Test 30 multiple choice FRQ sheet AP Economics

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 Individuals 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 • ________ to produce

What?

What?

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

3 Economic Questions *coordination tasks • _______________ to produce • ________ 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 • ________ to produce

MARKET v. COMMAND MIXED COMMAND MARKET

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

Circular Flow Model