AP Micro Unit 1

we have unlimited wants but limited resources

( 1 ) Land

( 2 ) Labor

( 3 ) Capital (physical and human)

( 4 ) Entrepreneurship

( 1 ) What goods and services should be produced?

( 2 ) How should these goods and services be produced?

( 3 ) Who consumes these goods and services?

the method used by a society to produce and distribute goods and services

( 1 ) Command (Centrally-Planned) Economy

( 2 ) Free Market Economy

( 3 ) Mixed Economy

in a centrally planned economy (communism), the government ( 1 ) owns all the resources and ( 2 ) answers the three economic questions

there is little incentive to work harder and central planners have a hard time predicting preferences

( 1 ) low unemployment; everyone has a job

( 2 ) great job security - the government doesn’t go out of business

( 3 ) less income inequality

( 4 ) “free” health care

( 1 ) no incentive to work harder

( 2 ) no incentive to innovate or come up with good ideas

( 3 ) no competition keeps quality of goods poor

( 4 ) corrupt leaders

( 5 ) few individual freedoms

( 1 ) little government involvement in the economy

( 2 ) individuals OWN resources and answer the three economic questions

( 3 ) the opportunity to make profit gives people incentive to produce quality items efficiently

( 4 ) wide variety of goods available to consumers

( 5 ) competition and self-interest work together to regulate the economy (keep prices down and quality up)

the concept that society’s goals will be met as individuals seek their own self-interest

a system with free markets but also some government intervention

part of the economy that is run by individuals and businesses

part of the economy that is controlled by the government

→ individuals demand products and supply resources

→ businesses supply products and demand resources

→ individuals and the government demand in the product market

→ businesses supply in the product market

a model that shows alternative ways that an economy can use its scarce resources

resources are easily adaptable for producing either good - result is a straight line PPC

as you produce more of any good, the opportunity cost (forgone production of another good) will increase - result is a bowed out PPC

( 1 ) change in resource quantity or quality

( 2 ) change in technology

( 3 ) change in population

countries that produce more capital goods will have more growth in the future

the producer than can produce the most output OR requires the least amount of inputs (resources)

the producer with the lowest opportunity cost

ALL the alternatives that we give up when we make a choice

most desirable alternative given up when you make a choice

the traditional out of pocket costs associated with making a decision

the opportunity costs of making a decision

making decisions based on increments (you will continue to do something as long as the marginal benefit is greater than the marginal cost)

as you consume anything, the additional satisfaction that you will receive will eventually start to decrease

Marginal Utility / Price

the consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other

MUx / Px = MUy / Py

compare additional costs and additional benefits when making a decision

Nation Y must have a comparative advantage in producing coffee

no, because he can increase his total utility by purchasing more music downloads and fewer snacks

government involvement in the allocation of resources