ECON Chapter 1 Notes PDF

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1 AP ECON C1 Notes CHAPTER 1 - LIMITS, ALTERNATIVES, AND CHOICES CHAPTER FOCUS: ●

Economics looks at how individuals, institutions, and societies maximize for needs and wants under conditions of scarcity

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Economist can generate theories using science (like PPC) to determine policies that aids in maximizing satisfaction

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Marginal Analysis = comparison of marginal benefits (MB) and marginal costs (MC) ○ Optimal Allocation: MB = MC

Full Chapter Summary on Last Page

THE ECONOMIC PERSPECTIVE I.

SCARCITY AND CHOICE A. Scarcity is the idea that although we have unlimited wants, we have limited resources; thus, we need to forgo something (opportunity cost) for another B. Concept of there’s no “free lunch”

II.

PURPOSEFUL BEHAVIOR A. Human behavior generally reflect “rational self-interest,” thus there decisions are “purposeful” and “rational” and not random 1. Rational self-interest can be defined as looking to increase their utility- pleasure, happiness, or satisfaction 2. It does not necessarily mean selfishness, however. B. This does not mean however that people are prone from making mistake; people at times do make careless mistakes, or are impulsive in their decision making

III.

MARGINAL ANALYSIS: COMPARING BENEFITS AND COSTS A. Marginal Analysis is the comparison of marginal benefits and marginal costs B. Marginal means change, thus marginal analysis looks at the benefits vs the cost of a change that’s made to the status quo 1. E.g., Buying a 1-carat diamond or a ¼-carat diamond? Marginal cost of the larger diamond is the higher price, but the marginal benefit of the larger diamond is the pleasure (utility).

THEORIES, PRINCIPLES, AND MODELS I. Economic Theory A. Theory is a well-tested economic principle. Hypotheses being tested → good results → theory B. Theory is “purposeful simplifications” but the economy is too complex C. Supported by facts on how humans and institutions behave in producing, exchanging, and consuming g/s II.

Economic Principles - things to know A. Generalization

2 1. Econ principles are generalizing, and it is not 100%, there are small instances (outliers) of scenarios that goes against the generalization B. Other-things-equal assumption (ceteris paribus) 1. Economist use this assumption that factors other than the ones being considered do not change (they assume all factors are held constant except the one they’re looking at) C. Graphical expression 1. Economic models are expressed graphically MICROECONOMICS AND MACROECONOMICS I.

II.

MICROECONOMICS A. Examining the individuals, institutions, workers, customers, business firms, etc. B. Looking at price of a specific product, number of workers in a single-firm, etc MACROECONOMICS A. Examines the performance of the economy as a whole B. Econ growth, business cycle, interest rates, inflation, and other major economic aggregates 1. Economic aggregates is a collection of specific economic units treated as one unit a) E.g. millions of customers in the U.S. → “consumers” b) Other examples: government, households, business sectors, etc. 2. Aggregates is used to determine a general outline, structure, trend

III.

C. Macro and Micro may interchange (unemployment is macro, but individuals choices of why they aren’t working is micro) POSITIVE AND NORMATIVE ECONOMICS A. Positive Economics 1. Facts and cause-and-effect relationships, “What is” 2. Avoids value judgements, opinions B. Normative Economics 1. Includes value judgements, what the economy should be like, “What ought to be” 2. “Ought” or “should” → most likely normative

INDIVIDUAL’S ECONOMIZING PROBLEM I. Limited Income A. Finite income makes us decide how to spend our money II. Unlimited Wants A. Desire for goods and services can not be satisfied, unlimited wants but limited resources → thus prices for them B. Since we have unlimited wants, and limited income… it’s in our best interest to economize and choose the better option III.

A Budget Line (budget constraint) A. graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of each of these combinations is equal to the money income of the consumer 1. Simplified: graph showing various combinations of two products that a consumer can purchase given their income B. Attainable and Unattainable Combinations* 1. Attainable: what you can get with your budget 2. Unattainable: you can not get it because of your budget

3 3. This applies to PPC C. Trade-offs and Opportunity Costs 1. Trade-offs: You are always giving up something for another thing 2. Opportunity Costs: What you are giving up for something else SOCIETY’S ECONOMIZING PROBLEM I. II.

Scarce Resources Resource Categories (factors of production or “inputs”) A. Land - natural resources 1. E.g. forests, mineral, oil deposits, water resources, wind power, sunlight, arable land (land for crops) B. Labor - physical actions and mental activities 1. E.g. retail clerk, teacher, football player, nuclear physicist C. Capital (or capital goods): manufactured aids used in producing goods and services 1. E.g. factory, storage, distribution facilities, transportation 2. Capital goods are DIFFERENT than consumer goods because they do not directly satisfy wants directly a) Baking oven (capital good), loafs of bread (consumer goods) 3. Does not refer to money because they produce nothing D. Entrepreneurial Ability 1. Initiative in combing resources of land, labor, and capital to produce a g/s 2. A catalyst: without a entrepreneur, there is no business 3. Strategic business decisions, innovates, bears risk

PRODUCTION POSSIBILITIES MODEL I. Four assumptions (this makes it easier for analyzing) A. Full employment B. Fixed resources: quantity and quality of the factors of productions are fixed

II.

C. Fixed technology: state of technology is fixed D. Two goods Production Possibilities Table/Curve (LECTURE NOTES) (POWERPOINT)) A. Lists the different combinations of two products with a specific set of resources, assuming full employment B. From the graph to the right, we can see that points A, B, C, D are at full efficiency C. S is unattainable because we do not have resources for it D. Yellow region is when we are

III.

inefficient E. It shows us that we must forgo x, to obtain y Law of Increasing Opportunity Costs A. As the production of a particular good increases, the opportunity cost of

4 producing an additional unit increases B. Think of it as it not being linear (the curve above shows law of increasing opportunity cost) C. The table shows that from A-B we gave up 1 robot for 1 pizza, but from B-C, we gave up 2 robots for 1 pizza. IV.

Economic Rational (for the Law of Increasing Opportunity Costs) A. Remember that we assumed that fixed resources/technology in the beginning, thus we’re only looking at the resources provided in that specific instance of the table/graph B. Also know that many resources are better at producing one type of good than the other 1. E.g., Some land might be more suitable for growing, then creating factories on C. Thus, in order to get x, we may need to sacrifice more of y (we need more y materials for one unit of x) because of how different the products are.

V.

Optimal Allocation A. Resources are being efficiently allocated to any product when the marginal benefit and marginal cost is equal (MB=MC) B. Refer to the chart to the right, we can see that producing way too much pizza has a high marginal cost C. Whereas, if we produce way too little pizza we have a low marginal cost, but again we’re only producing 100,000 D. Thus, the sweet spot is the intersection of the two points… called the optimal allocation

UNEMPLOYMENT, GROWTH, AND THE FUTURE I. A Growing Economy A. May result from growing population = more labor force, more education and training = higher quality labor force, greater resources = more potential output B. Technological advancement = more efficient C. Summarized: growing economy is a result… 1. Growing supplies of resources 2. Improvements in resource quality II.

3. Technological advancement Present Choices and Future Possibilities A. Goods for the future are capital goods, research, education, preventive medicine 1. Focusing on goods for the future, leads to growth in economy B. Goods for the present are consumer goods such as food, clothing, and entertainment 1. Focusing on goods for the present, does not necessarily lead to growth in economy but it leads to more goods to enjoy than the other option

5 C. Economies focusing on goods for the future has to sacrifice consumer goods for greater future production capacity and economic growth III.

A Qualification: International Trade A. Each nation specializes in the production of items that has the lowest opportunity costs and then engage in the international market B. International specialization and trade allow a nation to get more of a desired good at less sacrifice of other good

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