AP Microeconomics – Chapter 1 & 2

unlimited wants but limited resources

science of scarcity, study of choices of individuals, firms and governments

A system for coordinating society's productive activities
How do we produce and obtain the "stuff" we want

An economy in which decisions about production and
consumption are made by individual producers and consumers
Nobody is "in charge" except the "invisible hand"

Study of small economic units, such as individuals, firms,
and industries
- Supply and demand in specific markets
-Production costs
- Labor markets

use the scientific method to make generalizations and abstractions to develop theories
what/why is a problem happening

theories are then applied to fix problems or meet economic goals
how to fix problems

based on facts/not value

involves value judgement

1. Society has unlimited wants and limited resources (scarcity)
2. Due to scarcity, choices must be made, and every choice has a cost (a tradeoff)
3. "How much?" is a decision at the margin. Everyone makes these decisions by
comparing the marginal costs and marginal benefits of every choice
4. Everyone's goal is to make choices that maximize their satisfaction. Everyone
acts in their own "self-interest" and responds to incentives
5. Real-life situations can be explained and analyzed through simplified models
and graphs

All the alternatives we give up when we make a choice

Most desirable alternative given up when you make a choice
The real cost of something is what you give up to get it

In Summary: You will do something as long as the marginal benefit is greater than
the marginal cost

my choices affect your choices, and vice versa

1. There are gains from trade
2. Markets move toward equilibrium
3. Resources should be used as efficiently as possible to achieve society's goals
4. Markets usually lead to efficiency
5. When markets don't achieve efficiency, government intervention can improve
society's welfare

the division of tasks, is key to trade

when no individual would be better off
doing something else
Any time there is change, the economy moves to a new equilibrium

takes all opportunities to make some people
better off without making other people worse off
-bowdoin - puts more money into food to attract more people but gives less money to the poor

everyone gets his or her fair share
- vassar- even the poor kids can get in

Incentives built into a market economy usually ensure that resources are put to
good use
Opportunities to make people better off are not wasted
However, market failure, the individual pursuit of self interest making society
worse off, sometimes occurs- EX: factories polluting

Products are being produced in the least costly way
Any point ON the PPC represents productive efficiency (A)

Products produced are the ones most desired by society
This OPTIMAL point on the PPC depends on the desires of society

Resources are NOT easily adaptable for
producing either good (bowed out PPC, much more common)

Resources are easily adaptable for producing
either good (straight line PPC, uncommon)

1. Change in resource quantity or quality
2. Change in technology
3. Change in trade

Represents economic growth or shrinkage
*unemployment and demand does not change the PPC

means having a lower opportunity cost for
production than other people
who should specialize

who can make more
(better)

The variable is resources or time
IOU=
Input: Other goes Under
times taken to make a product changes

OOO= output other goes over
time is constant, number of products made changes

Amount of "usefulness" a consumer obtains from a good (satisfaction, benefit, joy, etc.)

additional

distribute

amount the consumers spends on a product

amount a seller pays to produce a good

Money spent by BUSINESS to improve their production

made for direct consumption

Created for indirect consumption, used to make consumer goods (oven, blenders, knives, etc.)

All resources can be classified as one of the following four factors of
production:
1. Land
2. Labor
3. Capital
4. Entrepreneurship

least flexible resource
all natural resources used to produce a good or service
income: rent

Any effort a person devotes to a task for which that person is paid
EX: Manual laborers, lawyers, doctors, teachers, waiters, engineers, etc.
The human effort in providing a good or service
Most flexible resource
Most abundant resource in developing countries
Income earned by labor resources is called wages

Any good or service used to produce others (intermediate goods)
Machinery, tools, buildings, factories, etc.
Most abundant factor for industrial countries (US, Japan, etc.)
Expenditure on capital is called investment
Income earned by capital resources is called interest

Any human-made resource used to create other goods and services

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

Ambitious leaders that combine the other factors of production to create
goods and services
Henry Ford, Bill Gates, etc
Take the initiative, innovate, act as risk bearers
Income earned by entrepreneurs is called profit