Module 1: First Principles AP Microeconomics Module 1: First Principles Mrs. Dannie G. McKee Sevenstar Academy dmckee@educatoronline.net August 2012

Learning Objectives A set of principles for understanding the economics of how individuals make choices A set of principles for understanding how individual choices interact A set of principles for understanding economy-wide interactions 9/22/2018 Mrs. Dannie G. McKee

Individual Choice Basic principles behind the individual choices: Individual choice is the decision by an individual of what to do, which necessarily involves a decision of what not to do. Basic principles behind the individual choices: 1. Resources are scarce. 2. The real cost of something is what you must give up to get it. 3. “How much?” is a decision at the margin. 4. People usually take advantage of opportunities to make themselves better off. 9/22/2018 Mrs. Dannie G. McKee

“How Much?” Is a Decision at the Margin You make a trade-off when you compare the costs with the benefits of doing something. Decisions about whether to do a bit more or a bit less of an activity are marginal decisions. 9/22/2018 Mrs. Dannie G. McKee

Resources are SCARCE A resource is anything that can be used to produce something else. Ex.: Land, labor, capital Resources are scarce – the quantity available isn’t large enough to satisfy all productive uses. Ex.: Petroleum, lumber, intelligence 9/22/2018 Mrs. Dannie G. McKee

The Real Cost of Something Is What You Must Give Up to Get It The real cost of an item is its opportunity cost: what you must give up in order to get it. Opportunity cost is crucial to understanding individual choice: Ex.: The cost of attending the economics class is what you must give up to be in the classroom during the lecture. Sleep? Watching TV? Rock climbing? Work? All costs are ultimately opportunity costs. 9/22/2018 Mrs. Dannie G. McKee

Everybody thinks about opportunity cost. I would rather be surfing the internet! Everybody thinks about opportunity cost. The bumper stickers that say “I would rather be … (fishing, golfing, swimming, etc…)” are referring to the “opportunity cost.” It is all about what you have to forgo to obtain your choice. 9/22/2018 Mrs. Dannie G. McKee

Opportunity Cost and Decisions An explicit cost is a cost that involves actually laying out money. An implicit cost does not require an outlay of money; it is measured by the value, in dollar terms, of the benefits that are forgone. 9/22/2018 Mrs. Dannie G. McKee

Opportunity Cost of an Additional Year of School 9/22/2018 Mrs. Dannie G. McKee

Marginal Analysis Making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. The study of such decisions is known as marginal analysis. Ex.: Hiring one more worker, studying one more hour, eating one more cookie, buying one more CD, etc. 9/22/2018 Mrs. Dannie G. McKee

Accounting Profit Versus Economic Profit The accounting profit of a business is the business’s revenue minus the explicit costs and depreciation. The economic profit of a business is the business’s revenue minus the opportunity cost of its resources. It is often less than the accounting profit. 9/22/2018 Mrs. Dannie G. McKee

It’s all about the numbers… 9/22/2018 Mrs. Dannie G. McKee

There are Gains from Trades In a market economy, individuals engage in trade: They provide goods and services to others and receive goods and services in return. There are gains from trade: people can get more of what they want through trade than they could if they tried to be self- sufficient. 9/22/2018 Mrs. Dannie G. McKee

There Are Gains From Trade This increase in output is due to specialization: each person specializes in the task that he or she is good at performing. The economy, as a whole, can produce more when each person specializes in a task and trades with others. “I hunt, she gathers—otherwise we couldn’t make ends meet!” The New Yorker, 1991 9/22/2018 Mrs. Dannie G. McKee

Capital The capital of a business is the value of its assets—equipment, buildings, tools, inventory, and financial assets. The implicit cost of capital is the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way. 9/22/2018 Mrs. Dannie G. McKee

Marginal Cost The marginal cost of producing a good or service is the additional cost incurred by producing one more unit of that good or service. 9/22/2018 Mrs. Dannie G. McKee

Marginal Cost - Marginal Benefit The marginal cost curve shows how the cost of producing one more unit depends on the quantity that has already been produced. Production of a good or service has increasing marginal cost when each additional unit costs more to produce than the previous one. The marginal benefit of a good or service is the additional benefit derived from producing one more unit of that good or service. The marginal benefit curve shows how the benefit from producing one more unit depends on the quantity that has already been produced. 9/22/2018 Mrs. Dannie G. McKee

Decreasing Marginal Benefit Each additional lawn mowed produces less benefit than the previous lawn  with decreasing marginal benefit, each additional unit produces less benefit than the unit before. There is decreasing marginal benefit from an activity when each additional unit of the activity produces less benefit than the previous unit. 9/22/2018 Mrs. Dannie G. McKee

Economics is an Approach to decision making, not a list of items to memorize. “The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method--rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.” (From the General Theory of Employment, Interest and Money) 9/22/2018 Mrs. Dannie G. McKee

Module 1: Important Concepts Economics Defined Positive vs. Normative Scarcity Ceteris paribus Trade-offs Macroeconomics Aggregate data Microeconomics Marginal Concepts Circular Flow model Full employment Full production Factors of Production Productive Resources Entrepreneurship Economic growth Economic Systems Traditional Economy Command Economy Market economy Production Possibilities Curve Consumer vs. Capital Good Opportunity Costs 9/22/2018 Mrs. Dannie G. McKee

Resource Paul Krugman and Robin Wells, Microeconomics, 2nd Edition - Teacher © 2008 Worth Publishers. 9/22/2018 Mrs. Dannie G. McKee