AP Micro Chris Lin I. Chapter One NOTES A.

People Face Trade-offs: wants are unlimited, resources are limited 1. Guns versus butter: invest in military or consumer goods 2. Efficiency versus equity(equality):efficiency=more per resource

B. Cost of Something is: what you give up for it 1. Opportunity Cost: next best alternative 2. Opportunity Cost versus explicit costs: explicit=you have to pay for it 3. Sunk costs are sunk!: sunk cost is money you cant get back (ie. Time) a. the grocery line example: time spent in line is lost

C. Rational People Think at the Margin 1. Marginal versus total: marginal=affect of next unit, total a. Mankiws famous GPA example: grades total increase, avg decrease 2. The Marginal Principle: compare everything to marginal cost (MC) a. If MR> MC: do it b. If MB> MC: do it c. IF MU> MC: do it

D. People Respond to Incentives: they act on their own benefit

E. Trade (Usually) Makes Everyone Better Off 1. Specialization: leads to greater efficiency 2. Why self-sufficiency can be bad: costly and inability to create

F. Markets Usually a good way to Organize Economic Activity 1. Smith's "invisible hand": greed is good, society is better off if you pursue your interest a. Why it works: everyone is better 2. Market Failure a. failure means: supply and demand works BUT outcome hurts society b. Monopolies: may hurt people (no competition=lesser quality) c. Externalities: somebody is affected other than buyer and seller b. discourages economic efficiency: market ends up with a winner thats not efficient

G. Government can SOMETIMES improve Market Outcomes 1. Market Failures: break up monopolies 2. Greater equity (if thats a goal): govt take from the rich and give to poor

H. Standard of Living of a Society Depends on its Productivity 1. More productivity means: lower costs 2. Which causes: prices to go down 3. So everyone gets: more

I. Prices Will Rise When Government Prints Too Much Money

J. Society Must face a Short-Term Choice Between Inflation and Employment 1. Philips Curve (for Macro): increase inflation, decrease unemployment 2. How it Works: increase money=increase inflation= decrease unemployment

II. THINKING LIKE AN ECONOMIST

A. The economist 1. What is the idea behind the cartoon. 2. The scientific method: observations, theory, and more observation a. The role of assumption: are things that we assume to be true or pretend b. Observation: used to gather data

3. Economic models

a. simplified views of reality

B. The Circular. Flow

Retail Market

FIRMS

PEOPLE

Factor Market

[Finish for your notes)

-People own factor of production

C. Production Possibilities Curve (production possibilities frontier)

[ [ butter [ [ [__________________

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1. Efficient points: every point on the curve lines are efficient 2. the Trade off (Opp costs): more of one thing=less of another 3. Why it bows out: because some resources are better producing one good than the other 4. Why the trade-off changes: because there is an inconsistent rate of exchange 5. Inefficient points: any point inside the PPF 6. Ffffantasy: any point outside the PPF 7. Changes that effect ONE goods production: the curve pivots on the unaffected good 8. Changes that effect BOTH goods production: whole curve shifts on both ends 9. Can it be shifted inward: yes

D. Macro vs. Micro 1. Micro: about individual actors within the economy 2. Macro: governments between countries

E. Economist as Policy-maker

1. Positive statements [not as in pos vs. neg]: statement of facts 2. Normative statements: what things should be

F. Why economists Disagree

1. Scientific judgments: data is read differently 2. Values: also disagree because they have different values 3. Cranks: crazy economist a. Mliton Friedman: used to be a crank b. Contrarians: believe almost the opposite of everyone who is investing c. One mans Crank is another mans sage

G. Some agreed Upon ideas [Bolded are the Micro ideas.] 1. Rent control reduces quantity and quality of housing (93%) 2. Tariffs and quotes usually reduce economic welfare (93%) 3. Flexible, floating rates are effective monetary policy for int. (90%) [Yet 3 Asia nations seem to disprove this] 4. Fiscal policy has a significant simulative impact on a less than folly employed economy (90%) 5. The Federal budget, if balanced, should be done over the business cycle, not yearly (85%) (i.e. tax when the economy is rolling, cut taxes in a recession) 6. Cash payments increase the welfare of recipients more than do transfers-in-kind (i.e. food stamps or free food) (84%) 7. A large Fed deficit adversely effects the economy (83%) 8. A minimum wage increases unemployment of young and unskilled (79%) 9. The government should make the welfare system resemble a "negative income tax." (79%) (Nixon's plan) 10. Taxes on emission and a market thereof are a better approach to pollution than pollution ceilings (78%)

H. Why do the Politicians Choose to Flout the Above? 1. Good reasons: dont always encourage equity 2. Other reasons: to get elected 3. Why would politicians willfully mistake economic concepts they believe: because its for their self interest

I Review of Graphing

1. Graphs of a single variable a. pie charts: shows percentile b. bar graphs: shows changes over time or changes in comparison 2. Graphs of two Variables: the Coordinate system (X and Y): 3. Correlation versus causality a. Correlation: two things are associated with one another b. Causality: one thing causes another 4. Supply and Demand versus Slope a. In slope, how X changes Y: slope is change in Y/ change in X b. In S+D, how Y changes X(!): want to know change in X(quantity) over change in Y(price) c. Why demand slopes downward (but has no slope): because between 2 points delta X over delta Y will change d. Why supply slopes upward (but has...): because delta X over delta Y changes over

the line e. Shift in demand versus changes in Q demanded: shift in quantity demand is moving from point B to point A in a line, shift in demand is the whole line is shifted 5. Slope and elasticity a. Slope is Y/X: is rise/run b. Elasticity (Chapter 5) = Delta % of Quantity (X) / Delta % of Price (Y)