AP Macro Unit 1: Basic Economic concepts

1civ) Fully explain the difference between Free- Market and centrally planned economies.

A Free market economy is an economy where the people and the business answer the three economic questions and the government does not play a role in the economy. Centrally planned economies is an economy where the government answers the three economic questions. In a free market economy businesses and markets are guided by the invisible hand. Competition and self- interest work together to regulate the economy. In centrally planned economies the government produces everything and there is basically little to no incentive to work. No country is fully one or the other but the US leans towards a free market economy and North Korea leans towards a centrally planned economy.

1ciii) Fully explain the differences between allocative and productive efficiency.

Allocative efficiency is about the optimal goods and combination of goods produced. Productive efficiency is about the amount of goods that can be produced with the least amount of cost. Allocative efficiency is dependant on the desires of society.

1ci) Fully explain the difference between consumer goods and capital goods.

Consumer goods are goods that are directly consumed. Capital goods are goods that are indirectly consumed. Consumer goods are directly consumed because they used directly by the customers, they are goods like coffee. Capital goods are indirectly consumed because they are goods used to make or produce the consumer godds. One example of capital goods is the coffee machine.

1a) Explain the relationship between scarcity, choices, and trade-offs.

Economics is based on the study of scarcity and the study of human choices. Scarcity has unlimited wants and limited resources. We have to make choices because of this scarcity. Individuals have to make choices on what resources benefit them the greatest, businesses have to make choices about how many people to hire so they can maximize output and profit and the government had to make choices on how to balance a budget so they can maximize safety and welfare. The choices that we say are not worth it and do not maximize benefits are called trade offs.

4c) Explain an experience or example that shows the "real world" application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept: Normal and inferior goods.

Normal goods are basically luxury good. As your income increases you are more likely to demand more normal good because they are of better quality, for example, a sports car. Inferior goods are goods that you buy out of necessity that you buy when your income goes down, for example, ramen noodle. For normal goods, as income goes up quantity demanded goes up and as income goes down quantity demanded goes down. For inferior goods, as income goes down quantity demanded goes up and as income goes up quantity demanded goes down.

1cii) Fully explain the difference between normative and positive economics.

Normative economics is economics based on opinions and is subjective. Positive economics is fact-based and objective. Positive economics is theoretical, but it has to be able to be proved. Normative economics is also theoretical but it doesn't have to be proved, it is just what people think ought to be.

1b) Differentiate between the following terms: price, costs, and opportunity costs.

Price, cost, and opporyunity costs are all forms of payment. However, they are different forms of payment. Price is the payment of consumers. Costs are the payments of businesses. Opportunity cost is the most desirable trade-off.

4d) Explain an experience or example that shows the "real world" application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept: Substitutes and complements.

Substitutes are products that can take place of another product when that product's price was increased. For example, the demand for coke can go up if the price of Pepsi increases. Complements are two products that are brought with each other. One example is milk and cereal.

4a) Explain an experience or example that shows the "real world" application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept: The Law of Demand and the Law of Supply.

The Law of Demand states that there is an inverse relationship between price and quantity demanded. That basically means that as price goes up, quantity demanded goes down and as price goes down quantity demanded goes up. The law of demand is the result of the substitution effect, the income effect, and the law of diminishing marginal utility. The law of supply states that as price goes up quantity supplied goes up and as price goes down, quantity supplied goes down.

4b) Explain an experience or example that shows the "real world" application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept: The Law of diminishing marginal utility.

The law of diminishing marginal utility states that as you consume any product additional satisfaction that you will receive will eventually start to decrease. For example, if you go for a movie once you will love it but the third or fourth the movie does not seem as great and might even seem boring because you know what is going to happen. Businesses can capitalize on this buy giving you more for less, like buy one get one half off.

1cv) Fully explain the difference between the resource market and the product market.

The resource market is where resources are sold to businesses. The product market is where businesses sell to households. In the product market, the money going into the market is called spending and the money going out of the market to the businesses is called revenue. The money going into the resource market is called costs, and the money going out to the resources/ labor is called income. In the product market, the items being traded are goods and services. In the resource market, the items being traded are called resources are factors of production.