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

2. 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.

3. Scarcity

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

5. TANSTAAFL!

6. 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

7. Positive v. Normative Economics

8. 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.

9. Module 3 Key Terms & Review1. 2. 3. 4. 5.
Production Possibilities Curve
Efficiency

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

11. 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)

12. 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”

13. 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!

14. Module 4 Key Terms & Review1. 2. 3. 4. 5.
Terms of trade

15. 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

16. 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

17. 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

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

19. 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

20. Gains from Trade

21. 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 )

22. 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.

23. Unit 1 Review 1. 2. 3. 4. 5. 6. 7. 8. 9.
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Read Section 1 Appendix pgs