AP Micro Unit 1

Economics: study of choice under the conditions of scarcity 

Individual choice: refers to decisions made by individuals about allocating limited resources 

• Choices are influenced by tradeoffs, opportunity costs, and personal preferences

Trade Offs: give up one thing to get something else

Opportunity cost: value of a choice

• Next best alternative is foregone when a choice is made

• Represents what is gained or lost by choosing one option over another

All resources are scarce

• Quantity available isn’t large enough to satisfy all productive uses

Resource: anything used to produce something else 

Microeconomics: smaller concerns that affect individuals, families, or businesses. Focuses on specific goods, markets, and individual decision makers. 

Macro: big pictures Micro: smaller picture

Economy: system for deciding how scarce resources are used so that goods and services are produced and consumed

Economic System: organizational structure for addressing what, how, and for whom to produce 

Adam Smith: Scottish scholar, 1723-1790

• Originally a philosopher 

• Study of econ. Began with the 1776 publication of his book “The Wealth of Nations”

• Stressed people should make choices without outside or government meddling 

There are 4 broad and basic economic systems

1. Traditional

2. Command

3. Market

4. Mixed 

Market Economy: system where most key economic decisions are made by business owners and consumers 

• AKA Free enterprise system 

• Private ownership and voluntary exchange is key 

• Specialization = advantages

Capitalism: economic and political system where trade and industry are controlled by private owners for profit, not by the state. Adam Smith is the father of capitalism 

Command Economy: central planners (government) make the important decisions about what, how, and for whom to produce.

Socialism: economic system where most resources and businesses are publicly owned and economic decisions are made by groups of workers and consumers. Origins are from French Revolution Philosopher Henri de Saint Simon

Communism: a political-economic system where all resources and businesses are publicly owners and economic decisions are made by central authorities. Origins from Karl Marx and the Communist Manifesto 

Traditional Economy: economic decisions about resources are made by habit, custom, superstition, or religious tradition. 

Mixed Economy: combines a market economy with lots of government involvement and elements or tradition  

Marginal Analysis: economics examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. 

Wealth of nations and property

Capitalism: has the assumption that property rights encourage their holders to develop the property, generate wealth, and efficiently allocate resources based on the operation of markets. 

Property rights: theoretical, socially enforced constructs in economics for determining how a resource or economic good is used and owned

Resources: can be owned by individuals, associations, or governments.

There are 3 different types of property

1. Public Property: aka state property. Property that is owned by all, but its access and use are controlled by the state or community

   1. Example: national park

2. Common Property: owned by a group of individuals, and controlled by joint owners

3. Private Property: owned by individuals or private entities. Use, access, and exclusion are controlled by private legal owners. 

Fifth Amendment- takings clause: “private property shall not be taken for public use without just compensation.”

Eminent Domain: power of a government to take private property for public use

Intellectual Property: work or invention that is a result of creativity, such as manuscript or design, to which one has rights to 

• Can apply for patent, copyright, trademark 

A competitive market has 2 characteristics

1. Many buyers and sellers

2. Identical good or service 

• The supply and demand model is a model of how a competitive market works

Supply and Demand model has 5 key elements 

1. Demand curve 

2. Supply curve

3. Supply and demand curve shifts

4. Market equilibrium

5. Changes in market equilibrium

Demand Schedule: shows how much of a good or service consumers are willing to buy at different prices 

• Almost like a table of points for a graph 

Demand Curve: graphical representation of the demand schedule, shows how much of a good or service consumers want to buy at any given price 

Law of demand: inverse relationship between price and quantity demanded 

• Downward sloping: as price goes down, there is more quantity demanded 

• From perspective of consumers

A shift and a movement along the curve are different 

Movement along a demand curve: change in quantity demanded that is a result of a change in that good’s price 

Shift of the demand curve: change in quantity demanded at any given price, represented by the change of the original demand curve to a new position denoted by a new demand curve 

6 Demand Curve Shifters

1. Substitutes: good that can be used in place of another. Perceived as similar or comparable 

   1. Name brand vs off brand

2. Complements: two goods are complements if a fall in a price of one good makes people more willing to buy the other good. 

   1. Peanut butter and jelly

3. Normal Goods: any good for which demand increases when income increases

   1. Gasoline

4. Inferior Goods: any good for which demand decreases when income rises

   1. Canned fruits and vegetables

5. Changes in taste: change in demand due to fads, beliefs, cultural shifts

   1. Fidget spinner 

6. Changes in expectations: expectations of drop in price = decrease in demand

Expectations of rise in price = increase in demand 

Supply Curve: shows graphically how much of a good or service people are willing to sell at any given price

Law of Supply: positive relationship between price and quantity supplied

• Other things equal, price and quantity supplied of a good are positively related

More money to be made = more supply Less money to be made = less supply 

• Upward sloping

• From perspective of supplier, or producer

There are 9 supply curve shifters

1. Cost of inputs: what is put in, taken out, or operated on by any process or system. The price of these can affect supply 

2. Policies: activity that supports or provides active encouragement

3. Regulations: rule or order that is created and enforced 

4. Subsidies: a sum of money granted by the government

5. Taxes: mandatory payment that a government imposes on businesses

6. Number of firms: refers to total count of businesses operating within a specific market

7. Technological Change: efficiency of production 

8. Expectations about future prices: from producer’s perspective 

   1. Inventory: goods held in temporary storage

9. Natural Disasters/Weather: can destroy factories 

Movement along the demand curve: a change in the quantity demanded of a good that is the result of a change in that good's price

Movement along the supply curve: occurs when there is a change in the price of the good or service being supplied

PRICE NEVER SHIFTS THE CURVE

• A change in the quantity demanded of a good leads to movement along the demand curve

A change in the price of a good leads a to a movement along the supply curve