ap micro unit 1

opportunity cost

opportunity cost

the most desirable alternative given up as the result of a decision

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

law of comparative advantage

the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good

voluntary exchange

a situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction

economic way of thinking

A reasoning process that involves considering opportunity costs as well as benefits in making decisions.

marginal analysis

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less

marginal cost

the cost of producing one more unit of a good

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

positive statement

a factual claim about how the world actually works

normative statement

statement which describes how the world should be

efficiency

using resources in such a way as to maximize the production of goods and services

three questions of economics

1. what goods to produce?

2. how to produce the goods?

3. for whom are goods being produced?

market economy

economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets (i.e. the US and capitalism)

command economy

An economic system in which the government controls a country's economy. (i.e. Soviet Union)

tradition economy

system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation (i.e. agriculture, hunter/gatherer society)

advantages of market economy

Advantages: economic efficiency (responds quickly to change); economic freedom (high level of personal choice); economic growth (competition leads to innovation); wide variety of goods and services to meet consumer wants

disadvantages of market economy

Income and wealth inequalities; Environmental issues; Social hardship; Wasteful competition

advantages of command economy

Capable of dramatic change in a short time. Many basic education, public health, and other public services available at little to no cost. easy to answer why how and for whom

disadvantages of command economy

Does not meet the needs of consumers. No incentive for people to work hard. Requires a large bureaucracy to make decisions.

Advantages of traditional economy

-sets forth certain economic roles for all members of the community

-stable, predictable, and continuous life

Disadvantages of traditional economy

-discourages new ideas and new ways of doing things

-stagnation and lack of progress

-lower standard of living

specialization

the development of skills in a specific kind of work

exchange

the act of obtaining a desired object from someone by offering something in return