AP Microeconomics UNIT 1

Productive Efficiency

efficiency means we are producing at a combination that minimizes costs. represented by any point on the production possibilities curve.

9. Which of the following is true if consuming one latte yields 20 utils and consuming the second latte increases satisfaction by 17 utils? A. total utility of consuming both lattes is 37 B. total utility of consuming both lattes is 3 C. the marginal utility for the second latte is 3 D. the marginal utility for consuming the third latte is 7

Explanation: 20 + 17 = 37

15. A PPC that demonstrates constant opportunity costs would be... A. a straight line B. bowed outward C. bowed inward D. upward sloping

Explanation: A PPC with constant opportunity costs has a straight line, and means that the producer could easily switch between the production of the two goods.

13. If technological advancements lead to more efficient production... A. the PPC would shift outward/to the right B. the PPC would shift inward/to the left C. there would be no movement in the PPC D. there would be mass unemployment and higher price levels

Explanation: Economic growth caused by advances in technology shift the PPC to the right.

14. Which of the following would shift the PPC to the left? A. a decrease in the supply of consumer goods B. an increase in the supply of capital goods C. improvements in computer processors D. a deep freeze that knocks out power grids, causing mass power outages

Explanation: Electricity is a resource, and a decrease in key resources decreases production and efficiency, shifting the PPC to the left.

10. When making a rational decision, economists would point out that... A. marginal cost is of no significance B. marginal benefit is of no significance C. marginal benefit should be less than marginal cost D. marginal benefit should outweigh marginal cost

Explanation: In economics, we consume or do something until the marginal cost outweighs the marginal benefit.

6. Producer A can produce either 5 units of chocolate or 10 aloe plants per day. Producer B can produce either 3 units of chocolate or 12 aloe plants per day. Based on this information, which of the following is true? A. producer A has the absolute advantage in producing aloe B. producer B has the absolute advantage in chocolate C. producer B has the comparative advantage in producing chocolate D. producer B has the comparative advantage in producing aloe

Explanation: Producer B's per-unit opportunity cost to produce a unit of aloe is 1/4 of a unit of chocolate, which producer A's per-unit opportunity cost of producing 1 unit of aloe is 1/2 unit of chocolate. Since producer B has the lower per-unit opportunity cost in producing aloe, it should specialize in the production of aloe and trade for chocolate.

Steps for working these problems (Utility)

Steps for working these problems - If you are given total utility (TU), you must first calculate marginal utility (MU). To calculate the MU, you subtract the TU going from one unit to another. Sometimes the problems will give you marginal utility (MU), and then you can jump right to the second step. - Once you have marginal utility (MU), calculate marginal utility per dollar (MU/P). This is done by dividing your marginal utility (MU) by the price of the product. - Once you have calculated all these values, the consumer will look to buy the good that has the greatest MU/P first. You, then, subtract the cost of that good from your budget. - You continue this process until you have spent all of your budget.

Comparative Advantage

ability to produce a good at the lowest opportunity cost

Absolute Advantage

ability to produce more of a good or service with a given amount of resources than someone else

law of diminishing marginal utility

as a person consumes more of a particular good or service additional utility or satisfaction they derive from each additional unit will eventually decline. - first unit or good or service might provide a lot of satisfaction but as the person consumes more the incremental benefit they receive from each additional unit will decrease. - pizza - person hungry and eats slice of pizza. they are satisfied with first slice but if they continue to eat more slices the enjoyment of the pizza will reduce and the additional slices of pizza will provide little or no additional utility.

Trade-offs

choices we make to manage resources in most efficient way possible

Allocative Efficiency

producing @ point society desires and is represented by point on production possibilities curve that meets desires & needs of particular society.

Economic Growth

shift to right of production possibilities curve

Economic Contraction

shown by leftward shift of production possibilities curve

Economics

study of how individuals, firms, and governments deal with scarcity. as a result of scarcity all members of society have to make choices in effort to manage resources in most efficient way possible.

Microeconomics

study of how individuals, households, and firms make decisions and allocate resources ex. - whether high school graduate decides to go to college or directly into workforce

Terms of Trade

the rate at which one good can be exchanged for another

(Cost-Benefit Analysis) Implicit Costs

these are monetary or non-monetary opportunity costs of making a choice. For example, the implicit costs of going to college are forgone wages you can't earn when you go to college full-time or the traveling you can't do because you are in school.

total benefit/cost

total amount of benefit or cost you gain or give up from consuming a certain # of goods. ex - eat 5 slices of pizza - may gain 15 utils (imaginary unit of utility) and similarly it may have cost 20 bucks to eat all 5 slices which is total cost

(Cost-Benefit Analysis) Explicit Costs

traditional out of pocket costs associated with choosing one course of action. For example, the explicit cost of going to college is the paying of college tuition.

Shifters of PPC

Change in the quantity or quality of resources, Change in technology, Trade

Types of Economic Systems

- Centrally-Planned (Command) Economic System - Government makes basic economic decisions and answers 3 basic questions. Government decides what goods & services to produce, prices of items, and wage rates. (ex. North Korea and Cuba). - Market Economic System - Economic decisions are guided by changes in price that occur as individual buyers/sellers interact in marketplace. (ex. China and Japan). Consumer part of economy that answers question of what to produce while produces answer question of how to produce. Prices tend to guide the answers to ?'s for whom to produce. 2 advantages of this is there is lot of competition and there is lot of variety provide in the type of goods and services. Competition keeps costs of production and prices of goods & services low. Disadvantages include large wealth disparity for individuals living in economic system and very few public goods - Mixed Economic System - in which there are characteristics of both market economy and command economy present. In a mixed economy, private property rights are protected, there is a certain level of economic freedom, but the government is also allowed to intervene in an effort to meet societal aims. (ex. the US). Advantages are that it has the advantages of a market economy, including being able to distribute goods and services to where they are most needed, and it allows prices to measure supply and demand. Other advantage is that it rewards the most efficient producers with the highest profit, as well as encouraging innovation in an effort to meet customer needs. This type of economic system can also take on the disadvantages of other types of economies so it depends on which characteristics it emphasizes. For example, if they emphasize too much freedom, it can leave some members of society without any government support. The central planning aspect could also create some problems depending on the degree of government involvement.

Rules for Utility (useful) Maximization

- The consumer will spend all of their income. - The consumer will buy only two goods. - When choosing which good to buy next, the consumer will always choose the good with the greatest MU/P (Marginal Utility per dollar). - When a consumer stops buying, the MU/P of the last unit of each good should equal each other.

Three Economic Questions

- What goods and services will be produced?: Since scarcity exists no society has resources to produce everything people want causing this question. An economy chooses between building or fixing roads or buying txtbks for schools. They can also involve making decisions whether government should conserve wilderness areas or open them up for development. - How will goods and services be produced? - Question deals with how businesses and other producers should go abt producing various goods & services. (ex. asking whether pipes should be made out of copper or plastic or whether clothing should be made by machines or by hand). - For whom will the goods and services be produced? - Question is answered after production of goods and services as it is decided who should be allowed to consume the goods and services have been produced. (ex. should it be first-come, first-serve basis or based on whether consumer can afford goods or services).

Implicit Costs

- aka opportunity costs are indirect costs associated with a particular resource - these costs represents the potential income or benefits that are forgone (do without/decline/omit) as a result of using the resource in a specific way - ex. business owner decides to use own money to invest in new project the implicit cost is the opportunity cost of not being able to use that personal money for other purposes such as saving or accounting records but they can still have significant impact on financial performance of business - considering both explicit and implicit costs businesses can make more informed decision on how to allocate resources and maximize profits.

Scarcity

- basic problem in econ in which society doesn't have enough resources to produce whatever every needs/wants - basically it is unlimited wants and needs vs. limited resources - all societies and economic systems face scarcity - due to this we must make choices on how to allocate and use scarce resources

Explicit Costs

- direct monetary costs that business experiences in production of goods or services. - costs are easily identifiable and can quantified (measured) in therms of dollars - examples of explicit costs include cost of raw materials, labor, rent, utilities, and insurance - costs typically recorded in accounting records of business and used to calculate cost of goods sold and cost of running the business - important for business to accurately track and manage explicit costs to maximize (make large as possible) profits and make informed decisions about resource allocation. - explicit cost also used in cost-benefit analysis to evaluate the financial viability of proposed projects/policies

Cost-benefit analysis

- technique used to evaluate potential costs & benefits of proposed project or policy - involves calculating costs used to implement project/policy and expected benefits that come from it - meant to determine if benefits outweigh the costs and if it's a good investment - used in business, government, and non-profit organizations - help decision-makers determine if their proposed project/policy will be successful and financially workable - considering both costs & benefits of project/policy cost-benefit analysis provides systematic way to make informed decisions about resource allocation & investment

Question 3 Sylvia works part-time at a local convenience store and earns $12 per hour. She wants to spend next Saturday afternoon attending a sporting event. The full price of the sporting event is $100, but Sylvia was able to get a discounted price of $75 from her cousin who purchased the ticket and is unable to attend. If Sylvia took 5 hours off from her job to attend the sporting event, what was her opportunity cost of attending the concert?

Answer $135 Explanation Sylvia would have earned $60 from working for 5 hours (implicit cost). She also spent $75 on the ticket (explicit cost). 60 + 75 = 135.

Question 1 After graduating high school, Billy decided to enroll in a two-year program at the local community college rather than to accept an internship that offered a salary of $15,000 per year. If the annual tuition and fees are $5,000, the annual opportunity cost of attending the community college is:

Answer $20,000 Explanation Opportunity cost includes both explicit and implicit costs. In this question, the $15,000 in salary for the internship you gave up is the implicit cost, and the $5,000 in tuition and fees is the explicit cost of going to the community college.

Question 2 All of the following are included in computing the opportunity cost of attending college EXCEPT: (A) interest paid on student loans (B) wages the student gave up to attend college (C) money spent on books and supplies (D) money spent on college tuition (E) money spent on clothing expenses

Answer Choice E Explanation No matter what decision you make, you will always have clothing expenses.

Production Possibilities Curve

Assume three things when working with these graphs: Only two goods can be made, Resources are fixed, Technology is fixed

Factors of Production (Land, Capital; Physical Capital and Human Capital, Labor, Entrepreneurship)

Land— natural resources and raw materials used to make products. Ex: water, vegetation, oil, minerals, and animals. 🚜 Labor— the effort, skills, and abilities that individuals devote to a task for which they get paid. 👷 Capital— these types of resources can be divided into two types, physical capital and human capital Physical Capital— the tools and equipment used to produce a good or service. 🔧 Human Capital—the education and training an individual has that is used in the production of a good or service. Entrepreneurship—the ability of an individual to coordinate the other categories of resources to invent or produce a good or service. Ex: Bill Gates, Steve Jobs, and Henry Ford. 🚗

Cost-Benefit Maximizing Principle

NOTE: marginal surplus is equal to MB-MC - cost-benefit maximizing principal states total benefit is maximized at the quantity marginal benefit (MB) equals marginal cost (MC). - at any given quantity we have 1 or 3 scenarios: MB > MC, MB = MC, MB < MC - When MB > MC gaining benefit overall meaning we should rationally keep consuming - due to diminishing marginal utility this won't last forever since MB is decreasing as we consume more and more. - MB < MC meaning we are actively losing benefit by consuming so we shouldn't consume anywhere MB < MC - MB = MC - at this point we shouldn't consume more since total surplus is zero but we also shouldn't cut back since we've been gaining utility up until this point

marginal benefit/cost

benefit/cost of each additional unit of a good. - pizza example - first piece may have given you 8 utils where second slice gave 3, third slice 2, and so on. - marginal benefits add to the total benefit. - moreover, each additional slice might cost more than $4. - this is a constant marginal cost where each additional slice of pizza costs the same as you eat more - diminishing marginal utility since each slice of pizza gave less utility than the one before - negative marginal utility - actually lose utility by eating pizza

Output problems

focus on data associated with what each party can produce with a given set of resources and who should specialize in each good. Rules: - determine the absolute advantage (looking for which country can produce a higher amount of the good or service) - determine comparative advantage you have to calculate per unit opportunity cost using the formula give up/gain (the amount of good you are giving up divided by the amount of good you are gaining). Once you have calculated per unit opportunity cost, the country with the lowest one has a comparative advantage. - If the two countries can both make the same amount of the good, then we say neither country has an absolute advantage. - Countries export what they have a comparative advantage in and import what they don't have a comparative advantage in.

Input problems

focus on how much of a resource is needed to produce one unit of a particular good or service. Rules: - To determine absolute advantage, you are looking for the country that uses the least amount of resources (i.e. the lower number) - To determine comparative advantage, you have to calculate the per unit opportunity cost using the formula gain/give up. Once you have calculated the per unit opportunity cost the country with the lowest one has a comparative advantage. - If the two countries both can make one unit of the good with the same amount of resources, then we say neither country has an absolute advantage. - Countries export what they have a comparative advantage in and import what they don't have a comparative advantage in.

Constant Opportunity Cost

occurs when opportunity cost stays the same as you increase your production of one good. indicates that the resources are easily adaptable from production of one good to production of another good.

Increasing Opportunity Costs

occurs when you produce more and more of one good and give up more and more of another good. this happens when resources are less adaptable when moving from production of one good to production of another good.