AP Micro Unit 1

Scarcity

Scarcity

we have unlimited wants but limited resources

The Four Factors of Production

( 1 ) Land

( 2 ) Labor

( 3 ) Capital (physical and human)

( 4 ) Entrepreneurship

The Three Economic Questions

( 1 ) What goods and services should be produced?

( 2 ) How should these goods and services be produced?

( 3 ) Who consumes these goods and services?

Economic System

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

Types of Economic Systems

( 1 ) Command (Centrally-Planned) Economy

( 2 ) Free Market Economy

( 3 ) Mixed Economy

Centrally Planned Economics

in a centrally planned economy (communism), the government ( 1 ) owns all the resources and ( 2 ) answers the three economic questions

Why do centrally planned economies face problems of poor-quality goods, shortages, and unhappy citizens?

there is little incentive to work harder and central planners have a hard time predicting preferences

What is GOOD about Communism?

( 1 ) low unemployment; everyone has a job

( 2 ) great job security - the government doesn’t go out of business

( 3 ) less income inequality

( 4 ) “free” health care

What is BAD about Communism?

( 1 ) no incentive to work harder

( 2 ) no incentive to innovate or come up with good ideas

( 3 ) no competition keeps quality of goods poor

( 4 ) corrupt leaders

( 5 ) few individual freedoms

Characteristics of Free Market

( 1 ) little government involvement in the economy

( 2 ) individuals OWN resources and answer the three economic questions

( 3 ) the opportunity to make profit gives people incentive to produce quality items efficiently

( 4 ) wide variety of goods available to consumers

( 5 ) competition and self-interest work together to regulate the economy (keep prices down and quality up)

The Invisible Hand

the concept that society’s goals will be met as individuals seek their own self-interest

Mixed Economies

a system with free markets but also some government intervention

Private Sector

part of the economy that is run by individuals and businesses

Public Sector

part of the economy that is controlled by the government

Circular Flow Model Review

→ individuals demand products and supply resources

→ businesses supply products and demand resources

→ individuals and the government demand in the product market

→ businesses supply in the product market

Production Possibilities Curve (PPC)

a model that shows alternative ways that an economy can use its scarce resources

Constant Opportunity Cost

resources are easily adaptable for producing either good - result is a straight line PPC

Law of Increasing Opportunity Cost

as you produce more of any good, the opportunity cost (forgone production of another good) will increase - result is a bowed out PPC

Shifters of the PPC

( 1 ) change in resource quantity or quality

( 2 ) change in technology

( 3 ) change in population

Capital Goods and Future Growth

countries that produce more capital goods will have more growth in the future

Absolute Advantage

the producer than can produce the most output OR requires the least amount of inputs (resources)

Comparative Advantage

the producer with the lowest opportunity cost

Trade-offs

ALL the alternatives that we give up when we make a choice

Opportunity Cost

most desirable alternative given up when you make a choice

Explicit Costs

the traditional out of pocket costs associated with making a decision

Implicit Costs

the opportunity costs of making a decision

Marginal Analysis

making decisions based on increments (you will continue to do something as long as the marginal benefit is greater than the marginal cost)

Law of Diminishing Marginal Utility

as you consume anything, the additional satisfaction that you will receive will eventually start to decrease

Calculating Marginal Utility Per Dollar

Marginal Utility / Price

Utility Maximizing Rule

the consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other

MUx / Px = MUy / Py

Cost-benefit analysis assumes rational agents do which of the following?

compare additional costs and additional benefits when making a decision

If Nation X produces coffee at a higher opportunity cost than Nation Y, what is true?

Nation Y must have a comparative advantage in producing coffee

Suppose that Habib has a weekly fixed budget and spends it all on music downloads and snacks. At his current combination of consumption, the marginal utility of the last dollar spent on music downloads is greater than the marginal utility of the last dollar spent on snacks. Has Habib maximized his utility?

no, because he can increase his total utility by purchasing more music downloads and fewer snacks

Compared to a market economy, in a command economy there is greater

government involvement in the allocation of resources