as total consumed increases, marginal utility decreases linearly

Marginal Analysis

• With a table showing inputs, outputs, and marginal benefits between two goods, go down the table and select the greatest MB and allocate a resource to it. The ‘losing’ MB will be compared to the next MB in the other column. If both are equal, choose both. Continue until all resources (like hours) are used up.

• This gives you the maximum combined output

Consumer Choice

• Consumer’s income should be allocated so that the last dollar spent on each product yields the same amount of marginal utility

• Use marginal analysis, but this time compare Marginal Utils per Dollar (MU / Price), and stop when all money has been used. You should end off at a point where MU / $ is the same, and you selected both.

• If not, then consume more of the product with the higher MU / dollar and give up more of the other product until they are equal