basic economic concepts scarcity, opportunity cost & ppc capitalism characteristics supply and...
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Basic Economic ConceptsScarcity, 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 Opportunity Cost is what is sacrificed when
one choice is made over the “next best alternative”
Every decision has an opportunity cost
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 Illustrates scarcity, choices & opportunities
costs Points on the curve show production amounts
possible for 2 goods
Capital goods
Consumer Goods
Point A
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 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 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?
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 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 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 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)