43 terms

AP Micro Test 1

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What is Economics?
Economics is the science of scarcity and the study of choices.
Scarcity
The fact that we have unlimited wants but limited needs
Choices
since we are unable to have everything, we must make choices on how we will use our resources
Resource
is a good that is used to produce something
What compromises Macro and Micro Economics
Microeconomics is the study of individuals and firms while macro studies government
What affects choice?
Cost vs. Benefit
Theoretical Economics
Economists use the scientific method to make generalizations and abstractions to develop themes
Policy economics
Policy economics involves the use of theoretical theories to fix problems or meet economic goals
Positive Statement
Based on facts, avoids value judgement (what is is) (fact)
Normative Statement
Includes value judgments (what it ought to be) (opinion)
5 Key Economic Assumptions
1. Society's wants are unlimited, but ALL resources are limited (SCARCITY)
2. Due to Scarcity,, choices must be made. Every choice has a cost. (A TRADE OFF)
3. Everyone's goal is to make choices that maximize their satisfaction. Everyone acts in their own "selfish interest"
4. Everyone Makes decisions by comparing marginal costs and marginal benefits of every choice.
5. Real life situations can be explained and analyzed through simplified models and graphs
Marginal
means the change in a variable from one to the next
Total
Agregate, simply the added total, not the change
(total benefit should be higher than total cost)
Marginal Analysis
-In economics, marginal=additional
-marginal analysis takes it one step at a time and assesses if the decision in worth it
-marginal analysis is more commonly used than the all or nothing approach
-
Trade Offs
are alternatives you give up whenever we choose one course of action over another
Opportunity Cost
the most desirable alternative give up as a result of a decision
Utility
a measurement of relative satisfaction obtained from a particular good or service
Production Possibilities Frontier/Cost
Is a graph that bases the economy with only two goods, shows the maximum number of goods that can be produced with the resources obtained in a trade off
Opportunity cost
What you LOSE
Straightline in PPC
Means constant opportunity cost, usually for two similar things. Slope= opportunity cost
Concave PPC
Means increasing opportunity cost
Convex PPC
Decreasing opportunity cost
Opportunity cost
What you LOSE
Production Cost and Efficiency
2 types: Productive Efficiency and Allocative Efficiency
-Productive efficiency can be determined, on PPC
-Allocative cannot be determined
Productive Efficency
Products are being produced in a least costly way, this is any point ON the PPC.
-outside= impossible
-inside= inefficient
Allocative Efficiency
The products being produced are the most desired by society
-optimal point on the PPC depends on the desires of society
What causes Shifts in PPC?
1. Change in quantity or quality
2. Change in technology
3. Changes in Trade
Utility, Marginal, Allocative
Satisfaction, Additional, Distributive
Scarcity
occurs at all times for all goods
Shortages
producers won't/can't offer goods at current prices (temporary)
Price
amount a consumer pays
Cost
amount consumer pays to produce a good
Investment
money spent by BUSINESSES to improve their product
(capital>consumer)
Goods
physical objects that satisfy needs and wants
Services
Actions that one person performs for another
Consumer goods
Created for direct consumption (pizza)
Capital goods
Created for indirect consumption (oven, machinery, tools, and equipment)
Accountants
Look only at explicit costs. Traditional "out of pocket"
Economists
Look at explicit and implicit costs
Four Factors of Production
1. Land- includes natural resources: land and animals
2. Labor- effort a person devotes to task
3. Capital - man made resources and machinery
4. Entrepreneurship- you! initiative to do the thing
2 Types of Capital
1. Physical Capital: human made resources used to create other goods
2. Human capital- skills or knowledge gained by a worker
Profit
Revenue-cost
Per unit is different from straight opportunity cost
Per unit= slope of two goods
opp. cost= the amount lost
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