AP Micro u1 (og)

based on ppt

What is the "economizing problem" for an individual?

The combination of limited income and unlimited wants.

Why does society as a whole face an economizing problem?

Because resources are scarce.

In economics, what is the definition of "Resources"?

Inputs that are used in the production of other goods and services.

What are the four categories of resources (factors of production)?

1. Land
   2. Labor
   3. Capital
   4. Entrepreneurial ability

Define the resource "Land" in economic terms.

Includes all natural resources used in the production process (e.g., minerals, water, forests).

Define the resource "Labor" in economic terms.

The physical actions and mental activities that people contribute to production.

Define "Capital" (or investment) in economics.

All manufactured aids used in production, such as tools, machinery, and buildings.

Is money considered an economic resource?

No. Money is not even considered a resource because it is not productive; it is merely a medium of exchange.

What is "Entrepreneurial ability"?

A special human resource, distinct from labor, that combines resources, innovates, makes non-routine decisions, and takes risks.

What are the four primary assumptions of the Production Possibilities Model?

1. Full employment
   2. Fixed resources
   3. Fixed technology
   4. Two goods (Consumer and Capital).

What does producing on the blue line of a Production Possibilities Curve (PPC) represent?

The economy is efficient and producing the maximum possible amount of both goods.

What does a point inside the PPC represent?

Inefficiency. This implies the economy has idle resources or resources are not being used to their full capacity.

What does a point to the right (outside) of the PPC represent?

A combination of goods that is unattainable or impossible to create with current resources and technology.

Why is the PPC typically concave (bowed out) to the origin?

Because of the Law of Increasing Opportunity Costs.

Define the Law of Increasing Opportunity Costs.

As more of a particular good is produced, its marginal opportunity costs increase because resources are not perfectly adaptable to all uses.

What would the PPC look like if opportunity costs were constant?

The PPC would be a straight line.

How does an economy decide on the optimal output of a good (e.g., pizza)?

By comparing Marginal Benefit (MB) to Marginal Cost (MC). The optimal amount is where ( MB = MC ).

Graphically, how is economic growth shown on the PPC?

As a shift to the right of the entire curve.

What is the benefit of a rightward shift in the PPC?

Points that were once unattainable become attainable, leading to a higher standard of living.

How do "present choices" affect "future possibilities" on a PPC?

Choosing to produce more future goods (capital, education, R&D) leads to greater economic growth than choosing present consumer goods.

Define "Present Goods" vs. "Future Goods."

Present Goods: Satisfy needs today (e.g., consumer goods).
Future Goods: Satisfy future needs by increasing production capacity (e.g., machinery, education).

How does international trade affect a country's PPC?

It enables countries to specialize in what they produce most efficiently, essentially acting like an increase in resources and shifting the curve rightward.

Define Absolute Advantage.

When an individual or country can produce more of a good or service in a given amount of time/resources than another.

Define Comparative Advantage.

When an individual or country has a lower opportunity cost in producing a good or service than others.

What is the "Other Over" formula for calculating opportunity cost using the Output Method?

( \text{Opportunity Cost of 1A} = \frac{B}{A} \text{ of B} ).

What is the "It Over" formula for calculating opportunity cost using the Input Method?

( \text{Opportunity Cost of 1A} = \frac{A}{B} \text{ of B} ).

According to the Principle of Comparative Advantage, when is total output greatest?

When each good is produced by the entity that has the lower opportunity cost.

If Washington has an opportunity cost of 1 Apple = .25 Timber, and Oregon has 1 Apple = 4 Timber, what is the range for the terms of trade for 1 Apple?

Somewhere between .25 and 4 Timbers.

For trade to be mutually beneficial, the trade agreement must fall where?

Between the opportunity costs of each country.

What happens to a state's consumption possibilities with trade?

They can consume well beyond their own Production Possibilities Curve (PPC).

Define Marginal Analysis.

Weighing the marginal benefit against the marginal cost; a choice is rational if MB > MC.

What is "Utility" in economics?

A subjective measure of the satisfaction a consumer derives from the consumption of goods and services.

What is the unit of measurement for Total Utility (TU)?

Utils.

What is a "consumption bundle"?

The combination of goods and services a consumer chooses to consume.

Define Marginal Utility (MU).

The change in total utility generated by consuming one additional unit of a good or service.

What is the formula for Marginal Utility (MU)?

( MU = \frac{\Delta \text{Total Utility}}{\Delta \text{Quantity}} ) [ ( \frac{\Delta TU}{\Delta X} ) ].

Define the Principle of Diminishing Marginal Utility (DMU).

Each successive unit of a good or service consumed adds less to total utility than the previous unit.

What does a negative Marginal Utility imply?

Consumption of that unit will actually decrease total satisfaction (happiness).

As long as ( MU \ge 0 ), a rational consumer will…

Choose to consume the item, as it still adds to (or maintains) total utility.

What is a Budget Constraint?

A limit that restricts the cost of a consumer's consumption bundle to no more than the consumer's income.

What is a Budget Line?

A downward-sloping line showing all consumption bundles available to a consumer who spends all of their income.

Where is an affordable bundle located in relation to the budget line?

On or inside the budget line.

What is an Optimal Consumption Bundle?

The bundle that maximizes total utility given the consumer's budget constraint.

Define "Marginal Utility per Dollar."

The additional utility gained from spending one more dollar on a specific good or service.

What is the formula for Marginal Utility per Dollar?

( \frac{MU}{P} ) (Marginal Utility divided by Price).

What is the Utility Maximization Rule (Optimal Consumption Rule)?

Consumers should spend all income such that:
[ \frac{MUx}{Px} = \frac{MUy}{Py} ]

If one good provides more utility per dollar than another, what should a rational consumer do?

Buy more of that good; as more is bought, its MU will diminish until the utility per dollar equals that of the other product.