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Basic Economic Concepts. Scarcity, Opportunity Cost & PPC Capitalism Characteristics Supply and Demand. SCARCITY. Economics is the study of limited resources and unlimited needs and wants Scarcity leads to making choices

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Basic economic concepts

Basic Economic Concepts

Scarcity, Opportunity Cost & PPC

Capitalism Characteristics

Supply and Demand


Scarcity
SCARCITY

  • Economics is the study of limited resources and unlimited needs and wants

  • Scarcity leads to making choices

  • Opportunity Cost is what is sacrificed when one choice is made over the “next best alternative”

  • Every decision has an opportunity cost



Scarcity1
SCARCITY

  • Marginal decision making = the result of an additional change

  • Marginal benefits vs. marginal costs is the basis for making the decision

  • Examples:

    1 more hour of sleep vs. eating breakfast

    Part time job vs. goofing off

    College vs. full time job


Production possibilities curve
Production Possibilities Curve

  • Illustrates scarcity, choices & opportunities costs

  • Points on the curve show production amounts possible for 2 goods

Capital goods

Point A

Consumer Goods


Capital Goods

Y = Point Not Possible

Point A

X = Point possible,

but inefficient

Consumer Goods


Capitalism market economy
CAPITALISM – MARKET ECONOMY

  • Ownership of all resources is in the hands of individuals

  • Decision making is by individuals in the market

  • Voluntary exchange of goods and services

  • Self interest influences all decisions – to the benefit of society

  • Competition is the regulating mechanism


Capitalism market economy1
CAPITALISM – MARKET ECONOMY

  • Markets and Prices coordinate the millions of decisions

  • System is facilitated by:

    • Specialization

    • Use of money

    • Technology

    • Active, but limited government involvement


Capitalism market economy2
CAPITALISM – MARKET ECONOMY

  • Basic Questions every society must ask:

    • What goods & services to produce?

    • How to produce?

    • How much to produce?

    • For whom to produce?

    • How will changes be implemented?


Capitalism market economy3
CAPITALISM – MARKET ECONOMY

  • Lesson on property rights – Power point


Supply and demand
Supply and Demand

  • Go to Power Point on S & D


Problem areas in ap economics
Problem Areas in AP Economics

  • Investment – term defined as business spending for capital equipment, machinery, factories, inventories, etc.

  • Personal investment is NOT used in Macro

  • Investment decisions are MB vs MC

  • MB = rate of return business will receive (profit motive = revenue – cost = profit)

  • MC = interest rate that must be paid to borrow funds for Ig (gross private investment)


Problem areas in ap economics1
Problem Areas in AP Economics

  • Real Interest rate – cost of borrowing the money to buy the capital goods (machinery)

  • If rate of return is greater than the cost of the interest, the investment will be profitable

  • Ex: 10% rate of return is greater than 7% interest = profitable decision

  • Even if capital is financed by savings, it gives up interest earned on $$$savings

  • REAL interest is used – inflation adjusted $$ (nominal rate – inflation rate = real interest rate)


Problem areas in ap economics2
Problem Areas in AP Economics

  • Investment Demand Curve shows amount of Ig at each real interest rate amount

  • Ig Demand Curve shifts (left or right) when other factors change:

    • Costs of production

    • Business taxes

    • Technology changes

    • Excessive inventories (no need for new production)

    • Expectations for future business conditions


Problem areas in ap economics3
Problem Areas in AP Economics

  • Key Graphs to know and teach:

    • Circular Flow

    • PPC

    • Supply and Demand

    • Foreign Exchange Rates (S & D)

    • Investment Demand

    • Business Cycles

    • AD/AS (Short Run and Long Run)


Problem areas in ap economics4
Problem Areas in AP Economics

  • Key Graphs to know and teach:

    • Loanable Funds (S & D) + AD/AS (Fiscal Policy)

    • Money Market + Ig Demand + AD/AS (Monetary Policy)

    • Phillips Curve (Long Run and Short Run)

    • Laffer Curve

    • Cost Curves (Micro)


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