AP Microeconomics Unit 1 Notes: Making Choices in a World of Limited Resources

Scarcity

The condition that resources are limited relative to unlimited wants; you cannot have everything because inputs (time, labor, land, capital, etc.) are finite.

Tradeoff

The idea that choosing more of one option means choosing less of another due to scarcity.

Incentive

Anything that motivates a person or firm to act in a certain way (including rewards, penalties, fees, opportunity costs, or social pressure).

Marginal Analysis

Decision-making that compares the additional (marginal) benefits and additional (marginal) costs of doing a little more or a little less of an activity.

Marginal Benefit (MB)

The additional benefit gained from one more unit of an action (e.g., one more hour worked or one more unit produced).

Marginal Cost (MC)

The additional cost incurred from one more unit of an action (including what must be given up to do it).

Marginal Decision Rule

Do more of an activity if marginal benefit exceeds marginal cost; do less (or stop) if marginal cost exceeds marginal benefit.

Economic Model

A simplified representation used by economists to focus on key relationships and predict or explain outcomes.

Ceteris Paribus

“Other things equal”; an assumption used to isolate the effect of one change while holding other relevant factors constant.

Positive Statement

A factual claim that can be tested in principle (e.g., a higher minimum wage reduces quantity demanded for low-skill labor).

Normative Statement

A value judgment about what should be (e.g., the minimum wage should be higher).

Opportunity Cost

The value of the single next best alternative given up when a choice is made; it exists even when there is no money cost.

Explicit Cost

A direct monetary payment made (what you pay out-of-pocket), which may differ from opportunity cost.

Production Possibilities Curve (PPC)

A graph showing the maximum combinations of two goods an economy can produce with available resources, current technology, and efficient production.

Productive Efficiency

Producing at a point on the PPC, meaning output is maximized given resources and technology.

Inefficiency (Inside the PPC)

A point inside the PPC indicating underutilized resources or misallocation (e.g., unemployment, idle factories).

Unattainable (Outside the PPC)

A point outside the PPC that cannot be produced with current resources and technology.

Increasing Opportunity Cost

When the opportunity cost rises as more of one good is produced; typically shown by a bowed-out (concave) PPC because resources are not equally suited to all production.

Constant Opportunity Cost

When the tradeoff between two goods stays the same; shown by a straight-line PPC, implying resources are equally adaptable between goods.

PPC Shift

A change in an economy’s productive capacity: outward with growth (more resources/better technology) or inward with loss of resources/capacity.

Movement Along the PPC

Reallocating resources between two goods while remaining efficient (more of one good means less of the other), without changing productive capacity.

Absolute Advantage

The ability to produce more of a good with the same resources (or the same output with fewer resources) than another producer.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer; the basis for specialization and trade.

Gains from Trade

Increases in total production and/or consumption that occur when parties specialize according to comparative advantage and then trade.

Terms of Trade

The rate at which one good exchanges for another; for both sides to gain, the trade price must fall between their opportunity costs.