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● Production Possibilities Curve ● Efficiency

● 1.● 2.● 3.● 4.● 5.

Production PossibilitiesA B C D E

Pizzas (x) 0 1 2 3 4

Robots (y) 10 9 7 4 0

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● Terms of trade ● 1.

● 2.● 3.● 4.● 5.

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

●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) ● 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

Tom’s Opportunity Cost

Hank’s Opportunity Cost

One fish ¾ coconut 2 coconuts

One coconut 4/3 fish ½ fish

● 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 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

Terms of Trade

●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 )

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

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