AP Economics - Micro
Introduction to Economics
Key Terms
- Economics - The study of how humans make choices based on scarcity of finite objects and of the results of those choices for society
- Resources are scarce (finite), Humans infinite in needs
- Scarcity - In short supply; a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it.
- Rational Person - Someone with well-defined goals who tries to fulfill those goals in the best possible way with the resources that he has
- Marginal Analysis - Looking at the cost and benefit (margin is the neutral spot where there is no cost and no benefit)
- Cost/Benefit Principle - Based on marginal analysis to find if it will end up benefitting or costing you
People to Know
- Thomas Malthus (1766-1834) - Population
- Adam Smith (1723-1790) - Wealth of Nations, Theory of Moral Sentiments
Questions
- What four principles guide the choices made by individuals?
- Choices are necessary because resources (Anything that can be used to produce something else like money) are scarce.
- The true cost of something is the opportunity cost (the true cost of something).
- “How much?” is a decision at the margin. A trade-off is a comparison of the costs and the benefits of doing something.
- A marginal decision is a decision made at the margin of an activity about whether to do a bit more or a bit less of that activity. Marginal analysis is the study of those decisions.
- Incentive is anything that offers rewards to people who change their behavior. People usually respond to incentives, exploiting opportunities to make themselves better off.
- In the United States, restaurant customers have the option of adding a tip to the restaurant bill. In much of Europe, a tip is added automatically.
- What five principles govern how individual choices interact?
- There are gains from trade. Trade allows us all to consume more than we otherwise could.
- Markets move toward equilibrium (an economic situation in which no individual would be better off doing something different). Specialization is the situation in which each person specializes in the task that he is good at preforming.
- Resources should be used efficiently to achieve society’s goals. Efficiency is taking all opportunities to make some people better off without making other people worse off.
Calculating Marginal Analysis
| Highest Degree Earned | Expected Lifetime Earnings (total benefit) by degree | Marginal Benefit of Additional Degree | Expected Lifetime Costs (total cost) by Degree | Marginal Cost of Additional Degree |
|---|---|---|---|---|
| High School | $600,000 | $600,000 | $0 | $0 |
| Associate | $1,200,000 | $600,000 | $200,000 | $200,000 |
| Bachelor’s | $1,700,000 | $500,000 | $500,000 | $300,000 |
| Master’s | $2,100,000 | $400,000 | $900,000 | $400,000 |
| Doctorate | $2,400,000 | $300,000 | $2,400,000 | $1,500,000 |
Problem Set: Marginal Analysis
The local farmer’s market offers 1 bag of romaine lettuce for $3 or 2 bags for 5. What’s the marginal cost of the second bag?
Marginal Cost = $2
The local farmer’s market offers 1 bag of cilantro for $6 or 2 bags for 10. What’s the marginal cost of the second bag?
Marginal Cost = $4