AP Economics - Unit 1 - The basics of Economics

Inputs

Land, labor, and capital

Outputs

Goods & Services

Land

Place

Labor

employees

Capital

Machinery

Subsidizes

Money from the government to companies who open in certain areas or use certain environmental protection devices

Scarcity

Refers to the inherently limited nature of society’s resources

Economics

The study of how individuals & societies allocate their limited resources to satisfy their practically unlimited wants

Microeconomics

The study of the individual units that make up the economy

Example of Microecnomics

If one person was laid off

Macroeconomics

The study of the overall aspects and working of an economy

Example of Macroeconomics

If many people were laid of it would affect the unemployment rate

Incentives

Factors that motivate a person to act or exert effort

Positive incentives

enourage action by offering rewards or payments

negative incentives

discourage action by producing undesirable consequences or punishments

direct incentives

an immediate reward/punishment designed to cause an intended behavior

indirect incentives

a change in behavior resulting from the unintended or less obvious consequences of an action

Tradeoffs

doing one thing often means you will not have the time, resources, or energy to do something else (natural in a world of scarcity)

Oppurtunity costs

Highest-valued alternative that must be sacrificed to get something else (how or how much is given up through tradeoffs)

Marginal thinking

requires decision-making to evaluate wether the benefit of one more unit is something greater than its cost

Economic thinking

requires a purposeful evaluatoin of the avaliable oppurtunities to make the best decision possible

marginal analysis

a decision-making tool in economics and business that involves comparing the additional benefits of an action with the additional costs to determine the optimal level of that action

trade

voluntary exchange of goods and serviecs between 2+ parties

markets

bring buyers & sellers together to exchange goods & services

Trade creates value

voluntary trade between rational individuals

Comparative advantage

situation where an individual, business, or country can produce at a lower oppurtunity cost than a competitor can

free market capitalism

an economic system where private businesses and individuals determine prices and production through competition, driven by supply and demand with minimal government intervention

centrally planned economy

an economic system where a central government authority makes all decisions about the production, distribution, and pricing of goods and services, rather than relying on market forces like supply and demand

Mixed Market Capitalism

an economic system that combines elements of both free-market capitalism and central planning, where private ownership and competition exist alongside government intervention and regulation to achieve public goals

Natural experiments

real-world events that meet the criteria of an experiment designed to test a hypothesis

positive statement

can be tested and validated; it describes “what is”

normative statement

opinion that cannot be tested validated; it describes “what ought to be” (should is a common give away)

Economic models

simplified versions of reality. analyze the components of the ecnomy

ceteris paribus

the process of examining a change in one variable while balancing everything else constant

endogenous factors

variable that are inside a model

exogenous factors

variables that are outside a model

you should be mindful of what 3 factors?

what is included in the model

assumptions made when choosingwhat to include in the model

outside conditions that affect the model s performance

importance of assumptions

include important variables & exclude variable that can be safely ignored

productions possiblites frontier (PPF)

a model that illustrates the combo of outputs a society can produce if all of its resources are being used efficiently

economic growth

process that enables a society to produce more output in the future

specialization

limiting of one’s work to a particular area

constant trade-off

PPF is straight

Absolute advantage

refers to one producer’s ability to make more than another produce with the same quantity of resources

comparative advantage

ability to make a good at a lower oppurtunity cost than another producer

productively efficient

points on the PPF

allocatively efficient

points in which society's most desired mix of goods is produced

short run

period in which we make decisions that reflect our immediate/short-term wants, needs, or limitations. In the short run, consumers can partially adjust their behavior

long run

period in which we make decisions that reflect our needs, wants, and limitations over a long time horizon. In the long run, consumers have time to fully adjust to market conditions

consumer good

produced for present consumption

capital good

help produce otther goods and services

investment

process of using resources to create/buy new capital

PPF can move outward when..

improvment in the quantity/quality of resources (land,labor,capital) or improvment in technology

inward

fewer resources (natural disaster or impact on technology)

demand curve

represents the tastes, prefences and resulting choices of individual consumers

utility

measure of personal satisfaction/benefit/joy

consumption

used to “produce” utility

utility function

shows the relationship between a consumers utility and the combo of goods and services (consumption bundle) the consumer

marginal utility

change in total utility granted by consuming one additional unit of that good or service

marignal utility curve

shows how marginal utility depends on the quantity of the good or service consumer

Principle of diminishing marginal utility

each successive unit of good or service consumed adds less to total utility than the previous unit

budget constraints

limits the cost of a consumers consumption bundle to no more than the consumers income

consumption possibilites

set of all consumption bundles that are affordable, given the consumers income & prevailing prices

budget line

all the possible combinations of two goods a consumer can purchase given a fixed income and prices for those goods

optimal consumption bundle

consumption bundle that maximizes the consumer’s total utility given their budget constraint (getting the most bang for your buck)

marginal utility per dollar

spent on a good service and is the additional utility from spending one more dollar on that g/s

marginal utility per dollar = (equation)

(marginal utility of g/s)/(price in dollars of 1 unit of the g/s)

optimal consumption rule

in order to maximize utility a consumer must equate the marginal utility per dollar spent on each g/s in the consumption bundle