AP ECONOMICS

UNIT 1 MICRO

scarcity

there are unlimited wants/needs but limited resources

ex: time, space

fundamental economic problem

result of scarcity

you have to make choices on how to spend recources which leads to tradeoffs

tradeoffs

when you make a choice you get less of one option but gain more of the other option

ex: choosing to do homework instead of partying or seeing a movie

opportunity cost

everything in the single next best choice you give up when you make a choice over others

ex: you miss out on the enjoyment of partying

4 factors of production

LLCE: land, labor, capital, entrepreneurship

land

resources from the earth

ex: agricultural production, iron, coal, water, actual land

labor

recources coming from mental/physical human labor

ex: factory work, teachers, farm workers

capital

tools, equipment, structures used to produce goods and services

ex: manufactured tools, devices, factories

entrepreneurship

the creative talent and risk taking associated with combining land, labor, and capital to produce goods and services

ex: business founders/owners

economics

allocating resources in a scarce environment

positive economics

how the economy works

facts

normative economics

how the economy should work

makes value judgments = personal opinions on how it should work

3 questions on resource allocation

what goods/services will be produced

how will goods/services be produced

who will recieve goods/services

traditional economy

production is based on traditions/past methods

market economy

private firms own factors of production and make choices

inequality

command economy

government owns factors of production and makes choices

equal

mixed economy

combination of market and command economy

incentives

rewards/punishments that motivate choices in production

property rights, profits

property rights

ownership of resources

other things equal assumption/ceteris paribus assumption

other factors are unchanged when looking at PPC

PPC

shows tradeoffs in producing 2 goods

efficient

on the curve all resources are used - productive efficiency

you cant make someone better off without making someone worse off

inefficient

inside curve not all resources are used

unemployment

unattainable

outside curve not enough resources

feasible

inside and on curve

efficient economy has

productive efficiency = use all resources

allocative efficiency = allocate resources to produce goods people want

straight line PPC

resources are very similar to produce the 2 goods

opportunity cost is constant

bowed out opportunity cost

increasing opportunity cost = as you produce more of one good, you give up even more and more of the other good

happens because resources are specialized, so the workers/machines aren’t equally as good at producing each good

economic growth

PPC moves out

more resources or improved technology for production or trade

economic shrink

PPC goes inwards

loss of resources

capital goods

used to produce consumer goods

more capital goods has a bigger shift out than more consumer goods

trade

people specialize in production then trade to consume more

absolute advantage

you produce more of a good/service with set time/resources

comparative advantage

you have comparative advantage in the production of a good if you have a lower opportunity cost for producing it

terms of trade

1 unit of X for btw the opp cost of both producers for Y

consumers try to maxamize utility

satisfaction/value

depends on consumer

firms try to maxamize profit

money from a good - cost of making good

revenue

price of good x number of goods sold

how consumers/firms choose between two things

total benefits > total costs —> good

total costs > total benefits —> bad

total benefits = total costs —> neutral

how consumers/firms choose between multiple things (how much, how many, how long)

total cost > total benefit —> bad

total benefit > total cost —> pick the choice that maxamizes difference between total benefit & total cost

total cost

marginal costs + additional costs

marginal cost

cost of one more of something

marginal benefit

benefit of one more of something

when to stop increasing quantity

when MB = MC

skunk costs

costs that should be ignored

cost that is nonrecoverable

consumption bundle

a combination of goods/services

marginal utility

change in utility by consuming one more of something

marginal utility curve

points are between the quantity values bc it happens during the change

diminishing because often adding one more of a good has less utlity than before

increasing marginal utility curve

utiltiy increases with experience/as you buy more

budget line

possible consumption bundles spending all of income

on and inside line —> affordable

outside line —> unaffordable

optimal consumption bundle

has maximum total utility

marginal utility per dollar

marginal utility for quantity/price

MU/$ of X = MU/$ of Y