AP Economics Study Guide Modules 1,2,4

Unit 1: Basic Economic Concepts

Macroeconomics: Big picture of the economy, overall ups and downs
Deals with aggregates, sums of data from many different markets

Basic economic problem: Societys wants are virtually unlimited and insatiable, but economic resources
are limited or scarce.

Market Economy vs Command Economy
Not regulated, choices Regulated, determined by government

Positive Economics vs Normative Economics
Objective, fact-based, can be tested Subjective, opinion-based, cant be proved/disproved

4 Types of Resources: Income Type:
1. Land: any resource originating in nature Rent
2. Labor: all human effort, physical and mental Wages/Salary
3. Capital: any physical objects that are used in Interest
the production of goods and services
4. Entrepreneurship: risk and innovation in Profits
putting the other 3 factors together to produce
ouput

Opportunity Cost: what you give up when you make a decision, the next best alternative

Production Possibilities Curve: Shows the possibilities of two commodities that can be produced in an
economy with a fixed amount of resources

Points B, C, D: efficient points
Point A: unemployment of resources
Point E: Not possible without growth:
1. More resources
2. Better Technology



PPC is bowed out to show the Law of Increasing Opportunity Cost, which states that the amount of a
good which has to be sacrificed for each additional unit of another good is more than was sacrificed for
the previous unit.
1) Households
2) Businesses
3) Government
4) Other Countries

A
B
C
D
E
Quantity of Butter Produced
Q
u
a
n
t
i
t
y

o
f

G
u
n
s

P
r
o
d
u
c
e
d

AP Economics Study Guide Modules 1,2,4

Using PPC:
Corn (bushels) Sunscreen (gallons)
Country A 300 150
Country B 200 150


Minimum that Country A would accept for a bushel of corn
is gallon of sunscreen, because they could produce it
for less than that amount themselves.

Mow (min) Trim (min)
Tyler 60 40
Jessica 75 90

Tyler Jessica



Absolute advantage: producing the most of something, or something in the least amount of time
Comparative advantage: producing something with the lowest opportunity cost
Specialization: when each produces only the thing that they have the comparative advantage in, leading
to greater productivity

150 =1/2
300 gal.

150 =
200 gal.
300 = 2
150 bu.
200 = 4/3
150 bu.
60 = 3/2
40 trim
75 = 5/6
90 trim
40 = 2/3
60 mow
90 = 6/5
75 mow
A B
Corn
Sunscreen
For PPCs in terms of units of
production, the chart goes 2
nd

unit /1
st
unit, in terms of the 1
st

unit:
ex) 150 gallons/300 bushels =
opp. cost of gallon per bushel
When they are in terms of time,
then it goes time of 1
st
/time of
2
nd
= opp. cost of doing the 1
st
in
terms of 2
nd

ex) 40 min trim/60 min mow =
opp. cost of 2/3 mow per trim
Mow
Trim
Tyler- comparative
advantage in mowing
Jessica- comparative
advantage in trimming