Unit 1: Basic Economic Concepts (Princeton Review AP Macroeconomics 2023 [21st Edition])

Scarcity

The fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. It forces individuals and societies to make choices about how to allocate resources efficiently.

Factors of Production

The resources, including land, labor, capital, and entrepreneurship, used to produce goods and services in an economy.

Capital

manufactured goods that can be used in the production process like tools, equipment, buildings, and machines

Labor

the physical and mental effort of people, including human capital, the knowledge and skill acquired through training and experience

Entrepreneurship

the ability to identify opportunities and organize production and the willingness to accept risk for pursuit of reward

Land (Natural Resources)

productive resource existing in nature like plants, mineral deposits, wind, and water

Economics

the study of how societies allocate scarce resources to satisfy unlimited wants and needs

Positive Economics

describes the way the economy actually works, focusing on observable phenomena and measurable outcomes

Normative Economics

the branch of economics that examines what ought to be rather than what is, focusing on value judgments and opinions about economic policies

PPC Curve

a graphical representation of the production possibilities of an economy, illustrating the trade-offs between two goods

Opportunity Cosy

the benefit foregone from choosing one option over another, often expressed as what is sacrificed

Points Inside the PPC

inefficient

Points On the PPC

efficient

Points Outside the PPC

unobtainable

What does absolute value indicate on the PPC curve?

average opportunity cost between two points

Consumer Goods

products that are used by consumers to satisfy their needs and wants

Capital Goods

manufactured goods used to produce other goods and services

Specialization

the process of concentrating on a particular activity or product to improve efficiency and productivity

Productivity

the measure of output produced per unit of input, often assessed over time in economic terms

Division of Labor

the separation of tasks in production processes, allowing workers to specialize in specific tasks to increase efficiency and output

Absolute Advantage

the ability of an individual or group to carry out a particular economic activity using fewer resources

Comparative Advantage

the ability of an individual or group to produce a good or service at a lower opportunity cost than another

Benefits of Trade

the gains that occur when countries or individuals specialize in the production of certain goods and services and trade them, leading to increased overall efficiency and higher living standards

A beneficial trade agreement…

is when two countries agree to specialize in the good they have a comparative advantage in

Cost-Benefit Analysis

is a process used to evaluate the total expected costs versus the total expected benefits of a choice to determine its feasibility or profitability

The Three Economic Questions

address what to produce, how to produce, and for whom to produce goods and services in an economy

Distributive Efficiency

occurs when goods and services are allocated in a way that maximizes overall welfare, ensuring that resources are used where they are most valued

Utility

refers to the satisfaction or pleasure derived from consuming goods and services. It is a key concept in understanding consumer choice and preferences.

Marginal Utility

the additional satisfaction or pleasure gained from consuming one more unit of a good or service

Marginal Utility Formula

Utility Maximization

(MU₁ / P₁) = (MU₂ / P₂) OR (P₁ / P₂) = (MU₁ / MU₂)

Marginal Rate of Substitution

the rate at which a consumer is willing to give up one good in exchange for another while maintaining the same level of utility

Optimal Allocation of Resources

MC = MB

Long-run competitive equilibrium suggest…

P = MC