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8.1 – Major Graphs Review

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1.1 – Intro to Economics

What is Economics • The study of how people seek to satisfy their need and wants by making choices. • Scarcity ○ definition: the concept of having unlimited wants vs. having limited resources Macroeconomics vs. Microeconomics • Macroeconomics ○ involves economic problems encountered by the nation as a whole • Microeconomics ○ concerned with the economic problems faced by individual unites within the overall economy Four Factors of Production (Resources) • Land ○ definition: natural resources that are used to make goods and services • Labor ○ definition: the effort that people devote for a paid task • Capital ○ definition: any human-made resource used to create other goods and services ○ Physical capital: tools and buildings ○ Human capital: skills and knowledge through education and experience • Entrepreneurship ○ definition: a person who uses the three factors of production to create goods and services Needs vs. Wants • Need - There is no other alternative • We do not NEED anything! • Economics is about placing value on the things that you WANT and making CHOICES based on these wants. Every Choice Has a Cost • Nothing is free. • When you make a choice, the best alternative you gave up as a result is known as the opportunity cost. • All the possible things that you give up would referred to a trade-off • Every choice, however large or small, will incur an opportunity cost. Positive Economics vs. Normative Economics • Positive Economics ○ branch of economics analysis that describes the way the economy actually works • Normative Economics ○ branch of economic analysis that interjects subjective claims on how the economy should work • Positive statement: ○ If a new tax is implemented, the state will collect $1 million in new revenue. ○ If the government provides a safety net for citizens, income taxes will be increased. ○ If you spend 15 hours studying AP Microeconomics, you will get a 5 on Microeconomics. • Normative statement: ○ The government should raise taxes on higher income families in order to raise more revenue. ○ The government should provide a safety net for those in society that are incapable of thinking care of themselves ○ You should get a 5 on the AP Microeconomics Exam. Marginal Analysis • definition: deciding whether to do or use one additional unit of some resource • Most decision are not

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1.2 – Production Possibilities Frontier

Production Possibilities Frontier • Graph that shows the combinations of amounts of two items that could be produced using the same resources • All points on the graph are points of efficiency • If you don't use all resources, then you have points of underutilization ( or inefficiency) • PPF Graph show alternative ways to use resources but does not show the best way because that is a normative issue. • Famous

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1.3 – Comparative Advantage & Trade

Trade and Specialization • Adam Smith in Wealth of Nations, written in 1776, writes about the benefits of specialization. ○ One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a particular business, to whiten the pins is another; it is even a trade by itself to put them into paper; and the important business of making a pin is, in this mannar, divided into about eighteen distinct operations… Those ten persons, therefore, could make among them upwards of 48,000 pins in a day. But if they had all wrought separtely and independently… they certainly could not each of them have made twenty, perhaps not one pin in a day. • Modern example: I, Pencil: The Movie Market Economy vs. Command Economy • In a market economy, production and consumption decisions are the result of decentralized decisions by individuals and firms. • In a command economy, industry is publicly owned and the government makes decisions on the allocation of goods and services. • Most economies are mixed. Specialization and trade are what makes countries prosper. Absolute Advantage • A coutry or individual is simply better than another country or individual in producing a particular product. Comparative Advantage • A country or individual has a LOWER opportunity cost than another country or individual in producing a particular product. • Examples 1 • Examples 2 • Examples 3 Comparative Advantage & PPF Graph • Flatter slope will have comparative advantage in the x-axis good. • Steeper slope will have comparative advantage in the y-axis good.

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1.4 – Utility Maximization

Utility vs. Marginal Utility • Utility ○ arbitrary measure of benefit one receives from an activity (measured in utils) • Marginal Utility ○ change in total utility generated by consuming one additional unit of that good or service ○ Air, for example, is necessary for survival but tends to have little value in terms of marginal utility. ○ Diamonds, on the other hand, provides lots of marginal utility for many consumer. Marginal Utility Per Dollar • The marginal utility per dollar spent on a good considers budge constrains • Formula: ○ 〖MU〗_good/P_good • We are constrained by a budget. • The role of scarcity comes into play when making consumer choices. • Example: ○ We prefer a vacation to Hawaii over a movie, but we must consider the cost of each decision. ○ If Hawaii's marginal utility is 500 but costs $500, and a movie's marginal utility is 50 but costs $10, what do we choose? ○ Marginal Utility Per Dollar for Hawaii: 〖MU〗_good/P_good =500/500=1 ○ Marginal Utility Per Dollar for movie: 〖MU〗_good/P_good =50/10=5 ○ Since 5 1, choose movie Diminishing Marginal Utility • As a person increases consumption, there is a decline in the marginal utility from consuming each additional unit of that product. • You get less

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