1. AP Macroeconomics Key Assumptions in Economics, Scarcity, Opportunity Cost and the Production Possibilities Curve

2. Key Assumptions in Economics People are rationally self-interested – They seek to maximize their utility (happy points) People generally make decisions at the margin – They weigh the marginal benefit against the marginal cost of a decision Ceteris Paribus – Economists hold factors constant, NO “what ifs”; “but”; or “what abouts”.

3. Basic Economic Vocabulary Economics – The study of choices people make to satisfy their needs and wants Microeconomics – The study of how individuals and firms deal with scarcity Macroeconomics – The study of how society as a whole deals with scarcity

4. Basic Economic Vocabulary Needs – Necessities for survival Wants – Goods and services consumed beyond what is necessary for survival

5. Basic Economic Vocabulary Goods – Physical objects that can be purchased Services – Actions or activities performed for a fee Consumers – People who purchase goods and services Producers – People who supply goods and services

6. Resources a.k.a. The Factors of Production – These MUST be present to produce! Economists classify resources into 4 categories 1.Land Natural resources The payment for Land is RENT 2.Labor Human resources The payment for Labor is WAGES 3.Capital (a product of Investment) Tools, machines, factories The payment for Capital is INTEREST 4.Entrepreneurship The special ability of risk-takers to combine land, labor and capital in new ways in order to make profit The payment for Entrepreneurship is PROFIT

7. The Fundamental Problem of Economics: Scarcity People have unlimited wants but the resources to satisfy those wants are scarce. Therefore, we must make choices about how to use our scarce resources. We face trade-offs when it comes to using available resources. – Examples of the world?

8. Opportunity Cost Once a decision has been made, an opportunity cost is incurred. Opportunity cost is the next best alternative use for a resource. (choice) – Example? Student view?; parent view?; employee view? Business mgr view? No matter what we do with our time or resources, we always incur opportunity cost. TINSTAAFL.

9. TINSTAAFL There is no such thing as a free lunch.

10. TINSTAAFL Everything has a cost.

11. TINSTAAFL Illustrated: The PPC The PPC = The Production Possibilities Curve The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.

12. TINSTAAFL Illustrated: The PPC

13. Graph a new PPC 2008 question 3 FRQ……….collaborative quiz. https://www.youtube.com/watch ?v=SJQ56vJoy3Y&list=PL8C243C1 F4555FDC7

14. Question 3 6 points (1 + 2 + 2 + 1) (a) 1 point: One point is earned for stating that the opportunity cost of a bicycle in Artland is 600/300 = 2 hats. (b) 2 points: One point is earned for stating that Rayland will import bicycles. One point is earned for any one or more of the following explanations: Rayland has a comparative advantage in hats. Rayland has a comparative disadvantage in bicycles. Rayland has a lower opportunity cost in hats or higher opportunity cost in bicycles. Artland has a comparative advantage in bicycles. Artland has a comparative disadvantage in hats. Artland has a lower opportunity cost in bicycles or a higher opportunity cost in hats. (c) 2 points: One point is earned for stating that it is advantageous for Artland. One point is earned for stating that it is NOT advantageous for Rayland. (d) 1 point: One point is earned for stating that Rayland has a comparative advantage in producing