AP ECON UNIT 1

Economics

the science of scarcity; the study of choice due to limited resources and unlimited wants

Economics

a social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants

Scarcity

The fundamental problem of having limited resources to meet unlimited wants and needs.

Microeconomics

Study of small economic units such as individuals, firms, and industries

Macroeconomics

Study of the large economy as a whole or economic aggregates

Theoretical Economics

Using the scientific method to develop generalizations and abstractions into theories

Policy Economics

Applying economic theories to fix problems or meet economic goals

Positive Statement

Based on facts, avoids value judgments (what is)

Normative Statement

Includes value judgments (what ought to be)

Opportunity Cost

The most desirable alternative given up when making a choice

Utility

Satisfaction gained from consuming a good or service

Marginal

Additional; extra benefit or cost from one more unit of a good or service

Allocate

To distribute resources among different uses

Price

The amount a buyer pays for a good or service

Cost

The amount a seller pays to produce a good or service

Investment

Money spent by businesses to improve production (ex

Trade off

when you give up one thing in order to get another

Consumer Goods

Goods created for direct consumption

Capital Goods

Goods created for indirect consumption; used to produce consumer goods

Land

All natural resources used to produce goods and services (water, sun, plants, animals)

Labor

Human effort devoted to tasks for which a person is paid (teachers, doctors, waiters)

Physical Capital

Any human-made resource that is used to create other goods and services

Human Capital

Skills or knowledge gained by a worker through education and experience

Entrepreneurship

Leaders who combine land, labor, and capital to create goods and services

Three Economic Questions

What goods/services should be produced? How should they be produced? Who consumes them?

Communism

Government owns all resources and answers the three economic questions

Adv Communism

Low unemployment, job security, equal incomes, free healthcare

Disadv Communism

No incentive to work harder, poor quality goods, corruption, few individual freedoms

Capitalism

Little government involvement, private ownership, profit incentive, competition

Invisible Hand

Concept that society’s goals are met as individuals pursue self

Mixed Economy

An economic system with free markets and some government intervention (ex

PPC (Production Possibilities Curve)

A model showing alternative ways an economy can use scarce resources; demonstrates scarcity, trade

Assumptions of PPC

Only two goods, full employment of resources, fixed resources, fixed technology

Law of Increasing Opportunity Cost

As production of a good increases, opportunity cost increases; resources are not equally adaptable

Productive Efficiency (PPC)

Any point on the PPC curve where resources are fully utilized

Allocative Efficiency (PPC)

The point on the PPC that best satisfies society’s preferences

Specialization

When individuals or countries focus on producing goods/services they are relatively most efficient at producing

Trade

Exchanging goods or services to obtain what others produce, increasing choices and standard of living

Per Unit Opportunity Cost

Opportunity cost of producing one unit of a good; calculated as total opportunity cost ÷ units produced

Absolute Advantage

Ability to produce more output or use fewer resources than another producer

Comparative Advantage

Ability to produce a good at lower opportunity cost than another producer

OOO (Output Question)

number in table is product

IOU (Input Question)

number in problem is hours

Terms of Trade

the ratio at which one good can be exchanged for another between countries

Product Market

Where businesses sell goods/services to households

Factor Market

Where households sell land, labor, capital, and entrepreneurship to businesses

Private Sector

Part of the economy run by individuals and businesses

Public Sector

Part of the economy run by the government

Factor Payments

Payments for factors of production ex: rent, wages, interest, profit.

Transfer Payments

Government redistribution of income ex: welfare, social security

Subsidies

Government payments to businesses to support production or lower costs