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Micro unit 1


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AP Microeconomics Unit I

AP Microeconomics Unit I

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  • 1. Microeconomics
    UNIT: I
  • 2. Micro Terms
    Economic Perspective: The economic viewpoint which society is viewed.
    Scarcity: lacking the resources required to meet needs
    Factors of production: Basic economic resources
    Land: physical place, gifts from nature (oil, etc)
    Capitol: manmade items on land (infrastructure)
    Labor: physical and mental talents of people.
    Entrepreneurial ability: vision for opportunity
  • 3. Micro Terms (cont’d)
    Choices: decisions made when unlimited wants meet limited means
    Full employment (of resources): using all economic resources fully
    Full production (of resources): using things to full efficiency; stresses efficiency
    Productive efficiency: make product as cheap as possible (black highlighter)
    Allocative efficiency: how to cheaply produce what people want (colored highlighters)
    Opportunity cost: value of forgone activity
    Law of increasing opportunity cost: as time goes on, the value of opportunity cost gets greater.
  • 4. Micro Terms (cont’d)
    Production Possibilities Table (PPT): Combinations of two goods that can be produced or purchased.
    Production Possibilities Curve (PPC): Graphic representation of the combination of two goods that can be produced or purchased.
    Consumer goods: satisfy immediate need (like pizza ingredients).
    Capital goods: investment that benefits you down the line (like pizza oven).
    Absolute advantage: One country can make more of a product than another country (who makes most at full employment).
    Comparative Advantage: One country has a lower opportunity cost of producing a good than another country (who benefits most from trade).
  • 5. “The Economic Way of Thinking”
    Everything has a cost. (Opportunity cost included)
    People choose for good reasons. (May not be good to you, but is to them)
    Incentives matter. (like a bribe)
    People create economic systems to influence choices and incentives. (not like controlled economies)
    People gain from voluntary trade. (both people win)
    Economic thinking is marginal thinking. (look at sections, not averages)
    The value of a good or service is affected by people’s choices. ( value goes down if people won’t buy)
    Economic actions create secondary effects. (other things result, acts as a catalyst)
    The test of a theory is its ability to predict (predict based on past action)
  • 6. PPC’S
    *types follow opportunity cost of situation.
    PPC: Increasing
    PPC: Constant
    PPC: Zero
    Capital goods
    Consumer goods
  • 7. Specialization & Trade
  • 8. Specialization & Trade
    Absolute Advantage = U.S.
    At full employment (when one variable is 0) the U.S. can make more of a product than Mexico.
    U.S. = 30 soybeans Mexico = 15
    U.S. = 90 avocado Mexico = 60
  • 9. Specialization & Trade
    Comparative Advantage
    For Avocado = Mexico
    For every gain of 4 avocados, Mexico only loses 1 soybean.
    The U.S. only gets 3 avocados for the same price of 1 soybean.
    • Comparative Advantage
    • 10. For Soybeans = U.S.
    • 11. For every gain of 1 soybean, the U.S. must spend 3 avacado
    • 12. Mexico must spend 4 avacado in order to gain 1 soybean.
    Use chart columns B & C to observe these statistics!
  • 13. Economies
    Essential Questions:
    #1- Who directs the economic activity?
    #2- Who owns the means of production?
  • 14. Traditional Economy
    Traditional Economy- economic activity is based on precedent.
    No change over time; produced for years the same way
    Collective communitarian use of barter:
    -> trade something else of value; not dealing with money
    Native American culture (trade corn for wheat, etc.)
    History (traditional groups) own and direct economic activity
  • 15. Command Economy
    Command economy- associated with communism; government directs essential authority, they decide what they will buy.
    Determine what people have access to
    Controls means of production, they produced what THEY felt necessary
    Economic freedom is replaced by economic security
    Soviet 5 year plans (past)- all used to build them/ make them industrialized; allowed to say if you didn’t make your good, you’re sent to camp so people can get things done. Whole country works around this plan/goal.
    China’s (ED2) (present)- if they didn’t make changes they would cease as a government and people would rebel
  • 16. Market Economy
    Market economy- people direct the economic activity
    People buy products, so you control it
    Private individuals own means of production
  • 17. Circular Flow Diagram
    Money income (wages, rents
    Labor, land, capital, entrepreneurial ability
    Goods and services
    Goods and services
    Consumption expenditures
  • 18. More on Market Systems
    Invisible hand (Smith)- idea that if leftalone, economic activity governs itself (through incentives)
    Efficiency: forces businesses to produce & sell goods in the least costly way (if their price is too high, consumer will just buy it somewhere else!)
    Incentives: Reason for doing something (saving money, saving time, etc)
    Freedom: ability to make our own choices
  • 19. Transactions
    Transaction- event at which a good or service is traded for money (normally between two people)
    Externalities- How 3rd parties are impacted in a transaction
    Negative externality/spillover cost: 3rd part is adversely affected & has to pay part of the cost (like people paying for pollution that don’t buy products that produce it)
    Positive externality/ spillover benefit: 3rd party benefits from a transaction (like person who admires a neighbor’s flowers, but doesn’t make or buy the flowers being admired)
  • 20. Last of Micro Terms
    Property rights- Your ability to protect what it yours.
    Bargaining- Make a deal or a compromise between parties.
    Cost-benefit analysis- decision making process (like a pros and cons list)
    Marginal cost- cost of the next unit of a good or decision
    Marginal benefit- extra satisfaction received from the next unit of a good or decision
  • 21. END OF UNIT I