AP Economics Study Guide
Modules 1,2,4
Unit 1: Basic Economic Concepts 1) Households
Macroeconomics: Big picture of the economy, overall ups and downs
2) Businesses
Deals with aggregates, sums of data from many different markets
3) Government 4) Other Countries
Basic economic problem: Society’s wants are virtually unlimited and insatiable, but economic resources are limited or scarce. vs
Market Economy ▪ Not regulated, choices
Command Economy ▪ Regulated, determined by government
vs Positive Economics ▪ Objective, fact-based, can be tested
Normative Economics ▪ Subjective, opinionopinion-based, can’t be proved/disproved
4 Types of Resources:
Income Type:
1. Land: any resource originating in nature
Rent
2. Labor: all human effort, physical and mental
Wages/Salary
3. Capital: any physical objects that are used in the production of goods and services
Interest
4. Entrepreneurship: risk and innovation in putting the other 3 factors together to produce ouput
Profits
Opportunity Cost: what you give up when you make a dec ision, the next best alternative Production Possibilities Curve: Shows the possibilities of two commodities that can be produced in an economy with a fixed amount of resources B E
c r
Points B, C, D: efficient points Point A: unemployment of resources
C
s
Point E: Not possible without growth:
f
1. More resources 2. Better Technology
y t i t a
D Quantity of Butter Produced
PPC is bowed out to show the Law of Increasing Opportunity Cost, which states that the amount of a good which has to be sacrificed for each additional unit of another good is more than was sacrificed for the previous unit.
AP Economics Study Guide
Modules 1,2,4 A
Using PPC: Corn (bushels)
Sunscreen (gallons)
Country A
300
150
Country B
200
150
Corn
Sunscreen
150 =1/2 300 gal.
B 150 = ¾ 200 gal.
300 = 2
200 = 4/3
150 bu.
150 bu.
Minimum that Country A would accept for a bushel of corn is ½ gallon of sunscreen, because they could produce it for less than that amount themselves.
Tyler Jessica Tyler Mow
60 = 3/2 40 trim
Trim 40 = 2/3 60 mow
Mow (min)
Trim (min)
60 75
40 90
Jessica 75 = 5/6 90 trim 90 = 6/5 75 mow
Tyler- comparative advantage in mowing Jessica- comparative advantage in trimming
For PPC’s in terms of units of nd production, the chart goes 2 st st unit /1 unit, in terms of the 1 unit: ex) 150 gallons/300 bushels = opp. cost of ½ gallon per bushel When they are in terms of time, st then it goes time of 1 /time of nd st 2 = opp. cost of doing the 1 in nd terms of 2 ex) 40 min trim/60 min mow = opp. cost of 2/3 mow per trim
Absolute advantage: producing the most of something, or something in the least amount of time Comparative advantage: producing something with the lowest opportunity cost Specialization: when each produces only the thing that they have the comparative advantage in, le ading to greater productivity
