AP Econ Unit 1 Review

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the basics: deals with the basic problem of SCARCITY and how people make TRADE OFFs between alternatives
the condition that occurs because people's wants and needs are unlimited, while the resources requiered to meet those needs are limited
Does scarcity appy to everything?
no, a good is not scarce if everyone can have all they want of it
the decision making process about what NEEDS will be satisfied and how resources will be used to satisfy them
opportunity cost
the real cost of an item (the value of the alternative forgone when a decision is made; what you would get if you made the other choice)
opportunity benefit
what you would gain from making a decision
what are resources allocated by?
combined actions of millions of households and firms
Mankiw's Principle 1: People face trade offs (individual)
making decisions requires trading one good against another
an economy is efficient if there is no way to make anyone better off without making at least 1 person worse off (no missed opportunities)
increasing benefits are being distributed uniformly
Mankiw's Principle 2: the cost of something is what you give to get it (individual)
requires comparing costs and benefits of alternative courses of action
Mankiw's Principle 3: rational people think at the margin
systematically and purposefully do the best they (rational thinkers) can to achieve their objectives given available opportunities
marginal changes
small incremental adjustments to a plan of action
is the average cost higher or lower than the marginal cost
Mankiw's Principle 4: people respond to incentives
rational people respond to something that induces a person to act
how does a higher market price affect people responding to incentives?
provides incentive for buyers to consume less and an incentive for sellers to produce more
Mankiw's Principle 5: trade can make everyone better off (how people interact with another)
allows buying a greater variety of goods and services at a lower cost
Mankiw's Principle 6: Markets are usually a good way to organize economic activity (how people interact with another)
when the government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand's ability to coordinate the decisions of what is worth purchasing and what isn't
free market
contain many buyers and sellers of numerous goods and services, all interested in primarily their own well being
market economy
economy that allocates resources through decentralized decisions of many firms and households as they interact in markets for goods and services
Mankiw's Principle 7: Governments can sometimes improve market outcomes (interaction between people)
invisible hand can only work its magic only if the government enforces the rules and maintains institutions that are key to a market economy -promote efficiency or to promote equality
market failure
a situation in which a market left on its own fails to allocate resources efficiently
Mankiw's Principle 8: A country's standard of living depends on its ability to produce goods and services (economy as a whole)
as productivity increases, standard of living increases
Mankiw's Principle 9: Prices rise when the government prints too much money (economy as a whole)
inflation is due to the increase of money printed
Mankiw's Principle 10: Society faces a short-run trade-off between inflation and unemployment (economy as a whole)
inflation increases, employment decreases (inversely proportional)
productive (PPF)
produces at a point on PPF
a model that helps economists think about the trade offs our economy faces: efficiency, opportunity cost, economic growth, scarcity
allocative (PPF)
produces at point along its PPF that makes consumers as well off as possible
increasing opportunity cost (PPF)
more of one resource = more of 2nd resource has to give up
gains from trade
dividing tasks and trading, two people can each get more of what they want than they could get by being self-sufficient
how can the economy produce more?
by having each person specialize in a task and trade with others
comparative advantage
producing something if the opportunity cost of that production is lower for that individual than for other people
absolute advantage
can produce more output with a given amount of input (time & resources)
terms of trade
amount 1 < x < amount 2
productive efficiency is the same as ...?
pareto effiecieny (able to produce as much as they can)
traditional economy
production is done by individuals for themselves (religious groups, tribal groups)
command economy
production is done based on what the government thinks is best (socialism, communism, USSR)
market economy
production is based on individual interactions in the marketplace (capitalism, USA)
Mixed economy
in reality, nearly all economies are mixed
invisible hand
individual does something good for themselves that benefits others in society (money hungry)
public goods rationale (need)
some goods are so important that they are best provided by the government at little or no cost to citizens (public schools, police)
economies of scale (efficiency)
some goods can be provided more efficiently when they are provided on a large scale (roads, wi-fi)
free rider problem
people will try to benefit from a public good without sharing in its cost, decreasing efficiency (not paying taxes, but wanting help of police)
bill of rights issues
people argue some social decisions cross the line of allowing individual freedome/choice (drug laws, public smoking bans)
private sector
part of economy owned by individuals and operated for their benefit (take place only when both sides benefit)
public sector
part of economy that is owned and operated for the benefit of the whole society
5 functions of the public sector
-promote competition -define and enforce property rights -provide public goods -reduce negative externalities -redistribute income
What does Friedman identify as the most appropriate means in a liberal society?
free discussion and voluntary co-operation
can be prevented from usage
helps one person from usage and inversely hurts another by same usage
private good
goods that are excludable and rival in consumption (preventable and hurtful)
common good
cannot be prevented from use but hurts one other person's ability to use it
natural monopoly
can be prevented from usage but does not hurt other's ability to use it
public good
neither excludable nor rival in consumption, cannot be prevented and does not reduce other person's ability to use it
negative externality
a loss suffered but are not compensated for it
3 basic economic questions
1. what will be produced 2. how will it be produced 3. from whom will it be produced
what is the study of economics?
the study of how producers and consumers interact to meet their unlimited wants and needs with limited resources
free lunch
no such thing as free, always hidden cost behind something