AP Microeconomics Unit 1: Foundations & Systems

Scarcity

The condition resulting from society not having enough resources to produce all the things people would like to have.

Positive Economics

Based on facts and cause-and-effect relationships. It avoids value judgments.

Normative Economics

Based on value judgments and opinions, relating to what 'ought' to be.

Microeconomics

The study of decision-making by individuals, households, and firms in specific markets.

Macroeconomics

The study of the economy as a whole, focusing on broad aggregates.

Factors of Production

Four distinct groups (Land, Labor, Capital, Entrepreneurship) needed to produce goods and services.

Land

All natural resources used in production (e.g., water, oil, timber).

Labor

All physical and mental effort used by humans in production for which they are paid.

Capital

Human-made objects used to create other goods and services.

Entrepreneurship

The person who combines the other factors of production to create a new good or service.

Opportunity Cost

The most desirable alternative given up as a result of a decision.

Trade-off

All alternatives that are forgone when a particular course of action is chosen.

Centrally Planned Economy

An economic system where the government owns resources and answers economic questions.

Free Market Economy

An economic system where individuals or firms own resources and the market regulates itself.

Mixed Economy

An economic system that blends both free market and government intervention.

Production Possibilities Curve (PPC)

A graphical model showing the alternative ways an economy can use its scarce resources.

Efficiency

A situation where an economy is using all resources to their fullest potential.

Inefficiency

A situation where resources are underutilized or not fully employed.

Constant Opportunity Cost

A straight line PPC indicating resources are easily adaptable for producing either good.

Increasing Opportunity Cost

A bowed-out PPC indicating resources are not easily adaptable; higher cost for more of one good.

Shifters of the PPC

Factors that cause the PPC to shift outward (growth) or inward (recession).

Absolute Advantage

The ability to produce more of a good or produce it faster than another producer.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Marginal Benefit (MB)

The additional satisfaction gained from consuming one more unit of a good.

Marginal Cost (MC)

The additional cost incurred from producing or consuming one more unit of a good.

Explicit Costs

Traditional out-of-pocket payments involved in production.

Implicit Costs

The opportunity cost of using resources the firm already owns.

Utility

A measure of satisfaction gained from consuming goods and services.

Law of Diminishing Marginal Utility

As consumption of a good increases, the additional satisfaction from each unit eventually decreases.

Utility Maximization Rule

Consumers should maximize total utility by comparing the marginal utility per dollar for different goods.

Money is Capital

Mistaken belief that money is a factor of production; it is actually not.

PPC Shift vs. Movement

Understanding that unemployment is a point inside the PPC, while shifts are due to capacity changes.

Zero Opportunity Cost

Mistake of assuming 'free' goods have no cost; there is always an opportunity cost involved.

Comparative Advantage Limits

Misconception that one country can have a comparative advantage in everything; mathematically impossible.

Economic Systems

Systems societies occupy to answer the Three Basic Economic Questions.

Marginal

Referring to additional or extra units.

Production Efficiency

Producing in the least costly way; any point on the PPC line.

Allocative Efficiency

Producing the specific mix of goods that society desires; a specific point on the PPC line.

Opportunity Cost Calculation Rule

To calculate opportunity cost: Output Other Goes Over (OOO) or Input Other Goes Under (IOU).

Terms of Trade

The negotiated price between two countries for the exchange of goods, beneficial for both.

Cost-Benefit Analysis

Rational agents compare marginal benefits to marginal costs in decision-making.

Factors of Production - Capital

Includes Physical Capital (machinery, tools) and Human Capital (skills, education).

Competitive Market Failures

Market failures in a free market system such as monopolies or high inequality.

Pros of Centrally Planned Economy

Low unemployment and job security.

Cons of Centrally Planned Economy

No profit incentive, lack of innovation, frequent shortages.

Pros of Free Market Economy

High innovation, variety, and efficiency.

Cons of Free Market Economy

Market failures and potential monopolies.