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AP Economics
Recap #1
Scarcity
All societies, governments, families and
individuals must deal with the concept of
scarcity.
Resources in society that are
BOTH limited and valued
Scarcity forces us to make choices about how to
best use our LIMITED resources to satisfy
UNLIMITED wants
The Four Factors of Production
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Land (Natural Resources) - all things that come from nature
used in society.
Labor (Human Resources) – the input of humans in the
production process
Capital (Capital Resources) – Anything owned by a business
that is of value
Entrepreneurship – the organization of resources for
production
The Three Basic Economic Questions
All societies, big or small, must answer
these three questions about their
resources
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What to produce?
How to produce?
For whom to produce?
Economic Thinking
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Marginal Analysis- The key to Economics
 Also called cost/benefit analysis
 Everything in economics is based on marginal analysis
Positive and Normative economics
 A positive statement is one that is based in fact
 A normative statement is one that is based on opinion
Fallacy of Composition
 A fallacy is something that is false
 Because it is true for one, it must be true for all
Post Hoc Fallacy
 Post hoc, ergo propter hoc
 “After this, therefore because of this”
Correlation vs. Causation
 Correlation means that things happen together
 Causation means that one caused the other
Opportunity Cost
All decisions involve trade-offs
 Opportunity cost is what we give up in making a decision
 In economics we use the PRODUCTION POSSIBILITIES
CURVE to show one way in which societies make choices and
trade-offs
 Our PPF will demonstrate the law of increasing opportunity
cost
 The PPF can demonstrate productive efficiency; that is: the
most efficient use of a society’s economic resources
 Another term we need to know is allocative efficiency; that is:
society’s greatest benefit from it’s resources
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Economic Systems
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Pure Capitalism
 Laissez Faire
 Markets allocate resources
 Markets determine prices
 The invisible hand lends
control
 In theory this is the most
efficient form of economy
 Government is only to
protect property rights an
enforce contracts
 Division of capital and
consumer goods made by
consumer choice
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Command System
 Polar opposite of pure
capitalism
 Resources and prices are
allocated through the
government
 Division of consumer and
capital goods made by
government
Economic Systems
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Traditional System
 Economic system based
on tradition or custom
 Resource allocation is
based on custom as well
 Technology and economy
take a back seat to cultural
or religious issues
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Mixed Economy
 Most economies borrow a
bit from each of the
aforementioned types.
We have very few pure
economic systems
 Can you think of
examples of each in the
United States
Scarcity forces us to make decisions, this leads to:
OPPORTUNITY COST
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All decisions involve trade-offs
Opportunity cost is what we give up in making a decision
In economics we use the PRODUCTION POSSIBILITES
CURVE to show one way in which societies make choices
and trade-offs
Consumer Goods vs. Capital Goods
Consumer goods are the
things we use.
 Food, clothing, cars, and
DVD players are examples
of consumer goods
 These give us satisfaction
NOW, but don’t really help
the future
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Capital goods are things
that are used to produce
other things
Factories and machinery
are examples of capital
goods
These don’t do much now,
but will help us out in the
FUTURE by producing
more goods
Let’s see a picture
Changes in the PPF
Two types of changes can occur on the PPF
 The first is a SLIDE on the curve: this is when you decide
to produce more of one and less of another. You move
along the curve as you decide what your society needs.
 The second type is a SHIFT of the curve: this is when the
curve changes places on the graph because of an increase or
decrease of productive ability. These changes can occur
due to many factors: increase in population, development of
new technology, war or disaster, as well as many others.
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Exchange
BARTER was the first use of exchange, a trade of goods or
services for other goods or services
 Barter is inefficient because of the need for
COINCIDENCE OF WANTS. The idea that two people
have to have interconnected wants and needs.
 This lead to the development of MONEY.
 Money values products and makes exchange easier
 CREDIT is also a form of exchange. Credit is an exchange
where the buyer promises to pay back a debt at a later date,
and the seller recoups interest for extending credit
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The utility of pricing
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Information
 Allows producers and consumers to understand the market
better
Incentives
 Lower prices give consumers an incentive to buy
Choice
 Prices encourage participation in markets and offer choice
Efficiency
 High prices draw more resources, low prices will not draw
resources
Flexibility
 Supply and demand change constantly, allowing for flexibility
Limitations of the price system
Externalities
 failures not accounted for by the market system
 Can be both positive and negative
 Public Goods
 Those that will not be provided for by a private firm
 Instability
 Prices and quantities can shift over time
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Outcomes of Market Failures
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Surplus
 Too many goods or services offered in a particular
market
 Tends to drive price down
Shortage
 Too few goods or services offered in a particular market
 Tends to drive price up
Let’s look at a couple of pictures
Government Tools
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Price Controls
 Price Floors
 Price Ceilings
 Taxes and Subsidies
Minimum Wage
 Is this a floor or a ceiling?
Rationing
 Is this fair?
The Circular Flow Model