AP Micro - Unit 1: Basic Economic Concepts

economics

the study of scarcity and choice

scarcity

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

trade off

the act of giving up one benefit in order to gain another, greater benefit; income & time = limited supply/common _

resource (factor of production)

anything that can be used to produce something else; classified into 4 categories (land, labor, capital, entrepreneurship)

land

all resources that come from nature, such as minerals, timber, and petroleum

labor

the effort that people devote to a task for which they are paid

capital

refers to manufactured goods used to make other goods and services

physical capital

the human-made objects used to create other goods and services

human capital

the skills and knowledge gained by a worker through education and experience

Entrepreneurship

describes the efforts of entrepreneurs in organizaing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes

scarce resource

is not available in sufficient quantities to satisdy all the various ways a sociaety wants to use it; causes society to make choices; EX: limited supplies of coal and oil

opportunity cost

the value of the next best alternative that you must give up in order to get the item; "the real cost of an item"

microeconomics

the study of how individuals, households, and firms make decisions and how those decisions interact; consists of smaller parts that make up the economy as a whole

household

is a person or a group of people that share their income

firm

is any organization that produces goods or services for sale; EX: bank, store, or farm

macroeconomics

is concerned with the overall ups and downs of the economy; focuses on economic aggregates

economic aggregate

Economic measures such as the unemployment rate, the inflation rate, and gross domestic product that summarize data across many different markets

economic analysis

focuses on what is the best decision for a company's profits

positive economics

the branch of economic analysis that describes the way the economy actually works; definite answers; used most

normative economics

economic analysis that involves saying how the economy should work; "what ifs" and "should/could/woulds)

wage

payent for the use of labor; type of income

rent

payment for the use of land; type of income

interest

payment for the use of capital; type of income

profit

payment for entrepreneurship; type of income

economy

system for coordinating the production and distribution of goods and services; must answer the invisible hand; multiple types

invisible hand

a term coined by Adam Smith to describe the self-regulating nature of the marketplace; 3 questions: 1) what to produce? 2) how to produce? 3) for whom to produce?

market economy

Economic decisions are made by individuals or the open market; production and consumption are the result of decentralized decisions by many firms and individuals; consumers and producers answer the invisible hand; private ownership of resources; market prices direct resource use; income depends on resources and is an incentive; specialization promotes competition; prices fluctuate

command economy

An economic system in which the government makes all economic decisions; industry is publicly owned and there is a central authority making production and consumption decisions; invisible hand is answered by central authority; EX: Soviet Union, China, and North Korea

drawbacks of a command economy

frequent shortages and surpluses, lack of innovation, lack of incentive, lack of wages, lack of clear property, and fails to take into account that people make choices in own rational self-interest

mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion; combines free market and command economies; used by most countries; What and How of the invisible hand answered by producers and consumers; For Whom of the invisible hand answered by whoever is willing and able to pay and who the gov. provides

marginal analysis

analysis that involves comparing marginal benefits and marginal costs; many decisions are based on an incremental basis; utility and diminishing marginal utility; each additional unit of something usually gives lower additional satisfaction; if mb = mc, reached optimal amount

marginal benefits

Additional benefits; the benefits connected with consuming an additional unit of a good or undertaking one more unit of an activity.

marginal costs

The costs associated with each additional unit produced.

model

is a simplified representation used to better understand a real-life situation; in economics, used to create a real but simplified economy or simulate the workings of the economy on a computer; allows economists to focus on the influence of one change at a time

other things equal assumption

all other relevant factors remain unchanges in a model; also known as the "ceteris paribus assumption"

production possibilities curve

a graph that illustrates the necessary trade-offs in an economy that produces only two goods. It shows the max. quantity of one good that can be produced for each possible quantity of the other good produced; below , feasible but not efficient; on , feasible and productivity efficient; above ____, not feasible; shows opportunity cost; shows gains from trade

efficiency

an economy is ____ if there is no way to make anyone better off without making at least one person worse off; PPC is useful for illustrating this; allocative and productive

straight PPC

opportunity cost of an additional unit doesn't change regardless of the output mix; slope = opportunity cost; no specialization of resources

concaved PPC

opportunity cost is increasing; most common; as more of a good is produced, its opportunity cost rises because resources specialized for the productio of that good are used up and resources specialized for the production of the other good must be used instead

economic growth

is an increase in the max. amount of goods ad services an economy can produce; expansion of the economy's PPC; outward shift of PPC; 3 sources -> increased availability of resources used to produce goods, improved technology, and trade

technology

is the technical means for producing goods and services

trade

individuals provide goods and services to others and receive goods and services in return; characterstic of a market economy

gains from trade

the improvement in outcomes that occurs when producers specialize and exchange goods and services; consumers can get more of what they want; taking advantage of ____ is the reason we have an economy; is the same as comparative advantage; can occur without specialization

specialization

the division of tasks that allows gains from trade. It allows each person to engage in a task that they are particularly good at performing; the economy as a whole can produce more when each person ____ in a task and trades with others; allows mass production

comparative advantage

an individual has this in producing a good or service if that person' opportunity cost is the lowest among the people who could produce that good or service; is the opposite of opportunity cost; basis for mutual gain; leads to specialization

absolute advantage

an individual has this in producting a good or service if they can make more of it with a given amount of time and resources

terms of trade

indicates the rate at which one good can be exchanged for another; the mutually beneficial ____ for a good fall between the producer's opportunity cost for the good and the buyer's opportunity cost for the good

allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it; determined through pricing system; can't be seen on PPC

productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service); achieved when all resources are being used in the production of goods and services; can be seen anywhere on PPC

economic decline

a decrease in a country's capacity to produce goods and services over a period of time; loss of potential output shown as a shift to the left of the PPC

supply and demand model

is a model of how competitive markets work; made up of the following elements -> demand curve, set of factors that cause the demand curve to shift, the supply curve, set of factors that cause the supply curve to shift, the market equalibrium (which includes the equalibrium price and equalibrium quantity), and the way the market equalibrium changes when the supply curve or demand curve shifts

demand schedule

is a table that shows how much of a good or service consumers will be willing and able to buy at different prices; assumes product is standardized

quantity demanded

is the actual amount of a good or service consumers are willing and able to buy and some specific price. It is shown as a single point in a demand schedule or along a demand curve; as prices rise, the ____ falls

demand curve

is a graphical representation of the demand schedule. It shows the relationship between quantity demanded and price; is almost always sloped downward (expensive to cheap)

law of demand

says that a higher price for a good or service, all other things being equal, leads people to demand a smaller quantity of that good or service

change in demand

is a shift of the demand curve, which changes the quantity demanded at any given price; rightward or leftward shift

movement along the demand curve

is a change in the quantity demanded of a good that is the result of a change in that good's price; is not the same as a shift of the demand curve

rightward shift of demand curve

increase in demand; at any given price, consumers demand a larger quantity of the product than before

leftward shift of demand curve

decrease in demand; at any given price, consumers demand a smaller quantity of the product than before

demand curve shift factors

changes in tastes, changes in the prices of related goods, changes in income, changes in the number of consumers, and changes in expectations

increased demand factors

tastes change in favor of a good, price of related good falls, income rises for the normal good, income falls for the inferior good, number of buyers rises, price is expected to rise, and price of a related good rises

decreased demand factors

tastes change against a good, price of substitute falls, price of complement rises, income falls for normal good, income rises for inferior good, number of buyers falls, price is expected to fall

substitutes

two goods are ____ if a rise in the price of one of the goods leads to an increase in the demand for the other good; usually the goods serve a similr function; EX: jeans and khakis

complements

two goods are ____ if a rise in the price of one of the goods leads to a decrease in the demand for the other good; because consumers like to consume a good and its ____ together, a change in the price of one good will affect the demand of the other; EX: milk and cookies

normal good

when a rise in income increases the demand for a good; the normal case

inferior good

when a rise in income decreases the demand for a good; usually considered less desireable than more expensive options; when one can afford to, stop buying it; rise in income shift demand curve left; EX: bus ride vs. taxi ride

consumption soothing

occurs when people borrow and save to smooth consumption over their lifetime; shifts demand curve right when expected future income rises; shifts demand curve left when expected future income decreases

individual demand curve

a graphical representation of the relationship between quantity demanded and price for an individual consumer

market demand curve

a curve that shows how much of a product all consumers will buy at all possible prices; depends on market price of good; is the horizontal sum of the individual demand curves of all consumers in that market; increase in the number of consumers leads to an increase in demand