Chapter 1 AP Econ

economics

how society makes the best choices under scarcity

scarcity

limited resources

• everything is assumed to be scare

• forces us to choose something over another

opportunity cost

what you give up to get something else

behavior

• all actions are done with purpose

  • to increase utility (the satisfaction allowed from a g/s)

  • act in self interest but not selfishness

marginal analysis

= marginal benefits vs. marginal costs

• marginal = extra

• = (added benefits vs. added costs) 

example of marginal analysis

buying a bigger engagement ring

• marginal benefit = higher anticipated pleasure 

• marginal cost  = higher cost than original 

does obtaining the marginal benefits always come at a marginal cost of something else? 

yes; since everything is scarce, obtaining the marginal benefit from something always comes at a marginal cost of something else 

economic principles

• generalization 

• ceteris paribus = assume other things equal → only one variable changes 

positive economics

facts, cause/effect, subjective 

normative economics 

values, judgement, opinions, objective 

budget line/ constraint

represents all possible combinations of consumption of 2 goods at fixed costs. 

interior 

attainable because you don’t have to use all of provided money but inefficient because you don’t maximize profit

anterior

unattainable because you don’t have enough money

4 factors of production

• land

• labor

• capital

• entrepreneurial ability

land

• all natural resources

labor

• physical and mental exertion in production of goods and services

  • cannot be forced labor → no cost on slavery  

capital

• assets used to be produce goods 

• capital goods = physical assets to produce other goods/services 

  • not money → money is a means to buy capital goods, not a resource itself

• capital goods = facilitate production of consumer goods 

• consumer goods = directly satisfy individual wages/needs 

entrepreneurial ability

• person combines [land, labor, and capital] into a business venture

  • takes risks, makes decisions 

production possibilities model 

• PP table = shows different combinations of 2 products that can be produced with limited resources 

• PP curve/constraint/frontier  = graph 

what is the law of increasing opportunity cost

when the line gets steeper → giving up more of one product to produce another 

describe the behavior of the points on the PPC

any point on the PPC is an efficient use of resources, in which there is a max employment 

draw a circular flow model