AP Microeconomics Unit 1 Cheatsheet: Basic Economic Concepts

Scarcity: Most resources are limited relative to wants and needs, forcing individuals and societies to make choices.

Three Basic Questions:

• What goods/services to produce?
• How to produce them?
• Who consumes them?

Economic Systems: Command, market, and mixed economies answer these questions through different institutional arrangements and coordinating mechanisms.

What it shows: Trade-offs between producing two goods at full employment and resource utilization.

Key concepts illustrated:

• Scarcity (cannot produce unlimited amounts)
• Opportunity cost (slope of PPC)
• Efficiency (points on the curve)
• Underutilized resources (points inside curve)
• Economic growth (outward shift)

Shape depends on: Whether opportunity costs are constant (straight line), increasing (bowed out), or decreasing (bowed in).

Opportunity cost: The value of the next-best alternative foregone when making a choice.

Absolute advantage: Ability to produce more of a good with the same resources than another producer.

Comparative advantage: Ability to produce a good at a lower opportunity cost than another producer.

Terms of trade: The exchange rate at which mutually beneficial trade occurs—must fall between each party's opportunity costs.

Causes of shifts:

• Changes in factors of production (labor, capital, land, entrepreneurship)
• Changes in productivity/technology

Outward shift: Economic growth—more output possible at full employment.

Inward shift: Economic contraction—fewer resources or lower productivity.