Basic Economic Concepts

Absolute advantage:

Accounting cost:

Basic economic questions:

Capital:

Command economy:

Comparative advantage:

Competition:

Constant opportunity cost:

Constraint:

Consumption:

Coordinating mechanism:

Cost-benefit analysis:

Decreasing opportunity cost:

Distribution:

Economic cost:

Economic system:

Efficient:

Explicit cost:

Factor market:

Factor of production:

Fixed (sunk) cost:

Implicit cost:

Incentive:

Increasing opportunity cost:

Inefficient:

Input:

Input question:

Institution:

Invisible hand:

Irrational:

Labor:

Land:

Law of Diminishing Marginal Utility:

Macroeconomics:

Marginal:

Marginal analysis:

Marginal utility:

Market economy:

Microeconomics:

Mixed economy:

Mnemonic:

Model of rational consumer choice:

Mutual benefits:

Net:

Non-rival good:

Normative economics:

Opportunity cost:

Output:

Output question:

Positive economics:

Product market:

Production:

Production possibilities curve (PPC):

Property rights:

Rational decision-making:

Resource:

Resource allocation:

Revenue:

Rival good:

Scarcity:

Self-interest:

Terms of trade:

Total cost:

Total utility:

Unattainable:

Util:

Utility:

Utility maximizing choice:

Production Possibilities Curve

Calculations 

Comparative Advantage

         Absolute advantage in fish:                        

          Absolute advantage in rice:

         Comparative advantage in fish:                  

Comparative advantage in rice:

Mutually beneficial terms of trade:

Utility maximizing choice (total):

Sam's utility maximizing choice:

Utility maximizing rule (marginal):

This student (not in AP Micro, of course) is dividing 5 hours between gaming and studying.

What combination of hours gaming and studying maximizes the student’s points per hour? (Remember to start by calculating marginal utility per hour.)

 UNIT 1 — Basic Economic Concepts

1.1 Scarcity & Trade-offs

• Scarcity: Unlimited wants, limited resources.

• Choices: Because resources are scarce.

• Trade-offs: Alternatives given up when choosing.

• Opportunity cost: The next best alternative NOT chosen.

• Key resources: Land, labor, capital (physical & human), entrepreneurship.

1.2 Economic Systems

• Command economy: Government answers the 3 economic questions.

• Free-market economy: Individuals own resources; prices allocate.

• Mixed economy: Combination; most modern economies.

• Three economic questions:

  1. What to produce?

  2. How to produce?

  3. For whom to produce?

1.3 PPC (Production Possibilities Curve)

• Shows max possible combinations of two goods.

• Points:

  • On curve → efficient

  • Inside → inefficient

  • Outside → impossible

• Law of increasing opportunity cost: Bowed-out PPC.

• Shifters of PPC:

  • Change in resources

  • Change in technology

  • Change in labor/education (human capital)

  • Trade (consumption possibilities > production possibilities)

1.4 Comparative Advantage & Trade

• Absolute advantage: Can produce more with same resources.

• Comparative advantage: Lower opportunity cost → determines specialization.

• Terms of trade: Must fall between opportunity costs.

1.5 Marginal Analysis

• Marginal benefit (MB) vs marginal cost (MC).

• Optimal output: MB = MC.