AP Macro Unit 1 Basic Econ Concepts Notes
5 Key Assumptions
Economics is the science of scarcity and the study of choices Limited resources & unlimited human wants Study of how individuals and societies deal with Scarcity
1) Society has unlimited wants and limited resources (scarcity).
2) Due to scarcity, choices must be made. Every choice has a cost (a trade-off).
Certeris Paribus -- all other things being equal
3) Everyone's goal is to make choices that maximize their satisfaction. Everyone acts in their own "self-interest.
Scarcity- we have unlimited wants but limited resources. Since we are unable to have everything we desire, we must make choices on how we will use our scarce resources. In order to be considered scarce, a good or service must be (1) limited, (2) desirable, (3) have a cost
4)Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.
5) Real-life situations can be explained and analyzed through simplified models and graphs.
In economics we will study the choices of individuals, firms, and governments.
MICROeconomics - study of small economic units such as individuals, firms, and industries (ex: supply and demand in specific markets, production costs, labor markets, etc.)
Marginal analysis (aka: "thinking on the margin") making decisions based on increments
In economics the term marginal = additional (1 more unit) You will continue to do something as long as the marginal benefit is greater than the marginal cost * MB > MC = good decision MC > MB = bad decision/not worth it
MACROeconomics - study of the large economy as a whole or economic aggregates (ex: economic growth, government spending. inflation, unemployment, international trade)
Positive v. Normative Economics Positive Statements- Based on facts. Avoids value judgements (what is).
Trade-offs and Opportunity Cost
All decisions involve trade-offs
Normative Statements- Includes value judgements (what ought to be).
Trade-offs - ALL the alternatives that we give up when we make a choice >Ex: If you choose to study for an economics test, then you give up a chance to go to the movies or read a book (trade-offs) Opportunity cost- most desirable alternative given up when you make a choice. > #1 trade-off you give up
"THERE IS NO SUCH THING AS A FREE LUNCH!" (TINSTAAFL) There's ALWAYS a COST!
2. Labor -Any effort a person devotes to a task for which that person is paid; workforce (Ex: manual laborers, doctors, teachers, Waiters, etc.)
Economic Terminology (Must Know!)
Utility = Satisfaction * Marginal = Additional * Allocate = Distribute
3. Capital- Physical Capital - Any human-made resource that is used to create other goods and services (Ex: tools, tractors, machinery, buildings, factories, etc.) Human Capital - Any skills or knowledge gained by a worker through education and experience 4. Entrepreneurship - ambitious leaders that combine the other factors of production to create goods and services. Ex: Henry Ford, Bill Gates, Inventors, Store Owners, etc. Entrepreneurs take the initiative, innovate, and are "risk-takers" in order to make a PROFIT
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