AP Micro Unit 1.1 What is Economics?

Created from Mrs. Chaiken's practice sets.

Economics

The study of how people make decisions, based on needs and wants, due to limited resources

Opportunity Cost

The best alternative that we forgo, or give up, when we make a choice or a decision. The next best thing you had to give up to do the action you chose.

Ex: You gave up an opportunity to practice your guitar in order to study.

Trade Offs

All the things and alternatives that we give up whenever we choose one course of action over others. Sacrificing one good for another (often times time or money)

Scarcity

The condition in which our wants are greater than our limited resources.

Micro

The study of small economic units such as individuals, firms, and markets

Macro

The study of the entire economy as a whole or economic aggregates.

Key Assumption #1

Society’s needs and wants are unlimited, but ALL resources are limited (scarcity).

Key Assumption #2

Due to scarcity, choices must be made. Every choice has a cost (trade-off). In order to gain something, you must give up something.

Key Assumption #3

Everyone’s goal is to make choices that maximize their satisfaction, everyone acts in their own self-interest.

Key assumption #4

Everyone acts rationally by comparing the marginal costs + benefts of each choice.

Factos of Production are the…

resources needed to produce all goods and services.

Land

The natural resources used in making a product.

Ex: vegetation, animals, soils, minerals, water

Labor

Work people are paid to do to produce goods + services. The labor force is all people who work for money

Ex: manual laborers, lawyers, doctors, etc.

Capital

Manufactured goods and resources used to produce goods and services

Ex: tools, machines, and factories

Factor Market

Refers to markets where services of the factors of production are bought and sold.

Ex: labor markets, the capital market, the market for raw materials

Product Market

Where goods and services produced by businesses are sold to households.

Ex: streaming subscriptions, coffee, fast foods, and automobiles

Subsidies

Financial payments made by the government to a private producer/consumer to encourage the production/consumption of a specific good or service.

Household

The owners of economic resources and the consumers of finished goods.

Firm

The business entities that produces goods and services.

Investment

The money spent by BUSINESSES to improve their production.

Ex: spending $1 million on a new factory and tools

Rival Goods

One person consuming a unit means no one else can consume that same unit.

Ex: a slice of pizza, if you eat the pizza, your friend cannot eat it.

Nonrival Goods

One person’s consumption does not reduce its availability/usefulness to other

Ex: digital streaming