AP Econ - Unit 1 Study Guide

scarcity

we have unlimited wants but limited resources

Microeconomics

the study of small economic units such as individuals, firms, industries (ex: supply and demand in certain markets, production costs, etc.)

Macroeconomics

study of the large economy as a whole or economic aggregates. (ex: economic growth, govt spending, inflation, etc)

positive statements

based on facts, avoids valued judgements

normative statements

includes value judgements (what ought to be)

5 key economic assumptions

1 society had unlimited wants and desires
2 due to scarcity, choices must be made and every choice has a cost (tradeoff)
3 everyones 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

marginal analysis

Making decisions based on increments

Trade-offs

all the alternatives that we give up when we make a choice

Opportunity Cost

most desirable alternative given up when you make a choice

Utility

satisfaction

marginal

Additional

allocate

distribute

price

Amount buyer (or consumer) pays

cost

amount seller pays to produce a good

investment

the money spent by businesses to improve their production

consumer goods

created for direct consumption (ex: pizza)

capital goods

created for indirect consumption (ex: oven, blender, knives)

4 factors of production

land, labor, capital, entrepreneurship

3 economic questions

what goods and services should be produced?
how should these goods and services be produced?
who consumes these goods and services?

centrally planned economy (command)

govt owns all the resources and answers the 3 economic questions

Free market economy

little govt involvement, laissez faire approach, individuals own resources and answer the 3 questions

production possibilities curve (ppc)

a model that shows alternative ways that an economy can use its scarce resources. it graphically demonstrates scarcity, tradeoffs, opportunity costs and efficiency

productive efficiency

products are being produced in the least costly way. any point on the ppc

allocative efficiency

the products being produced are the ones most desired by society. this optimal pt on the ppc depends on the desires

3 shifters of the ppc

1 change in resource quantity or quality
2 change in technology
3 change in trade

absolute advantage

the producer that can produce the most output or requires the least amt of inputs (resources)

comparative advantage

the producer with the lowest opportunity cost

terms of trade

countries should trade if they have a relatively lower opportunity cost and should specialize in the good that is "cheaper" for them to produce

product market

the place where goods and services produced by businesses are sold to households

resource (factor) market

the place where resources (land, labor, capital, and entrepreneurship) are sold to businesses

private sector

part of the economy that is run by individuals and businesses

public sector

part of the economy that is controlled by the govt

factor payments

payment for the factors of production, namely rents, wages, interest, and profit

transfer payments

when the govt redistributes income (ex: welfare, social security, etc)

subsidies

govt payments to businesses

Leakages

situatuon in which capital or income exits an economy or system rather than remaining with it (ex: savings, tourism, imports)

law of demand

there is an inverse relationship between price and quantity demanded

Law of Supply

there is a direct or positive relationship between price and quantity supplied

normal good

ex: luxury cars, seafood, etc.
as income increases, demand increases and vice versa

inferior goods

ex: top ramen, used cars, etc
as income increases, demand falls and vice versa

shortage

quantity demanded > quantity supplied

surplus

quantity supplied > quantity demanded

price ceiling

creates shortages. sets a max legal price a seller can charge for a product

price floor

creates surplus. set min legal price a seller can sell a product

5 shifters in demand

1 tastes and preferences
2 # of consumers
3 price of related goods
4 income
5 future expectations

5 shifters of supply

1 prices/availability of inputs
2 # of sellers
3 technology
4 govt action: taxes and subsidies
5 expectations of future profit

double shift rule

if 2 curves shift at the same time, either price or quantity will be indeterminage or ambiguous