First Principles AP Econ

Economics The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity

12 Basic Principles of Economics 1. The fundamental problem -resources are scarce Unlimited wants and needs: Society Individual Four factors of production Land- natural resources used in the production process Labor – physical and mental talents of individuals in the production process Capital – all manufactured aids used in producing consumer goods and services Entrepreneurship –human attribute distinct from labor

2. The real cost of something is what you must give up to get it Opportunity cost: what you give up in order to get the item you want b. Ex: go to college or find a job?

analysis 3. “How Much?” is a decision at the margin Examples: studying, eating Compare costs and benefits of doing a little bit more – marginal analysis

4. People usually exploit opportunities to make themselves better off Example: Jiffy Lube in Manhattan The role of incentives:

5. There are gains from trade Division of labor and specialization: 6. Markets move toward equilibrium Jiffy Lube in Manhattan (again): what happens if this scenario was real? Another example: Safeway lines Markets are predictable

7. Resources should be used as efficiently as possible to achieve society’s goals Efficiency: Take all opportunities to make some better off while not making anyone else worse off Equity: Examples of conflict?

8. Markets usually lead to efficiency – the “invisible hand” Opportunities for mutual gain are usually taken Examples:

9. When markets don’t achieve efficiency, govt intervention can improve society’s welfare Example: 10. One person’s spending is another persons income Chain reaction effect:

11. Overall spending sometimes gets out of line with the economy’s productive capacity Example: the Great Depression Can lead to inflation: 12. Govt policies can change spending Varying taxes, controlling circulation of money, etc.

The Office “The Art of the Swap http://economicsoftheoffice.com/all/?sea=7&eps=7_19

HW Ch1&2 Due Aug 23rd Read Ch 1 &2 P. 1-42 Basic Concepts Test Aug 24th