AP Microeconomics Unit 1: Basic Econ Concepts

economics

science of scarcity

a social science with the efficient use of scare resources to achieve maximum satisfaction of economic wants

goods

physical products that can be bought, sold, and consumed to satisfy human wants or needs

goods examples

food, clothing, etc

services

activities/benefits provided by one party to another to satisfy human wants or needs (NOT A PHYSICAL PRODUCT)

services examples

haircuts, teaching, etc

scarcity

unlimited wants, limited resources

having to make choices on how we will use our resources

cost

the value of everything that must be given up to obtain something

both out of pocket and opportunity costs

benefit

the gain of satisfaction a person or society receives from consuming a good, service, or making a decision

cost-benefit analysis

comparing margin benefits to this cost to see if it’s worth doing

opportunity costs

having a choice to do something for your benefit

whatever must be given up to obtain some item

marginal cost

 the cost (extra) of producing one more unit of a good or service

marginal benefit

the extra benefit (for satisfaction) gained for consuming one more unit of a good or service

MB > MC…

worth it

MC > MB…

NOT worth it

marginal analysis

comparing of the marginal benefits and costs of an action to decide if it should be taken (“thinking on the margin”)

you will continue to do something if the marginal benefit is greater than marginal cost.

factors of production…

land, labor, capital, entrepreneurship

land

all natural resources used to make goods and services

labor

any effort a person devotes to a task for which that person is paid

physical capital

any human-made resources that is used to create other goods & services

human capital

the skills and knowledge that individuals acquire through education and experience

entrepreneurship

leaders that combine the other factors of production to create goods & services

production possibilities (PPC)

shows all possible combinations of two goods & services that can be produced fully & efficiently with available resources and technology.

PPC inside curve

inefficient

PPC (on curve)

efficient

PPC (outside curve)

unattainable

law of increasing costs

production of a good increases, the opportunity cost of producing additional units increases due to resources being less adaptable. 

comparative advantage

when one producer can make a good at a lower opportunity cost than another producer

basis of trade

between two producers, allowing for mutually beneficial exchange, shows where each has a comparative advantage.

absolute advantage

when one producer can make more of a good than another producer using the same amount of resources

productive efficiency

occurs when a firm produces at the lowest possible cost, using resources in a way that maximizes output. (no wasted resources)

economic growth

when the PPC shifts outward because of better technology, better resources, or improvement in productivity

economy can produce more of BOTH goods

the invisible hand

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

economic systems:

structures that determine how resources are allocated (distribute!) and goods are produced

traditional

command

market

mixed

the 3 economic questions

1.) what goods and services will be produced?

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

3.) for whom consumes these goods and services?

the product market

“place” where goods and services produced by businesses are sold to households

the resource (factor) market

where factors of production, such as labor and capital, are bought and sold to businesses

private sector

the part of the economy that is owned and operated by individuals and businesses 

public sector

part of economy controlled by the government

factor payments

payment for the factors of production (rent, wages, interest, & profit)

transfer payments

when the government redistributes income (welfare, social security) based on customs and traditions

traditional economy

based on customs and traditions

command economy

government makes decisions

market economy

decisions made by buyers and sellers

mixed economy

blend of market and government

most countries

Utility

satisfaction!

marginal

additional!

allocate

distribute!

price

amount buys for consumer pays

cost

amount seller pays to produce good

investment

the money spent by firms to improve their production

consumer goods

created for direct consumption

capital goods

created for indirect consumption 

used to make consumer goods

trade-offs

ALL the alternatives that we give up to make a choice 

ex.) going to the movies →could’ve played video games

explicit costs

the traditional, out of pocket costs associated with making a decision 

example: movie ticket price

implicit costs

the opportunity costs of making a decision (the hidden costs)

ex.) the time/wage you could have earned when you went to the movies

stop light scenario

MB > MC: do it!

MC = MB: do it or stop there

MC > MB: don't do it! 

marginal utility

the additional satisfaction or benefit gained from consuming one more unit of a good or service.

law of diminishing marginal utility

As consumption of a good increases, the additional satisfaction (utility) gained from consuming each extra unit decreases.

**you will continue to do something as long as the MB is greater than the MC

Utility Maximizing Rule

the consumers money should be spent per dollar of each goods equal each other

we do this everyday!