1. AP MICROECONOMICS UNIT #1 BASIC ECONOMIC CONCEPTS
Lecture #1
An Economic Way of Thinking

2. ECONOMICS The study of how people satisfy their needs and wants
Need: essential for survival
Want: desired item that is not essential
Study assumes Ceteris Paribus – “all other things being equal” – all variables except the one being studied remain constant

3. MICROECONOMICS Studies individual economic units
A person, household, firm, or industry
The market for one product: apples, autos, timber, etc.
Studies the trees vs. the forest

4. MACROECONOMICS
Studies either the entire economy or its basic subdivisions like the government, business, or household sectors
The forest versus the trees

5. Stop to think…
Indicate whether each of the following statements applies to MICROECONOMICS or MACROECONOMICS:
The unemployment rate in the United States was 4.9 percent in January 2008.
A U.S. software firm discharged 15 workers last month because labor is cheaper in India.
An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise.
U.S. output, adjusted for inflation, grew by 2.2 percent in 2007.
Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1 percentage point.
The Consumer Price Index rose by 2.8 percent in 2007.

6. POSITIVE ECONOMICS Focuses on WHAT IS, facts Avoids value judgments
Statements can be tested for accuracy

7. NORMATIVE ECONOMICS Focuses on the way things OUGHT TO BE
Uses value judgments
Statements can’t be tested for accuracy

8. Factors of Production or Productive Resources
LAND (NATURAL RESOURCES)
Materials found in nature
LABOR (HUMAN RESOURCES)
CAPITAL (CAPITAL RESOURCES)
Human made objects used to produce other goods and services
Physical capital: buildings/tools
Human capital: knowledge and skills from education and experience
ENTREPRENEURSHIP: combines the other 3 resources to create new goods and services

9. SCARCITY THE FUNDAMENTAL ECONOMIC PROBLEM!!!!
Unlimited wants vs. Limited resources
Forces choices: decision making and trade-offs

10. Economic Decision-Making
Decisions require us to make trade-offs – giving up one thing to gain another (what we get for what we give)
Decisions have an associated opportunity cost
Opportunity Cost: VALUE of next best alternative given up due to the current choice

11. FOR AN ITEM TO BE SCARCE…
MUST BE:
limited in quantity and
desirable

12. PURPOSEFUL BEHAVIOR
Economics assumes that people behave according to rational self-interest.
Individuals look for ways to increase their utility: the pleasure, happiness, or satisfaction from consuming a good or service

13. Marginal Analysis
Compares Marginal Benefit (MB) and Marginal Cost (MC)
“Marginal” means extra, additional, or change in that results from adding one more unit
Any economic activity should be increased if MB>MC and decreased if MB<MC
The optimal level of the activity is where MB=MC

14. Optimal Allocation of ResourcesMC a c 15 10 5
MB = MC e
Marginal Benefit & Marginal Cost b d MB
Quantity of Pizza
1-14

15. Why Does This Work?
When marginal benefits exceed marginal cost, net benefits go up.
So the marginal unit of the control variable should be added.

16. Stop to think…
Think of recent examples (and prepare to share) where you weighed the marginal benefits and marginal costs in making decisions

17. Factors of Production Activity
Identify a scenario in which you become an entrepreneur and form a new business which requires productive resources.
Identify a business you would be creating and what will be produced
Identify what land, labor, and capital resources you would require to operate this business.
Describe how scarcity will/could impact you acquisition of these resources.
Using marginal analysis, identify a situation when MB > MC when acquiring resources and a situation in which MC > MB

18. AP MICROECONOMICS UNIT #1 BASIC ECONOMIC CONCEPTS
Lecture #2
Opportunity Cost
And
Production Possibilities

19. TRADE-OFF Choosing one thing over another
Why might it be necessary to choose one thing over another?

20. OPPORTUNITY COST
The value/cost of the next best alternative lost due to the current choice
In Economics, there is ALWAYS an associated cost with any choice we make!
THERE IS NO SUCH THING AS A FREE LUNCH!!! (TINSTAAFL)

21. THINKING AT THE MARGIN
Economists look at the benefit and the cost associated with one more unit of economic activity (hence, the concept of “marginal analysis”

22. CONSUMER GOODS VS. CAPITAL GOODS
Consumer goods-products and services which satisfy human needs and wants
Goods for the present
Capital goods-goods used to produce other goods, not to satisfy needs and wants
goods for the future
Economies that choose more capital goods are more likely to experience economic growth

23. PRODUCTION POSSIBILITIES TABLE
Lists different combinations of two products that can be produced with a specific set of resources
Remember, resources are scarce, so there is a limit to what we can produce and choices must be made.

24. PRODUCTION POSSIBILITIES CURVE
Plots the production possibilities table on a graph

25. ASSUMPTIONS OF THE PRODUCTION POSSIBILITIES TABLE/CURVE
1. full employment and productive efficiency
2. fixed resources
3. fixed technology
4. two goods

26. PRODUCTION POSSIBILITIES TABLE 1-CONSTANT
Good Y
Good X 10 2 8 4 6

27. Constant Opportunity Cost

28. PRODUCTION POSSIBILITIES TABLE 2- INCREASING OPP
PRODUCTION POSSIBILITIES TABLE 2- INCREASING OPP. COST PER UNIT OF GOOD A
GOOD A
GOOD B 12 1 10 2 6 3

29. Increasing Opportunity Cost

30. LAW OF INCREASING OPP. COST
As resources are shifted from one good or service to another, the cost of producing an item increases
*** REMEMBER THIS!!!!***
The PPC for most goods is bowed out (concave) to the origin because costs are not constant!!!

31. PRODUCTION POSSIBILITIES CURVE 3- ZERO OPP. COST PER UNIT OF GOOD A
GOOD B 12 1 2 3

32. GOOD A is as Free Good

33. INTERPRETING POINTS ON THE PRODUCTION POSS. GRAPH
Points on the curve are efficient
Points inside the curve are inefficient
Don’t use all available resources: ex. Unemployment
Also called “underutilization”
Points outside the curve are not possible (unattainable) given the current resources and technology

34. Figure 2 The Production Possibilities Frontier
Quantity of
Computers
Produced
3,000 D C
2,200
600 A
700
2,000
Production
possibilities
frontier
1,000
300 B
1,000
Quantity of
Cars Produced
Copyright©2003 Southwestern/Thomson Learning

35. FUTURE PRODUCTION POSSIBILITIES CURVES
The entire PPC may shift to the left or the right in the future due to:
Increases or decreases in resource supplies
Increases or decreases in the quality of resources
Advances or retreats in technology
A PPC shifting to the right represents economic growth

36. Production Possibilities CurveA’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’
Unattainable A
Economic
Growth B C’ C
Industrial Robots D’ D
Now Attainable
Attainable E E’
Pizzas
1-36

37. Figure 3 A Shift in the Production Possibilities Frontier
Quantity of
Computers
Produced
4,000
3,000
1,000
2,100
750 E
2,000
700 A
Quantity of
Cars Produced
Copyright © South-Western

38. Future Possibilities Compare Two Hypothetical Economies Presentville
Curve
Future
Curve F
Goods for the Future
Goods for the Future P
Current
Curve
Current
Curve
Goods for the Present
Goods for the Present
Presentville
Futureville
1-38

39. Stop and Think…
1. Draw a production possibilities curve that shows constant opportunity cost.
A. Place a point on the curve that shows inefficient use of resources and label it A. Explain why it is inefficient.
B. Place a point on the curve that is not possible right now and label it B. Explain why it is impossible.
C. Place a point on the curve that shows efficient use of resources and label it C. Explain why it is efficient.

40. 2. Put Good A on the X axis and Good B on the Y axis
2. Put Good A on the X axis and Good B on the Y axis. Draw a production possibilities curve that shows increasing opportunity cost per unit of good A. Label this curve PPC 1.
A. Assume that a technological breakthrough in the production of good A takes place. Draw a new PPC and label it PPC 2.
B. Assume that a technological breakthrough in the production of both goods takes place. Draw a new PPC and label it PPC 3.

41. 3. Put Good A on the X axis and Good B on the Y axis
3. Put Good A on the X axis and Good B on the Y axis. Draw a production possibilities curve that shows Opportunity Cost for good A.

42. AP MICROECONOMICS UNIT #1 BASIC ECONOMIC CONCEPTS
Lecture #3
Types of Economic Systems

43. BASIC ECONOMIC QUESTIONS
WHAT TO PRODUCE?*
HOW TO PRODUCE?*
FOR WHOM TO PRODUCE?*
* THOSE ARE THE BIGGIES
HOW WILL THE SYSTEM ACCOMMODATE CHANGE?
HOW WILL THE SYSTEM PROMOTE GROWTH?

44. TYPES OF ECONOMIC SYSTEMS
1. TRADITIONAL
2. COMMAND
3. MARKET
4. MIXED

45. TRADITIONAL ECONOMY Things are done as they always have been
Children often follow the career choice of their parents
Little room for innovation

46. COMMAND ECONOMY
The government makes the decisions (called central planning)
Socialism-belief that democratic means should be used to evenly distribute wealth
The government often owns major industries
Communism-a centrally planned economy with all economic and political power in the hands of the central government
Should come about after a revolution
Tends to have an authoritarian/dictatorial government

47. PROBLEMS WITH COMMAND ECONOMIES
1. consumers needs and wants aren’t met
2. a lack of incentives
3. can’t adjust well
4. discourages innovation
5. individual goals < societal goals
6. quality of goods can be poor

48. MARKET ECONOMY
A system in which buyers and sellers voluntarily exchange with one another
Economic questions are answered by citizens and businesses without government interference
Laissez-faire

49. CHARACTERISTICS OF THE MARKET
Self-Interest-people act for their own personal gain
Competition-based on incentives-get people to behave a certain way using reward or punishment
Consumers want lower prices/high quality
Producers want high profits

50. Invisible Hand-theory developed by Adam Smith-the market left alone will act as if guided by an invisible hand
Consumer Sovereignty- consumers decide what gets produced
Specialization-concentration on a limited number of activities
Private Property-people are allowed to own things

51. ADVANTAGES OF THE MARKET
Efficiency-it responds quickly to changes in conditions
Freedom-consumers and producers are free to choose what to focus on
Growth-competition encourages innovation

52. MIXED ECONOMY Combines elements of each
Most economies in the world today
Market dominates some and command dominates some
Some are in transition

53. Current “Market” Economies
Individuals own the means of production, answer the three economic questions
The government’s role has increased over time
National defense
Education
Enforcing property rights and contracts
Providing various programs for citizens
Constitutional right to private property
Right of voluntary exchange
Recognition of contracts

54. Index of Economic Freedom
Various Sources Calculate
mic-freedom-of-the-world-2016-map.pdf
2-54

55. AP MICROECONOMICS UNIT #1 BASIC ECONOMIC CONCEPTS
Lecture # 4
Comparative and Absolute Advantage

56. Production and Trade Decisions
It makes the most economic sense to produce where we are most efficient
Must consider production possibilities & related opportunity costs
Allows us to specialize

57. Absolute Advantage
Occurs when one nation is able to produce a product “more” efficiently than another.
Two ways to look at it…
Input Method: When a nation is able to produce the same output as another with less inputs
Output Method: When a nation is able to produce more output than another with the same input

58. Absolute Advantage (cont.)
Example based on inputs…
Country A produces 5 computers with 2 workers while Country B produces 5 computers with 4 workers.
Example based on outputs…
Country A is able to produce 10 computers with 6 workers while it takes Country B 6 workers to produce 12 computers.
Why might countries rich in resources tend to have absolute advantage in producing the most goods?

59. Example of Absolute Advantage
Nations
# of iPods produced per hour
# of Tablet Computers produced per hour
Warriorland 40 20
Mustangland 90 30
Which nation has the Absolute Advantage producing iPods? Tablets?

60. Comparative Advantage
Occurs when one country has the lowest opportunity cost for producing that good.
It’s the ratio of “What is being produced” vs. “What is given up”
Nations specialize if they can produce more of one product with the same amount of input as another (or the same output with less input)
It’s why we trade!!!!

61. Example of Comparative Advantage
Nations
# of iPods produced per hour
# of Tablet Computers produced per hour
Warriorland 40 20
Mustangland 50 30
Which nation has the Comparative Advantage producing iPods? Tablets?

62. When to Trade… When it benefits both parties
It allows greater specialization & efficiency
Terms based on opportunity cost:
Country A trades “x” for “y” as long as they give up less “x” than they could get if they produced both goods
Example: