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Jeff Knight

Jeff Knight. AP Economics. Key Assumptions in Economics,Scarcity, Opportunity Cost and Production Possiblities Curve. Key Assumptions in Economics. -People are rationally self- interested -They seek to maximize their utility(happy points) - People generally make decisions at the margin

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Jeff Knight

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  1. Jeff Knight AP Economics

  2. Key Assumptions in Economics,Scarcity, Opportunity Cost and Production Possiblities Curve

  3. Key Assumptions in Economics • -People are rationally self- interested • -They seek to maximize their utility(happy points) • - People generally make decisions at the margin • - They weigh the marginal benefit against the • marginal cost of a decision • Ceteris Paribus- Economists hold factors constant, except for what’s being considered

  4. Basic Economic Vocabulary • Economics: The study of choices people make to satisfy their needs and wants • Microeconomics: The study of how individuals and firms deal with scarcity • Macroeconomics: The study of how soceity as a whole deals with scarcity

  5. Needs: Necessities for survival • (Food, Shelter, Clothing) • Wants: Goods and services consumed beyond what is necessary for survival • Goods: Physical objects that can be purchased

  6. Services: Actions or activities performed for a fee • Consumers: People who purchase goods and services • Producers: People who supply goods and services

  7. Resources (aka Factors of Production) • 1. Land • -natural resources • -the payment for land is Rent

  8. 2. Labor • - Human Resources • - The payment for Labor is Wages

  9. 3. Capital (a product of investment) • -Tools, Machines, Factories • - The payment for Capital is Interest

  10. 4. Entrepreneurship • - The special ability of Risk-takers to combine land, labor, and capital in new ways in order to make a profit • - The payment for Entrepreneurship is Profit

  11. The Fundamental Problem of Economics: Scarcity • People have unlimited wants but the resources to satisfy those wants are scarce • Therefore, we must make choices about how to use our scarce resources. We face trade-offs when it comes to using available resources

  12. Example- Assume that flour is a scarce resource: 3 cups of flour can be used to make a loaf of bread or a cake, but the 3 cups cannot be used to make both • or

  13. Opportunity Cost • Once a resource or factor of production has been put to productive use, an opportunity cost has incurred • Opportunity cost is the next best alternative use for a resouce. • Example – if the 3 cups of flour are used to make bread, then the opportunity cost is the cake that could have been also baked with the 3 cups of flour

  14. No matter what we do with our time or resources-We always incur Opportunity Cost

  15. TINSTAAFL • There • Is • No • Such • Thing • As • A • Free • Lunch • Everything has a cost

  16. TINSTAAFL Illustrated: the PPC • The PPC = The Production Possibilities Curve • The PPC = A graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods

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