unit 1 econ final review

12th grade ap microeconomics

economics

- science of scarcity
- study of choices
- social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants

scarcity

the condition in which our wants are greater than our limited resources

positive statements

- facts
- avoids value judgements (what is)

normative statements

- opinions
- value judgements (what ought to be)

marginal

- additional
- additional benefit ≥ additional cost

economic assumptions

- society wants are unlimited but resources are limited (scarcity)
- every choice has a cost/trade-off
- maximizers
- MC = MB

trade offs

alternatives that we give up whenever we choose something else (opportunity cost)

opportunity cost

the most desirable alternative given up as a result of a decision (second best option)

product market

- firms sell
- households buy

factor/resource market

- firms buy
- households sell

factors of production

capital, land, labor, entrepreneurs

production possibilities curve/frontier

- shows alternative ways that an economy can use its scare resources
- demonstrates scarcity, tradeoffs, opportunity costs, and efficiency

production possibilities curve/frontier assumptions

- only two goods can be produced
- full employment of resources
- fixed resources (ceteris paribus)
- fixed technology

constant opportunity cost

resources are easily adaptable for producing either good

increasing opportunity cost

- resources are not easily adaptable to producing both goods
- as you produce more of any good, the opportunity cost will increase

shifters of production possibilities curve/frontier

- resource quantity or quality
- technology
- trade

productive efficiency

- products are being produced in the least costly way
- point on PPC

allocative efficiency

- products being produced are the ones most desired by society
- optimal point on PPC

per unit opportunity cost

opportunity cost/ units gained

absolute advantage

- producer that can produce the most output or requires the least amount of inputs/resources
- input: smallest #
- output: largest #

comparative advantage

- producer with the lowest (per unit) opportunity cost
- input: cross-add -> smallest #/ other goes under
- output: cross-add -> largest #/ other goes over

economic questions

- WHAT goods and services should be produced?
- HOW should these goods and services be produced?
- WHO consumes these goods and services

economic system

method used by a society to produce and distribute goods and services

command (centrally-planned) economy

gov owns resources and decides what to produce, how much, and who will receive it

capitalism/ free market system

- laissez faire: little gov involvement
- individuals own resources and determine the economic questions
- ppl can make profit = incentive to produce quality items efficiency
- wide variety of goods
- competition and self-interest regulate economy

invisible hand

society's goals will be met as individuals seek their own self-interest