1. AP Econ
Chapter 2

2. Work on Activity 1-1

3. The foundation of economics is the economizing problem: society’s material wants are unlimited while resources are limited or scarce.
A. Unlimited wants (the first fundamental fact):
1. Economic wants are desires of people to use goods and services that provide utility, which means satisfaction.
2. Products are sometimes classified as luxuries or necessities, but division is subjective.
3. Services satisfy wants as well as goods.
4. Businesses and governments also have wants.
5. Over time, wants change and multiply.

4. Scarcity
“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it.
The first lesson of politics is to disregard the first lesson of economics”. --Thomas Sowell

5. Remember -- ALL THESE RESOURCES ARE IN LIMITED SUPPLY.
Resources or “Factors of Production”
Land – Natural Resources
Acreage, rivers, lakes, ports, (oil, precious metals, minerals)
Labor – Human Resources
Physical and mental talents that produce goods and services
Capital – “stuff used to make other stuff”
All manufactured goods & services used in producing
consumer goods. Examples: Tools, machinery,
equipment, trucks to carry goods, airplanes, etc.
Entrepreneurship – the “boss”
1. Someone who takes the initiative in using or combining land, labor & capital to produce a good or service.
2. Someone who is innovative, a risk taker, and makes basic business decisions.
Remember -- ALL THESE RESOURCES ARE IN LIMITED SUPPLY.
And who is
the “World’s Best Boss”?
They are scarce!!!

6. The Four Factors of Production
Resources beget production, which beget income, which beget wealth.
The Four Factors of Production .
1. Land [natural resources] – Nature’s items [“gifts of nature”]
A. In the earth - coal, oil, water, fossil fuels, etc.
B. On the earth – vegetation and water
C. In the atmosphere – sun, wind, and rain
[Land is the starting point of all production.
“Stuff” from which everything is made.
Water
Wind
Fossil fuels
Sun

7. “Hired Help” 2. Labor [human resources] {“effort”}
anyone who works [“paid work”]
[Labor is the “brain-power” and
“muscle-power” of human beings]
A. Physical – pro athletes & lumberjacks
B. Intellectual – ministers, doctors & lawyers .
*Most important resource – 70% of input cost
“Hired Help”

8. Real Capital v. Financial Capital
[tools, machinery, & factories]
Can produce something
directly with these
FINANCIAL CAPITAL
[stocks, bonds, and money]
Can’t produce anything
directly with these

9. production process (tools, machinery, and physical plants).
3. Capital Resources – all “man-made inputs” used in the
production process (tools, machinery, and physical plants).
A. Capital goods – produced goods [machinery, buildings, & tools]
used to produce other goods. [crane, Ford plant, hammer]
[products meant for “future consumption”] [Satisfy our wants indirectly]
B. Consumer goods – products meant for “immediate consumption”.
A product can be both a consumer good and a capital good –depends on its use.
Ex: Jet aircraft used by a movie star [like Jim Carey] to visit friends (consumer good).
The same aircraft used by a business manager to serve customers [capital good].
Ex: F150 pick-up to deliver produce [capital good] or take family to church [consumer good]
“man-made inputs”

10. Rent Wages Interest Profits Land Labor Capital Entrepreneur.
4. Entrepreneurship – starting a new business or introducing a new
product “Sparkplugs” who introduce the product or start the new
business He combines land, labor, & capital to produce products.
Resource payments. The resource owners receive rent [for
the use of their land; wages [for their labor]; interest [payment
for financial capital], and profits [for their entrepreneurial ability].

11. Economics: Employment and Efficiency
A. Basic definition: Economics is the social science concerned with the problem of using scarce resources to attain the greatest fulfillment of society’s unlimited wants.
B. Economics is a science of efficiency in the use of scarce resources. Efficiency requires full employment of available resources and full production.
1. Full employment means all available resources should be employed.
2. Full production means that employed resources are providing maximum satisfaction of our economic wants. Underemployment occurs if this is not so.
C. Full production implies two kinds of efficiency:
1. Allocative efficiency means that resources are used for producing the combination of goods and services most wanted by society—for example, producing compact discs instead of long-playing records with productive resources or computers with word processors rather than manual typewriters.
2. Productive efficiency means that least costly production techniques are used to produce wanted goods and services.
D. Full production means producing the “right” goods (allocative efficiency) in the “right” way (productive efficiency).

12. Production Possibilities Table
A. Assumptions:
1.Economy is operating efficiently (full employment and full production).
2.Available supply of resources is fixed in quantity and quality at this point in time.
3.Technology is constant during analysis.
4.Economy produces only two types of products.
B. Choices will be necessary because resources and technology are fixed. A production possibilities table illustrates some of the possible choices (see Table 2-1).
C.A production possibilities curve is a graphical representation of choices.
1.Points on the curve represent maximum possible combinations of robots and pizza given resources and technology.
2.Points inside the curve represent underemployment or unemployment.
3.Points outside the curve are unattainable at present.

13. Assumes... Full Employment and Productive Efficiency Fixed Resources
PRODUCTION POSSIBILITIES
Assumes...
Full Employment
and Productive
Efficiency
Fixed Resources
Fixed Technology
Two Goods
for example...

14. Assumes... Full Employment and Productive Efficiency Fixed Resources
PRODUCTION POSSIBILITIES
Assumes...
A Consumer Good
Full Employment
and Productive
Efficiency
PIZZA
Fixed Resources
Fixed Technology
Two Goods
for example...

15. Assumes... Full Employment and Productive Efficiency Fixed Resources
PRODUCTION POSSIBILITIES
A Capital Good
Assumes...
Full Employment
and Productive
Efficiency
Robots
Fixed Resources
Fixed Technology
Two Goods
for example...

16. for example... What if we could only produce ... 10,000 Robots
PRODUCTION POSSIBILITIES
What if we could only produce ...
10,000 Robots or
400,000 Pizzas
Using all of our resources, to
get some pizza, we must give
up some robots!
for example...

17. in table form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)

18. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

19. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

20. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

21. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

22. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

23. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

24. Limited Resources means a limited output...
PRODUCTION POSSIBILITIES
Limited Resources means
a limited output...
At any point in time,
a full-employment, full-production economy must sacrifice some of product X to obtain more of product Y.

25. PRODUCTION POSSIBILITIESQ 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable A B C W
Attainable
& Efficient
Robots (thousands) D
Attainable
but
Inefficient E Q
Pizzas (hundred thousands)

26. PRODUCTION POSSIBILITIES
Notes...
The amount of other
products that must be
forgone or sacrificed to obtain 1 unit of a specific product is called the opportunity cost of that good.
LAW OF INCREASING
OPPORTUNITY COSTS Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable A B C W
Attainable
& Efficient
Robots (thousands) D
Attainable
but
Inefficient E Q
Pizzas (hundred thousands)

27. PRODUCTION POSSIBILITIES
Notes...
LAW OF INCREASING
OPPORTUNITY COSTS
A graph of the production possibilities curve will be CONCAVE - bowed out from the origin.
Economic resources are
not completely adapt-
able to other uses. Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable A B C W
Attainable
& Efficient
Robots (thousands) D
Attainable
but
Inefficient E Q
Pizzas (hundred thousands)

28. Law of increasing opportunity costs:
1. The amount of other products that must be foregone to obtain more of any given product is called the opportunity cost.
2. Opportunity costs are measured in real terms rather than money (market prices are not part of the production possibilities model.)
3. The more of a product produced the greater is its (marginal) opportunity cost.
4. The slope of the production possibilities curve becomes steeper, demonstrating increasing opportunity cost. This makes the curve appear bowed out, concave from the origin.
5. Economic Rationale:
a. Economic resources are not completely adaptable to alternative uses.
b. To get increasing amounts of pizza, resources that are not particularly well suited for that purpose must be used. Workers that are accustomed to producing robots on an assembly line may not do well as kitchen help.

29. Work on Activity 1-2

30. Allocative Efficiency: MB=MC
PRODUCTION POSSIBILITIES
Allocative Efficiency: MB=MC P Q
Marginal Benefit & Cost
Quantity of Pizzas
$15 10 5 MC
MB=MC MB

31. Allocative efficiency revisited:
1. How does society decide its optimal point on the production possibilities curve?
2. Recall that society receives marginal benefits from each additional product consumed, and as long as this marginal benefit is more than the additional cost of the product, it is advantageous to have the additional product.
3. Conversely, if the additional (marginal) cost of obtaining an additional product is more than the additional benefit received, then it is not “worth” it to society to produce the extra unit.
4. Figure 2‑2 reminds us that marginal costs rise as more of a product is produced.
5. Marginal benefits decline as society consumes more and more pizzas. In Figure 2‑2 we can see that the optimal amount of pizza is 200,000 units, where marginal benefit just covers marginal cost.
a. Beyond that, the added benefits would be less than the added cost.
b. At less than 200,000, the added benefits will exceed the added costs, so it makes sense to produce more.
6. Generalization: The optimal production of any item is where its marginal benefit is equal to its marginal cost. In our example, for robots this must occur at 7,000 robots.

32. Production Possibilities Curve
Economic Growth
More/better resources
Better technology A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ A B C’
Unattainable
Industrial Robots C D’ D
Now Attainable
Attainable E E’
Pizzas

33. Economic Growth Demonstrating "Economic Growth" on a PPC Graph d a e b
- ability to produce a larger total output over time.
Economic Growth d a e b
Capital Goods [Robots] f C
Consumer Goods [Pizza]

34. Production Possibilities
Two Examples of Economic Growth
FAVORING
PRESENT GOODS
FAVORING
FUTURE GOODS
CONSUMPTION
CURRENT
CURVE
FUTURE
CURVE
FUTURE
CURVE
Goods for the Future
Goods for the Future
CURRENT
CURVE
CONSUMPTION
Goods for the Present
Goods for the Present

35. PPC Questions From Previous AP Exams
1. An economy that is fully employing all its productive
resources but allocating less to investment than
to consumption will be at which of the following
positions on the PPC to the right?
a. A b. B c. C d. D e. E
2. Which of the following best explains the shape of the
PPC for the two-commodity economy shown above?
a. Opportunity cost of producing another unit of each stays the same.
b. Opportunity cost of producing another unit of each decreases.
c. Opportunity cost of producing another unit of each increases.
3. Which of the following is true of the PPC on the right?
a. Point Q is attainable but undesirable.
b. Point R is unattainable but undesirable.
c. A technological improvement of watches would move
the economy from T to P.
d. There is unemployment at point T because workers
e. The opportunity cost of moving from S to T is the # of
watches given up.
4. If we move from B to C on the graph (right),
the opportunity cost is?
a. AH units of good Y
b. OG units of good Y
c. EF units of good X
d. HG units of good Y A H G O B C

36. PPC AP Questions 5. Which of the following would cause the
PPC shown (right) to shift outward?
a. Reopening steel plants that had been closed
b. Rehiring laid-off workers
c. Using machinery for missile production
instead of steel production
d. Using machinery for steel production
instead of missile production
e. Developing a more efficient steelmaking process
6. Base on the graph (right), which statements
are true?
I. The opportunity cost of moving from P to R
is 10 units of Y.
II. The opportunity cost of moving from R to P
is 8 units of X.
III. The opportunity cost of moving from Q to R
is 0 units.
a. I only b. III only c. I & II only d. I, II, & III
Missiles
Steel Y X

37. Economic Growth PRODUCTION POSSIBILITIES Q Robots (thousands) Q14 13 12 11 10 9 8 7 6 5 4 3 2 1
Economic Growth B’ C’
Robots (thousands) D’ E’ Q
Pizzas (hundred thousands)

38. Two Examples of Economic Growth
PRODUCTION POSSIBILITIES
Two Examples of Economic Growth
ALTA - FAVORS
PRESENT GOODS
CURRENT
CURVE
FUTURE
CURVE
Goods for the Future
CONSUMPTION
Goods for the Present
Alta

39. Two Examples of Economic Growth
PRODUCTION POSSIBILITIES
Two Examples of Economic Growth
Economic
Growth
More/better resources
Better technology
ALTA - FAVORS
PRESENT GOODS
ZORN - FAVORS
FUTURE GOODS
CURRENT
CURVE
CONSUMPTION
FUTURE
CURVE
FUTURE
CURVE
Goods for the Future
Goods for the Future
CONSUMPTION
CURRENT
CURVE
Goods for the Present
Goods for the Present
Alta
Zorn

40. Economic systems differ in two important ways: Who owns the factors of production and the method used to coordinate economic activity.
A. The market system:
1. There is private ownership of resources.
2. Markets and prices coordinate and direct economic activity.
3. Each participant acts in his or her own self-interest.
4. In pure capitalism the government plays a very limited role. Laissez-faire
5. In the U.S. version of capitalism, the government plays a substantial role.
B. Command economy, socialism or communism:
1. There is public (state) ownership of resources.
2. Economic activity is coordinated by central planning.

41. The Circular Flow
The Circular Flow is an abstract, oversimplified model, showing how economic transactions [resources, products (g/s), and money] take place.
iFuzzy iWuzzy 1
Products
[goods/services] 2
a. Goods and services[iFuzzy]
b. Consumer expenditures
c. Land, labor, cap., entrepreneur
d. Rent, wages, interest, & profits 1 2
Householders
Businesses 4 3 3
Resources
[Land, labor, cap., ent.] 4

42. The Circular Flow Resources Products D S D S 3 4 2 1 Product Market
[iFuzzy iWuzzy]
Product Market
Resource Market 1
Resources
[Land, labor, cap., ent.] 2
a. Goods and services[iFuzzy]
b. Consumer expenditures
c. Land, labor, cap., entrepreneur
d. Rent, wages, interest, & profits 3 4
Householders
Businesses 2 1
[iFuzzy iWuzzy] 3
Products
[goods/services] 4

43. Products [Goods/services] Consumer expenditures
Hog CIRCULAR FLOW MODEL
RESOURCE MARKET 1 2
Mechanic
Products [Goods/services]
Consumer expenditures
Land, Labor, Capital, Entrepreneur
Rent, Wages, Interest Profits 4
BUSINESSES
HOUSEHOLDS 3 3 4
PRODUCT MARKET

44. Products [Goods/services] Consumer expenditures
Hog CIRCULAR FLOW MODEL
RESOURCE MARKET 1 2
Mechanic 4
Products [Goods/services]
Consumer expenditures
Land, Labor, Capital, Entrepreneur
Rent, Wages, Interest Profits
BUSINESSES
HOUSEHOLDS 3 1 2 3 4
PRODUCT MARKET