Micro unit 1


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AP Microeconomics Unit I

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Micro unit 1

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