Unit 1: Basic Economic Concepts AP Exam: 8-12% Modules 1-4

Module 1 Key Terms & Review Economics Market economy Command economy Property rights Resource/factor of production Land Labor Capital Entrepreneurship Macroeconomics Microeconomics 1. 2. 3. 4. 5.

Scarcity

Opportunity Cost The value of what you must give up when you make a particular choice Can be in terms of $$, time, resources

TANSTAAFL!

Marginal Analysis: One more… Think of a decision that you made yesterday and analyze the marginal benefits and marginal costs of that decision Think of a major decision that you will have to make in the near future and analyze the marginal benefits and marginal costs of that decision

Positive v. Normative Economics

Module 2 Key Terms & Review Business cycle Depression Recession Expansion Unemployment Labor force Unemployment rate Aggregate output (GDP) Inflation Deflation Price stability Ceteris paribus 1. 2. 3. 4. 5.

Module 3 Key Terms & Review 1. 2. 3. 4. 5. Production Possibilities Curve Efficiency

Production Possibilities A B C D E Pizzas (x) 1 2 3 4 Robots (y) 10 9 7

Scarcity → desire for efficiency Full employment Using all available resources Full production Using employed resources efficiently Productive efficiency – producing a good or service in the least costly way Allocative efficiency – producing the “right” mix of goods and services (as determined by society)

Law of Increasing Opportunity Cost An increasing amount of Y must be given up for each additional unit of X that is produced “Economic resources are not completely adaptable to alternative uses”

Graph Tips Points represent temporary, short-run economic conditions Inside = Inefficient production / unemployment On = Productive efficiency / full employment Outside = Not possible w/ current level of resources Curve shifts represent permanent, long-run economic conditions Outward = economic growth (not always even) Increase in resources, productivity, technology, international trade (Module 4) Present v. future possibilities Inward = loss of capacity NOT a recession!

Module 4 Key Terms & Review 1. 2. 3. 4. 5. Terms of trade

Economic Basis for Trade The distribution of natural, human, and capital resources among nations is uneven Labor-intensive goods Land-intensive goods Capital-intensive goods

Specialization Absolute advantage Comparative advantage ability to produce an item at a lower cost (measured in time, quality, or cost of inputs) than someone else Comparative advantage ability to produce an item at a lower OPPORTUNITY COST than someone else

Example The CPA and the painter CPA ($50/hour) Painter ($15/hour) 30 hours to paint a house, 2 hours to file a tax return Painter ($15/hour) 40 hours to paint a house, 10 hours to file a tax return

Tom & Hank Who has the absolute advantage in each product? What will be the total level of production without trade?

Comparative Advantage How much of item A could be produced in the time it takes to make item B? Tom 30 coconuts = 40 fish 1 coconut = 4/3 fish / 1 fish = ¾ coconut Tom’s Opportunity Cost Hank’s Opportunity Cost One fish ¾ coconut 2 coconuts One coconut 4/3 fish ½ fish Tom will specialize in fish because he gives up less coconuts to produce them Hank will specialize in coconuts because he gives up less fish to produce them

Gains from Trade

Tom’s Opportunity Cost Terms of Trade Tom’s Opportunity Cost Terms of Trade Hank’s Opportunity Cost One fish ¾ coconut 1f = 1 c 2 coconuts One coconut 4/3 fish 1f = 1c ½ fish The terms of trade must make both people better off Tom gets ¼ more coconut for each fish he trades (1 > ¾ ) Hank gets ½ more fish for each coconut that he trades (1 > ½ )

Trade & the PPC Draw PPC graphs for Tom and Hank that show how their production possibilities will change if they trade Note: The whole PPC will not shift outward. Tom’s ability to product fish has not changed. What HAS changed is how many coconuts he can get if he trades away all of his fish.

Unit 1 Review 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Read Section 1 Appendix pgs. 36-42