AP Economics

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
Policy Economics
when theories are applied to fix problems or meet economic goals
Positive Statements
Based on facts
Normative Statements
Includes value judgements (feelings)
6 Key Assumptions
1. Unlimited wants, limited resources
2. Choices must be made, each choice has a trade off
3. Everyone acts on own self-interest
4. Choices made by comparing marginal cost v. benefit
5. Real life situations can be explained and analyzed through simplified models and graphs
6. Free products are NOT free
there is no such thing as a free lunch
Marginal Analysis
making decisions based on additional benefit vs. additional cost
Trade Offs
all alternatives that we give up whenever we choose one course of action over others
Opportunity Cost
The most desirable alternative given up as the result of a decision (second best thing)
Four Factors of Production
Land, Labor, Capital, Entrepreneurial Ability
Physical Capital
any human made resource that is used to create other goods and services
Human Capital
any skills or knowledge gained by a worker through education and experience
all natural resources that are used to produce goods and services
effort a person devotes to a task for which that person is paid
ambitious leaders that combine the other factors of production to create goods and services
1.) Initiative
2.) Innovate
3.) Take the Risk
Constant Opportunity Cost
same increase/decrease in increment of cost. resources are easily adaptable for producing either good. (straight line)
Law of Increasing Opportunity Cost
As you make more of any good, the opportunity cost (forgone production of another good) will increase
Per Unit Opportunity Cost
Opportunity Cost / Number of Units Gained
Purposeful Behavior
people make decision based on a desired outcome in mind
Three Economic Questions
1. What should be produced?
2. How should it be produced?
3. Who consumes these goods?
Economic Systems
Centrally Planned (command) economy
Free Market Economy
Mixed Economy
Centrally Planned Economy
economic system in which the central government makes all decisions on the production and consumption of goods and services (No profit, no incentive)
Free Market Economy
economy in which the market determines what goods and services are produced. Examples: United States, Canada, Japan
Invisible Hand
the tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interest of society
Absolute Advantage
producer can produce the most output or requires the least input
Comparative Advantage
the producer with the lowest opportunity cost
What will be produced?
The goods and services produced at a continuing profit will be produced, those produced at a continuing loss will not.
How will they be produced?
In combinations and ways that minimize the cost per unit of output.
Who will get the output?
Consumers willing and able to pay the price of the goods.
The resource market is the place where…
Households sell resources and businesses buy resources
Buy resources and sell products
buy products and sell resources

Get access to
knowledge base

MOney Back
No Hidden
Knowledge base
Become a Member