AP Micro 1 8 Summary

8/17/2019 AP Micro 1 8 Summary

1/62

Unit I: BasicEconomic Concepts


2/62

What is Economics in General?

Economics is the study of _________.

•Economics is the science of scarcity.

• Scarcity is the condition in which our wants

are reater than our limited resources.

•Since we are una!le to ha"e e"erythin wedesire# we must ma$e choices on how we will

use our resources.

•In economics we will study the choices ofindi"iduals# firms# and o"ernments.

choices


3/62

Economics %efined

Economics&Social science concerned with the

efficient use of limited resources to achie"e

ma'imum satisfaction of economic wants.

(Study of how indi"iduals and societies deal

with ________)

E'amples: *ou must choose !etween !uyin +eans or !uyin shoes.

Businesses must choose how many people to hire

Go"ernments must choose how much to spend on welfare.

scarcity


4/62

,icro "s. ,acro

MICROeconomics-Study of small economic units such as

individuals, firms, and industries (competitive

markets, labor markets, personal decision

making, etc!

M"CROeconomics-Study of the large economy as a #hole or in

its basic subdivisions ($ational %conomic&ro#th, &overnment Spending, Inflation,

'nemployment, etc!


5/62

-ositi"e "s. ormati"e-ositi"e Statements& Based on facts. /"oids "alue

+udements (what is).

ormati"e Statements& Includes "alue +udements

(what ouht to !e).

0ow is Economics used?

• Economists use the scientific method to ma$eenerali1ations and a!stractions to de"elop

theories. 2his is called theoretical economics.

• 2hese theories are then applied to fi' pro!lems

or meet economic oals. 2his is called policyeconomics.


6/62

Would you see the mo"ie three times?otice that the total !enefit is more than the

total cost !ut you would 32 watch the mo"ie

the 4rd

time.

2hin$in at the ,arin

5 2imesWatchin ,o"ie Benefit Cost

1st $30 $10

2nd $15 $10

3rd $5 $10

2otal 678 648


7/62

,arinal /nalysis

In economics the term marginal additional

)*hinking on the margin+, or M"R&I$" "$"SIS

involves making decisions based on the additional

benefit vs the additional cost

.or %/ample0

ou have been shopping at the mall for a half hour, the

additional benefit of shopping for an additional half-hour

might out#eigh the additional cost (the opportunity cost!

"fter three hours, the additional benefit from staying an

additional half-hour #ould likely be less than the additional

cost


8/62

7 9ey Economic /ssumptions. Society1s wants are unlimited# !ut /;; resources

are limited (scarcity).


9/62

Gi"en the followin assumptions# ma$e a

rational choice in your own self&interest (hold

e"erythin else constant). *ou want to "isit your friend for the wee$end


10/62

2rade&offs

/;; decisions in"ol"e trade&offs.

2he most desira!le alternati"e i"en up as a result of a

decision is $nown as opportunity cost.

2rade&offs are all the alternati"es that we i"e up

whene"er we choose one course of action o"er others.

(E'amples: oin to the mo"ies)

What are trade&offs of decidin to o to collee?

What is the opportunity cost of oin to collee?

10


11/62

2he @actors of -roduction

11


12/62

2he -roduction

-ossi!ilities Cur"e

(--C)Usin Economic ,odelsStep : E'plain concept in words

Step


13/62

What is the -roduction -ossi!ilities Cur"e?

• / production possi!ilities raph (--G) is a

model that shows alternati"e ways that aneconomy can use its scarce resources

• 2his model raphically demonstrates scarcity#

trade&offs# opportunity costs# and efficiency.= 9ey /ssumptions

• 3nly two oods can !e produced

• @ull employment of resources• @i'ed >esources (Ceteris Paribus)

• @i'ed 2echnoloy13


14/62

a ! c d e f

= < 7 8 8

8 < = D 8

Bikes

Computers

3W G>/-0 I2: -ut !i$es on y&a'is and

computers on '&a'is

-roduction -ossi!ilitiesF 2a!le

Each point represents a specificcom!ination of oods that can !e

produced i"en full employment of

resources.

14


15/62

4 i k e s

Computers

56

57

58

9

:

6

7

8

8 7 6 : 9 58

"

4

C

;

%

&

Inefficient<'nemployment

Impossible


16/62

2 Bikes

2.The opportunity cost of

moving from b to d is…

4.The opportunity cost of

moving from f to c is…

3.The opportunity cost ofmoving from d to b is…

7 Bikes

4 Computers

0 Computers

5.h!t c!n you s!y !bout point "#

$n!tt!in!b%e

&. The opportunity cost of

moving from ! to b is…

'(!mp%e)

3pportunity Cost

16


17/62

2he -roduction -ossi!ilities

Cur"e (or @rontier)

17


18/62

=I>>" 8 5 7 ? 6C">O$%S 6 ? 7 5 8

• ;ist the 3pportunity Cost of mo"in from a&!#

!&c# c&d# and d&e.• Constant 3pportunity Cost& >esources are

easily adapta!le for producin either ood.

• >esult is a straiht line --C (not common)

->3%UC2I3 -3SSIBI;I2IES

" 4 C ; %

18


19/62

=I>>" 59 5@ 5A 58 8

RO4O*S 8 5 7 ? 6

• ;ist the 3pportunity Cost of mo"in from a&!#

!&c# c&d# and d&e.

• ;aw of Increasin 3pportunity Cost&• /s you produce more of any ood# the

opportunity cost (forone production of

another ood) will increase.• Why? >esources are 32 easily adapta!le

to producin !oth oods.• >esult is a !owed out (Conca"e) --C

" 4 C ; %->3%UC2I3 -3SSIBI;I2IES


20/62

& Bike

2.The *'+ $,-T opportunitycost of moving from b to c is…

4.The *'+ $,-T opportunitycost of moving from d to e is…

3.The *'+ $,-T opportunitycost of moving from c to d is…

&.5 3/2 Bikes

2 Bikes

2.5 5/2 Bikes

Opportunity Cost

'nits &ained

&. The *'+ $,-T opportunity cost

of moving from ! to b is…

'(!mp%e)

-E> UI2 3pportunity CostBo# much each marginal

unit costs

,1T-C') -ncre!sing 1pportunity Costs 20


21/62

Shiftin the -roduction-ossi!ilities Cur"e

21


22/62


= 9ey /ssumptions >e"isited

• 3nly two oods can !e produced

• @ull employment of resources

• @i'ed >esources (= @actors)

• @i'ed 2echnoloy

What if there is a chane?

4 Shifters of the --C. Chane in resource uantity or uality


23/62


R o b o t s

=iDDas

56

5?

57

55

58

E

9 @

:

A

6

? 7

5

5 7 ? 6 A : @ 9

What happens ifthere is an increase

in population?

23


24/62


R o b o t s

=iDDas

56

5?

57

55

58

E

9 @

:

A

6

? 7

5

5 7 ? 6 A : @ 9

"1

41

C1

;1

%1

What happens ifthere is an increase

in population?

24


25/62

2echnoloy

impro"ements in pi11a

o"ens

R o b o t s

=iDDas

56

5?

57

55

58

E

9 @

:

A

6

? 7

5

5 7 ? 6 A : @ 9


25


26/62

2he -roduction -ossi!ilitiesCur"e and Efficiency

26


27/62

-roducti"e Efficiency&

• -roducts are !ein produced in the

least costly way.

• 2his is any point 3 the -roduction

-ossi!ilities Cur"e

/llocati"e Efficiency&

•2he products !ein produced are theones most desired !y society.

• 2his optimal point on the --C depends

on the desires of society.

2wo 2ypes of Efficiency

27

i / i ffi i


28/62

-roducti"e and /llocati"e Efficiency

4 i k e s

Computers

56

57

58

9

:

6

7

8

8 7 6 : 9 58

"

4

C

;

.

%

2hich points are productively efficient3

2hich are allocatively efficient3

&

28

-roducti"ely Efficientpoints are / throuh %

/llocati"e Efficientpoints depend on thewants of society

(What if this represents a

country with no electricity?)


29/62

=anama - ."FORS

CO$S'M%R &OO;S

Me/ico - ."FORS

C"=I*" &OO;S

Consumer goods

C !

p i t ! % " o o d s

C$++',T

C$+'

$T$+'

C$+'

Consumer goods C ! p i t !

% " o o d s

$T$+' C$+'

C$++',T

C$+'

Capital Goods and @uture Growth

,e'ico-anama29


30/62

--C -ractice%raw a --C showin chanes for each of the

followin:

-i11a and >o!ots (4)

. ew ro!ot ma$in technoloy


31/62

ew ro!ot ma$in technoloy

R o b o t s

=iDDas

Juestion 5

31

/ shift only for >o!ots

J ti 5


32/62

%ecrease in the demand for pi11a

R o b o t s

=iDDas

Juestion 5<

32

2he cur"e doesnKt shiftL

/ chane in demand

doesnKt shift the cur"e

J ti 54


33/62

,ad cow disease $ills 7H of cows

R o b o t s

=iDDas

Juestion 54

33

/ shift inward only for

-i11a

J ti 5=


34/62

B- 3il Spill in the Gulf

C a p i t a l & o o d s

( & u n s !

Consumer &oods (4utter!

Juestion 5=

34

%ecrease in resources

decrease production

possi!ilities for !oth

J ti 57


35/62

@aster computer hardware


( & u n s !


Juestion 57

35

Juality of a resourceimpro"es shiftin the

cur"e outward

J ti 5D


36/62

,any wor$ers unemployed


( & u n s !


Juestion 5D

36

2he cur"e doesnKt shiftL

Unemployment is +ust a

point inside the cur"e

J ti 5


37/62

Sinificant increases in education


( & u n s !


Juestion 5

37

2he uality of la!or is

impro"ed. Cur"e shifts

outward.


38/62

2he Circular @low ,odel

38

>esource ,ar$et SU--;*%E,/%


39/62

39-roduct ,ar$et

>esource ,ar$et

Businesses Indi"idualsG o o d

s a n d S e r " i c e s 6 6 6 > e " e n u e 6 6 6

6 6 6 S

p e n d i n

6 6 6 G o o d

s a n d

S e r " i c e

s

SU--;*%E,/%

%E,/%SU--;*

6 6 6 C o s t s

6 6 6

> e s o u

r c e s

6 6 6 I n c o m e 6 6 6 > e s o u r c e s

( @ a c t o r s o f

- r o d u c t i o n )


40/62

International 2radeWhy do countries trade and

what is speciali1ation?

40

- U it 3 t it C t > i


41/62

-er Unit 3pportunity Cost >e"iew

/ssume it costs you 678 to produce 7 t&shirts. What is

your -E> UI2 cost for each shirt?

68 per shirt

ow# ta$e money our of the euation. Instead ofproducin 7 shirts you could ha"e made 8

hats.

. What is your -E> UI2 3--3>2UI2* C3S2 foreach shirt in terms of hats i"en up?

shirt costs < hats

UI2 3--3>2UI2* C3S2 for

each hat in terms of shirts i"en up? 41

Opportunity Cost

'nits &ained

=er 'nit Opportunity Cost

- U it 3 t it C t > i


42/62

-er Unit 3pportunity Cost >e"iew>onald ,c%onald can produce onald has a C3,-/>/2INE /%N/2GE in the

production of !urers

-apa Mohn has a C3,-/>/2INE /%N/2/GE in the

production of pi11a

pi11a cost 8 !urers

!urer costs O8 pi11a

pi11a costs < !urers

!urer costs O< pi11a

/!solute and Comparati"e /d"antae


43/62

/!solute and Comparati"e /d"antae/!solute /d"antae

•2he producer that can produce the most output 3>

reuires the least amount of inputs (resources)•E': -apa Mohn has an a!solute ad"antae in pi11as

!ecause he can produce 88 and >onald can only

ma$e


44/62

Benefits of Speciali1eand 2rade

44

International 2rade


45/62

International 2rade

S u g a r ( t o n s !


45

40

35

30

25

20

15

10

5

0

30

25

20

15

10

5

0

A 58 5A 78 7A ?8 A 58 5A 782heat (tons! 2heat (tons!

S W

8 48

.7


46/62

2>/%E S0I@2S 20E --CL



45

40

35

30

25

20

15

10

5

0

30

25

20

15

10

5

0

A 58 5A 78 7A ?8 A 58 5A 78

".*%R *R";%

".*%R *R";%

2heat (tons! 2heat (tons!

International 2rade

46

US/ Bra1il

2h t S


47/62



45

40

35

30

25

20

15

30

25

20

15

10

A 58 5A 78 7A ?8 A 58 5A 782heat (tons! 2heat (tons!

'S"

4raDil

2heat Sugar

?8 ?8

58 78

(52 costs 5S! (5S costs 52!

(52 costs 7S! (5S costs 52 Suar?

2 Wheat?

4. Which country should I,-3>2 Wheat?

47


48/62

Output uestions0

OOO

Output0 Other goes Over

48


49/62

Input uestions0

IO' Input0 Other goes 'nder

49

Comparati"e /d"antae -ractice


50/62

Comparati"e /d"antae -racticeCreate a chart for each of the followin pro!lems.

•@irst& Identify if it is a output or input uestion

•Second&Identify who has the /BS3;U2E /%N/2/GE•2hird&Identify who has a C3,-/>/2INE /%N/2/GE

•@ourth& Identify how they should speciali1e

. Sara i"es < haircuts or perm and hour. ,ean i"es 4 haircuts

or < perms per hour.


51/62

Unit : BasicEconomic Concepts

51

Scarcity ,eans 2here Is ot Enouh @or


52/62

Scarcity ,eans 2here Is ot Enouh @or

E"eryone

Go"ernment must step in to help allocate

(distri!ute) resources 52

%very society must ans#er three Guestions0


53/62

%very society must ans#er three Guestions0

2he 2hree Economic Juestions

. What oods and ser"ices should !e produced?


54/62

Economic Systems. Centrally&-lanned

(Command) Economy


55/62

Centrally&-lanned

Economies(a$a Communism)

55

Centrally -lanned Economies


56/62

Centrally -lanned EconomiesIn a centrally planned economy (communism) the o"ernment

. owns all the resources.

3@I2 ,E/S 3 ICE2INESLL56

/d t d %i d t


57/62

/d"antaes and %isad"antaes

. ;ow unemployment&e"eryone has a +o!


58/62

2he difference !etween orth and South 9orea at niht. orth 9oreaQs G%- is 6=8 Billion

South 9oreaQs G%- is 6.4 2rillion (4< times reater).


59/62

@ree ,ar$et System(a$a Capitalism)

59

Ch t i ti f @ , $ t


60/62

Characteristics of @ree ,ar$et

5 ittle government involvement in the economy

(aisseD .aire et it be!

7 Individuals O2$ resources and ans#er the three

economic Guestions

? *he opportunity to make =RO.I* gives people

I$C%$*IF% to produce Guality items efficiently

6 2ide variety of goods available to consumers

A Competition and Self-Interest #ork together to

regulate the economy (keep prices do#n and

Guality up!

Re#ord for Communism 60

E'ample of @ree ,ar$et


61/62

E'ample of @ree ,ar$et%/ample of ho# the free market regulates itself0

If consumers #ant computers and only one companyis making themH

Other businesses have the I$C%$*IF% to start

making computers to earn =RO.I*

*his leads to more COM=%*I*IO$H2hich means lo#er prices, better Guality, and more

product variety

2e produce the goods and services that society

#ants because )resources follo# profits+

*he %nd Result0 Most efficient production of the

goods that consumers #ant, produced at the lo#est

prices and the highest Guality61

2he In"isi!le 0and


62/62

2he In"isi!le 0and2he concept that societyKs oals will !e met as

indi"iduals see$ their own self&interest.E'ample: Society wants fuel efficient cars

•-rofit see$in producers will ma$e more.

•Competition !etween firms results in lowprices# hih uality# and reater efficiency.

•2he o"ernment doesnKt need to et in"ol"ed

since the needs of society are automatically

met.

Competition and self&interest act as an in"isi!le

hand that reulates the free mar$et.

Documents

AP Micro 1 8 Summary