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Transcript
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 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 What to produce? How to produce? For whom to produce? Economic Thinking 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 Economic Systems 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 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 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 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 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 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. 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 The utility of pricing 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 Outcomes of Market Failures 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 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