ap microeconomics unit 1

microeconomics

study of small economic units like individuals, firms, markets

macroeconomics

study of large economy as a whole; economic growth, government spending, inflation, international trade, unemployment

positive statement

based on facts, avoids value judgments

normative statement

includes value judgments and opinions

scarcity

there are unlimited wants but limited resources

tradeoff

when you give up something in order to have something else

utility

satisfaction

price

amount that a consumer/buyer pays

cost

amount that a seller pays to produce a good

consumer goods

created for direct consumption

capital goods

created for indirect consumption; goods used to make consumer goods

what are the four factors of production?

land, labor, capital, entrepeneurship

land

all natural resources that are used to produce goods and services

labor

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

physical capital

any human-made resource that is used to create other goods and services

human capital

any skills or knowledge gained by a worker through education and experience

entreprenuership

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

productivity

a measure of efficiency that shows the number of outputs per unit of input

what are the three economic question?

what goods and services should be produced? how are they produced? who are they produced for?

economic system

the method used by a society to produce and distribute goods and services — answers economic questions

command economy

the govt owns all resources, answers the three economic questions — communism

what are some pros to command economy

low unemployment, great job security, free healthcare, less income inequality

what are some cons to command economy

no incentive to work harder or innovate, no competition - the quality of goods stays poor, corrupt leaders, few individual freedoms

free market system

little govt involvement in the economy, individuals own resources and answer all three economic questions, opportunity to make a profit gives people incentive to produce quality items, wide variety of goods, competition and self-interest regulate economy

invisible hand

society’s goals will be met as individuals meet their own self-interest

what is the invisible hand that regulates the free market?

competition and self interest

product market

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

resource (factor) market

the “place” where resources (land, labor, capital, entrepreneurship) are sold to businesses

private sector

part of the economy run by individuals and businesses

public sector

part of the economy that’s controlled by the government

factor payments

payment for the factors of production; namely rent, wages, interest, profit

transfer payments

when the government redistributes income (ex. welfare, social security)

subsidies

government payments to businesses

do individuals supply or demand?

both

do businesses supply or demand?

both

who demands in the product market?

individual/consumer

who supplies in the product market

businesses

opportunity cost

the value of the next best alternative that you must give up when you make a choice

production possibilities curve/frontier (PPC/PPF)

a model that shows alternative ways that an economy can use its scarce resources

what does a PPC show graphically?

scarcity, trade-offs, efficiency, opportunity cost

what are the four key assumptions of a PPC?

only two goods can be produced, full employment of resources, fixed resources (4 factors), fixed technology

what is the law of increasing opportunity cost?

as you produce more of any good, opportunity cost will increase

why is the law of increasing opportunity cost applicable?

resources are not adaptable to producing both goods

what does the forgone production of another good result in?

a convex/downward curve

constant opportunity cost

resources are easily adaptable for producing either good

what does constant opportunity cost result in?

straight PPC line (uncommon)

what are the three PPC shifters?

quality/quantity of a resource, change in technology, change in trade

what does limiting trade result in?

a reduction of choices

what does more access to trade result in?

more choices and a higher standard of living

absolute advantage

the producer that can produce the most output or requires the least amount of resources

comparative advantage

the producer with the lowest opportunity cost

when should countries trade?

if they have a relatively lower opportunity cost

what goods should countries specialize in?

one that is “cheaper” for them to produce — the one with a comparative advantage

terms of trade

the agreed upon conditions that would benefit both countries

when can both countries benefit from trade?

if they each have relatively low opportunity costs

marginal

additional

marginal analysis

making decisions based on increments

law of diminishing marginal utility

as you consume anything, the additional satisfaction you receive will eventually start to decrease

utility maximization rule

the consumer’s money should be spent so that the marginal utility per dollar of each good equals the other

incentives

rewards/punishments that motivate particular choices

property rights

establish ownership and give individuals the right to trade goods and services with each other

explicit costs

traditional out of pocket costs associated with making a decision

are explicit costs monetary or nonmonetary?

monetary

implicit costs

the opportunity cost of making a decision

are implicit costs monetary or nonmonetary?

nonmonetary (still costs opportunity cost though)

marginal analysis

costs and benefits of one more one less

marginal cost

added cost of one additional unit

marginal benefit

added benefit to one additional unit

when is the optimal quantity achieved?

when marginal benefit is equal to marginal cost

rational agents

consumers, producers, and others who behave rationally and make optimal decisions, incorporate opportunity costs into their decisions (implicit or explicit)

revenue

the amount of money a firm receives

do firms prefer revenue or utility?

revenue

sunk cost

cost that has already been incurred and cannot be recovered. It is irrelevant to future decision-making since the money or resources spent are irretrievable

why are most PPCs bowed out and not linear?

most goods aren’t perfectly substitutable