AP Microeconomics

Unit 1AP MicroeconomicsECONOMICSMr. HughesStudent InformationSyllabus & Class RulesWhat is Economics?Assign Textbooks2How to Think EconomicallySelf Interest people wish to improve their lives Incentives a punishment or reward that motivates peoplePrices and cost are not artificial and are determined by supply and demand3Self-Interest

Self interest is sometimes incorrectly called selfishness. Self interest means that you are the best person capable of providing for your needs and wants. And recognizing that that person next to you is the best person capable of looking out for their needs.

When you look out for your own self interest, society benefits. If you try to make the most money by producing the best product or open the best restaurant, you are doing that out of self interest. But society benefits. You make more money, put people to work, and produce a better product.

Any when you buy a better product, when you but the Iphone 4S, your rewarding Apple and giving an incentive to Samsung or Motorola to produce a better product at a better price. 4Incentives

You want people to recycle, raise the cost of dumping trash.

If you want less of something, tax it

If you want more of something, subsidize it.

We sometimes call this unintended consequences. Economics is not a conservative or a liberal way of thinking but liberal and conservative eocnomists differ, especially on the issue of incentives. 5

6Where do prices come from?

7Prices & Cost

Most people think that businesses set prices and just make them as high as they can.

Its because they are greedy but what about when prices drop when gas prices go down gee those sweet oil companies, giving us a break - or if interest rates go up those nice banks, paying me more on my savings count

Supply and demand determine prices

Opportunity cost is not what the price of something is, it is what you give up when you make an economic choice. Four days in Disneyworld for a family of four costs $2000 minimum. Thats the price. The cost is what are you giving up?

People spend money on a

People do this when they pay off their house the cost of their house is not $0 if they sold their house and moved someplace smaller, they could travel more, buy more stuff for their grandkids.

8Things we see less of todayBecause of self-interest, incentives and prices, the economy is constantly changing.For example9Blockbuster, because of

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12Fotomats & film developers, because of

13Digital cameras

14Bookstores, because of

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16The Study of EconomicsEconomics is the study of scarcity and choice An economy is a system of coordinating choices and distributing goods and servicesMarket Economy consumers and producers make most decisions Command Economy government planners make most decisions Mixed Economy questions are answered by both government and the private marketScarcity of ResourcesWhy do we have to make choices? Because all resources are scarce there is not enough to satisfy everyones desiresUnlimited wants, limited resources

Four Factors of ProductionResources used to produce goods and services1. Land2. Labor3. Capital4. Entrepreneurship

19Opportunity CostWhen you make an economic choice, you must give up an alternative actionWhat you could have had instead

LeBron James understands the concept of Opportunity Cost!

Marginal Cost & BenefitMarginal cost is the cost of consuming one more unit of a productMarginal benefit (aka marginal returns) is the benefit of consuming one more unit of an itemOne should take an economic action if the benefit is greater than the cost-22The Production Possibilities CurvePPC: A graph showing the amounts of 2 goods or services that can be producedThe production possibility frontier is the line itself23Uses of the PPCEfficiency means using resources in such a way to maximize output, on the line (point A or B)Production inside the line is inefficient or underutilization (point D). 24(uses, cont)3. Growth if the production capacity increases, the curve expands outward, representing growth (point C).How can a countrys production capacity increase?4. Cost a PPC shows the cost of one item in terms of another.How much does 4,000 bushels of corn cost?

25Law of Increasing CostsAs production of a good or service increases, the cost of producing additional units also increasesAs production increases, opportunity cost increases as wellDemonstrated on a PPC with a outward curve

14027Microeconomics v. MacroeconomicsMicroeconomics is the study of the choices made by consumers (households) and producers (businesses)Macroeconomics focuses on the big picture, such as trends in a nations economy Is this question micro- or macro-?Should I go to college or get a job after high school?What determines the overall or average level of prices?What determines the number of iPhones exported to France?Which government policies should be adopted to promote economic growth?Why does the U.S. have a trade deficit with China?Economic Systems How a society answers the three economic questions and which goals it considers most important determine its economic system.The Three Basic Economic Questions1. What goods and services should be produced?

2. How should Goods and services be produced?Which combination of land, labor and capital is best to produce a given item?

or?3. Who Consumes Goods or Services?Or who are the goods and services produced for?

Six Economic Goals Economic Efficiency - not using resources to produce unwanted goodsBankruptcy is an example of efficiencyEconomic Freedom allowing individuals to choose how to use their own resources, freedom of workers to choose jobs, start businesses34When an individual cannot use their own resource the way wish, is it their resource any longer?3. Economic Security Protection from uncertainty. Protecting consumers or producers from risks- bailouts, protection from foreign competition, seatbelt laws4. Economic Equity Fairness & greater equality, redistribution of the wealth Safety nets Food Stamps, TANF, WICFree Healthcare

5. Economic Growth increasing production of goods and services, rising GDP (gross domestic product); innovationLower tax rates on investment6. Economic Stability stable prices & full employment. Avoiding inflation and fully utilizing labor.

The Market EconomyEconomic questions are answered by consumers (households) and producers (businesses) Consumers sell resources to businesses and purchase goods and servicesProducers use resources to produce goods and services

This is illustrated by the Circular Flow of Goods and Services

The Circular Flow of Goods and ServicesThe Self Regulating Free MarketHow does a free market work without anyone in control? Why doesnt it end in chaos?

42The unrestrained nature of the free market is what prevents anyone from accumulating too much power. Centralized economies can be subverted and resources will be directed to inefficient and unproductive people/firms. The Invisible HandsAdam Smith (1723-1790)Wealth of Nations 1776He believed that the twin forces of self interest and competition guided the economy to its best result without government interventionHe called competition and self interest invisible handsLaissez faire let them do

Command EconomyMixed EconomyComparative and Absolute Adv.Chpt. 17, Section 1International EconomicsTrade between countries is based on the concept of opportunity cost

46Command EconomiesIn a command economy, central planners decide what will be made, how it will be made, and how the goods are distributedExamples today: North Korea, Cuba

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Government Control of ResourcesThe government owns all of the natural resources and capital resourcesAll producers are directed on the type of goods to be made and the quantity Competition is seen as wasteful besides, if the government owns all resources, who can compete? Socialism & CommunismSocialism democratic means can and should be used to redistribute wealth. Redistribution through the voteCommunism A variety of socialism, believe that socialism cannot be achieved democratically, revolution is necessary OriginsKarl Marx (1818-1883) German born philosopher, most influential communist writer and thinkerCommunist Manifesto (1848)"The history of all hitherto existing society is the history of class struggle.From each according to his ability, to each according to his need.

Advantages of Central PlanningFull Employment Production focuses on needs, not wants More equal distribution of resources

Capitalism makes us unequally wealthy, but socialism makes us equally poor.Problems of Central PlanningLow economic growth & less incentive to produce moreDecisions require a large & expensive bureaucracyCannot meets consumers needsLess consumer choice b/c there is no competition Must use propaganda to motivate workers. If that doesnt work, threats, violence & purges

The Soviet EconomyAll workers guaranteed a jobFarmers guaranteed incomeGovernment owns all factoriesLow, government controlled pricesLess choice and shortagesAttempting some reforms, the communist government collapsed in 1991

Modern EconomiesIn todays world, there are no pure free markets or entirely planned economies. Economists term this a mixed economy

Mixed EconomiesHow much government is necessary?Government is necessary at the very least, to protect private property & prevent anarchyThe market cannot provide some servicesPublic goods roads, police2.Which government services should be offered and who should pay?Taxes tend to be high in mixed economy1. Government dominatedNorth Korea- totalitarianChina transition to a market system since the 1980s (market socialism)Government owns all resources, prices are set by market

2. Government/Market Mix Mexico state owned oil industry, protection of national industriesFrance workers reforms 35 hour work week, 6 weeks vacation, national health careCanada, UK nationalized health care

3. Market DominatesUnited States welfare system, moderate taxes, but a commitment to private property and free tradeHong Kong, Singapore one of the freest markets, low taxes, few government services