1. Test
30 multiple choice
FRQ sheet

2. AP Economics Unit 1
Mr. Parish

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

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

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

6. Opportunity Cost
VALUE of the next best alternative

7. 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 $ for a one-week trip. Since he will not be working he will not earn his typical $ per week. Felix always eats at restaurants, even when he’s home, so he knows that he will spend about $ on food.
Calculate the total cost (explicit and implicit) of Felix’s trip. Show and label your work.

8. 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 $ for a one-week trip. Since he will not be working he will not earn his typical $ per week. Felix always eats at restaurants, even when he’s home, so he knows that he will spend about $ on food.
Calculate the total cost (explicit and implicit) of Felix’s trip. Show and label your work.

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

10. Economic Models
Simplified constructs used to simulate reality

11. Production Possibilities FrontierA B C

12. 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”

13. PPF (or PPC)

14. PPF (or PPC) Concave versus Linear

16. Shifting PPF
Change in resources or technology

17. 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

18. 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

19. 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”

20. Micro versus Macro Positive versus Normative

23. 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

24. Marginal Analysis
Pizza
Paper Clip Company

25. 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

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

27. 3 Economic Questions *coordination tasks

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

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

30. 3 Economic Questions *coordination tasks
_______________ to produce

31. What?

32. What?

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

34. 3 Economic Questions *coordination tasks
_______________ to produce

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

36. For whom to produce?

37. 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?

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

39. 3 Economic Questions
COMMAND MARKET

40. 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

41. US- Market or Command?

42. US Mixed Economy
Command Elements
Market Failure

43. 3 Economic Questions *coordination tasks
_______________ to produce

44. MARKET v. COMMAND
MIXED
COMMAND MARKET

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

46. Circular Flow Model