Test 30 multiple choice FRQ sheet

AP Economics Unit 1 Mr. Parish

Economics The study of decision-making and the use of limited resources in an attempt to fulfill unlimited wants

Scarcity Exists whenever there is not enough of something to fulfill all wants. Scarce Desirable Limited

Opportunity Cost The best forgone alternative. What one gives up when deciding to do one thing over another.

Opportunity Cost VALUE of the next best alternative

Opportunity Cost Felix is considering going to Florida for a spring vacation. His roundtrip airfare will be $275.00, car rental $175.00, and hotel expenses $950.00 for a one-week trip. Since he will not be working he will not earn his typical $1250.00 per week. Felix always eats at restaurants, even when he’s home, so he knows that he will spend about $290.00 on food. Calculate the total cost (explicit and implicit) of Felix’s trip. Show and label your work.

Opportunity Cost Felix is considering going to Florida for a spring vacation. His roundtrip airfare will be $275.00, car rental $175.00, and hotel expenses $950.00 for a one-week trip. Since he will not be working he will not earn his typical $1250.00 per week. Felix always eats at restaurants, even when he’s home, so he knows that he will spend about $290.00 on food. Calculate the total cost (explicit and implicit) of Felix’s trip. Show and label your work.

Rational Choice Theory People act in self-interest Decisions are based on opportunity cost Marginal Analysis MB > MC

Economic Models Simplified constructs used to simulate reality

Production Possibilities Frontier A B C

PPF (or PPC) Production Possibilities Frontier (Curve) Addresses The Economic Problem- Scarcity Opportunity cost and Trade-offs Resources/Factors of Production Specialization of Resources Productive and Allocative Efficiency Capital versus Consumer Goods Ceteris Paribus- “all other things constant”

PPF (or PPC)

PPF (or PPC) Concave versus Linear

Shifting PPF Change in resources or technology

Do we want a world with all links and no smiles??????? Productive Efficiency Lowest cost Full employment *P= minimum ATC *Not in this unit! Allocative Efficiency Socially optimal Ideal production quantities *MSB=MSC *P=MC

Micro v. Macro Small picture Big picture Individuals National stats Specific markets Specific firms Specific goods Specific services Specific resources Big picture National stats Country comparisons Money and interest International trade

Positive versus Normative Objective Fact-based Measureable Can Prove or Disprove “Cutting taxes will increase disposable income” Subjective Value-based Not Measurable Cannot Prove or Disprove “Cutting taxes is the best way to improve our economy”

Micro versus Macro Positive versus Normative

Marginal Analysis Compare additional benefit to the additional cost production or consumption Incremental analysis Cost/benefit analysis of a single unit of production or consumption

Marginal Analysis Pizza Paper Clip Company

Marginal Analysis KEEP GOING UNTIL: MB = MC MR=MC MRP=MFC Marginal Utility/Benefit (consumption) Additional satisfaction consumer gains from consuming/ acquiring one additional unit Marginal Return (production) Additional output from one unit increase of variable input

Marginal Analysis Marginal Benefit/Utility/Return decrease *Law of Diminishing Marginal Utility/Returns Marginal Cost (production)tend to increase

3 Economic Questions *coordination tasks

Resources/Factors of Production/Inputs Land = Natural Resources Labor = labor force, human capital Capital = man-made resources, tools, technology Entrepreneurship

Production INPUTS- land, labor, capital, entrepreneurship OUTPUTS- Goods and Services

3 Economic Questions *coordination tasks _______________ to produce

What?

What?

What? Factors of Production Land, Labor, Capital, Entrepreneurship

3 Economic Questions *coordination tasks _______________ to produce

How to produce? Factors of Production Land, Labor, Capital, Entrepreneurship

For whom to produce?

3 Economic Questions *coordination tasks What to produce How to produce For whom to produce Who/what answers these questions? Who/what should answer these questions?

Market v. Command Economies The market generally allocates resources efficiently.

3 Economic Questions COMMAND MARKET

Market or Command North Korea United States? free enterprise capitalism consumer sovereignty competition more efficient better quality profit motive government control government ownership no motivation no private property rights prices determined by s and d lack economic freedom

US- Market or Command?

US Mixed Economy Command Elements Market Failure

3 Economic Questions *coordination tasks _______________ to produce

MARKET v. COMMAND MIXED COMMAND MARKET

Comparative Advantage Absolute Advantage ability to produce with fewer resources Simple definition: better Comparative Advantage ability to produce at a lower opportunity cost

Circular Flow Model