AP Economics

What is

Economics
Economics, at its very heart, is the study of
people. It seeks to explain what drives human
behavior, decisions and reactions when faced
with difficulties or successes.

Economics is one of the central disciplines

underpinning the study of business and
management and public policy.

When you study economics you gain a toolkit

of skills, approaches and ways of thinking
that you can apply to a wide range of
problems.
Economics politics,
History

is a
discipline Sociology,
&
which Psychology

combines

Economics
Economics is a social science with stakes in
many other fields
Political
science

Law Geography

Engineering Mathematics

Psychology Sociology
 Economics
is
concerned
with the well-being of
Those with jobs Those with high
and ALL incomes and
Those without Those with low
jobs incomes
people
An economy, or economic system, is the way a
nation makes economic choices about how the
nation will use its resources to produce and
distribute goods and services.

2
Economic
Types

Economi
cs

Macroeconomi Microeconomi
cs cs

4
 It should be clear by now that economics covers a lot of
ground.
Therefore Economics is divided into 2 main types

MICROECONOMICS
Focuses on the actions of individual agents within the economy, like households,
workers, and businesses

MACROECONOMICS
looks at the economy as a whole. It focuses on broad issues such as growth of
production, the number of unemployed people, the inflationary increase in prices,
government deficits, and levels of exports and imports. Microeconomics and
macroeconomics are not separate subjects, but rather complementary perspectives on
the overall subject of the economy.
Microeconomics
What determines how households and individuals spend their
budgets? What combination of goods and services will best fit
their needs and wants, given the budget they have to spend?
How do people decide whether to work, and if so, whether to
work full time or part time? How do people decide how much to
save for the future, or whether they should borrow to spend
beyond their current means?

What determines the products, and how many of each, a firm will
produce and sell? What determines what prices a firm will
charge? What determines how a firm will produce its products?
What determines how many workers it will hire? How will a firm
finance its business? When will a firm decide to expand,
downsize, or even close? In the microeconomic part of this book,
Macroeconomics
What determines the level of economic activity in a society? In other words,
what determines how many goods and services a nation actually produces?
What determines how many jobs are available in an economy? What
determines a nation's standard of living? What causes the economy to speed
up or slow down? What causes firms to hire more workers or to lay workers
off? Finally, what causes the economy to grow over the long term?

An economy's macroeconomic health can be defined by a number of goals:

growth in the standard of living, low unemployment, and low inflation, to
name the most important. How can macroeconomic policy be used to pursue
these goals? Monetary policy, which involves policies that affect bank
lending, interest rates, and financial capital markets, is conducted by a
nation's central bank. For the United States, this is the Federal Reserve. Fiscal
policy, which involves government spending and taxes, is determined by a
nation's legislative body. For the United States, this is the Congress and the
executive branch, which originates the federal budget. These are the main
tools the government has to work with. Americans tend to expect that
government can fix whatever economic problems we encounter, but to what
To understand why both microeconomic and
macroeconomic perspectives are useful, consider the
problem of studying a biological ecosystem like a lake. One
person who sets out to study the lake might focus on
specific topics: certain kinds of algae or plant life; the
characteristics of particular fish or snails; or the trees
surrounding the lake. Another person might take an overall
view and instead consider the entire ecosystem of the lake
from top to bottom; what eats what, how the system stays
in a rough balance, and what environmental stresses affect
this balance. Both approaches are useful, and both
examine the same lake, but the viewpoints are different. In
a similar way, both microeconomics and macroeconomics
study the same economy, but each has a different
Whether you are looking at lakes or economics,
the micro and the macro insights should blend
with each other. In studying a lake, the micro
insights about particular plants and animals
help to understand the overall food chain, while
the macro insights about the overall food chain
help to explain the environment in which
individual plants and animals live.
In economics, the micro decisions of individual businesses
are influenced by whether the macroeconomy is healthy;
for example, firms will be more likely to hire workers if the
overall economy is growing. In turn, the performance of
the macroeconomy ultimately depends on the
microeconomic decisions made by individual households
and businesses.
MACROECONOMICS VS.
MICROECONOMICS

7
POSITIVE VS. NORMATIVE
ECONOMICS

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POSITIVE AND NORMATIVE ECONOMICS
▶ POSITIVE VS. NORMATIVE ECONOMICS:

The discipline of economics can be split in another way—positive and

normative economics.
Positive economics is based on the scientific method. That means
hypotheses are formulated and tested. For instance, one theory holds
that if a
family’s income increased, their spending will increase but not by as
much as the
increase in income. There are several ways that this theory could be
tested. One way is to observe how a group of families behave when
their income is increased. Another might be to survey lottery
o Positive
winners Economics
to see howeconomic analysis
they disposed that draws
of their conclusions based
winnings.
on logical deduction or induction; value judgments are avoided
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Normative economics
▶ Normative economics involves value judgments. Someone may feel that resources are better spent
exploring outer space than providing free breakfasts for elementary school children. If this is the person’s
opinion, not based on a scientific investigation of the matter, then we are in the realm of normative
economics. Normative economics is economics based on the way someone
believes things ought to be.
It may appear as if positive economics is a superior form of the discipline
since it is grounded in the scientific method and normative economics is based on opinions. However,
normative economics is a crucial part of the economics discipline. Any scientific study will require an
experiment, and experiments can
be designed to highlight a scientist’s prejudices. Even if an economist can keep her
biases out of a study, why did she choose this particular question to investigate? However much
economists strive to be like biologists and physicists, there will
always be a large normative aspect to economics. Some economists claim that the normative side of the
1
economics discipline is the more interesting. 0
In all Areas of study and work, to be able to have a better
understanding and have a clearer vision, Models are developed
and constructed.
Economics is not an exception, in economics Models are also
developed as a simplified version of the real world.
IMPORTANT BASIC TERMS
Economics

Social Science

Microeconomics

Macroeconomics
IMPORTANT BASIC TERMS
Goods and Services

Needs and Wants

Resources

Production Factors (Factors of Production)

Scarcity

Shortage

Surplus
• Economics – study of how people and how they
seek to satisfy their needs and wants by making
choices.

• Needs – something that is necessary for survival

(air, food, clothing, and shelter).

• Wants – items that we desire, but are not

essential to survival.
A need
is a basic requirement for survival.
Therefore
Needs are the things that a person must have to survive: Food,
Water, Shelter, Clothes, …….
The BARE NECESSITIES!

A want
is a way of expressing a need.
Therefore
Wants are those things that you would like, but do not need to
survive. Car, I-Pad, Concert Tickets, ……………………
Also note that
Since a variety of wants can satisfy a need, wants tend to be
broader than needs.
 Goods and Services

Goods – physical objects such as shoes, books, cars, etc.

Services – actions or activities that one person performs for

another
(barber, dentist, teacher, waitress).

A Good Is….. A Service Is…..

a physical is something
thing you can that gets used
hold up right after it
is purchased
Scarcity – all goods and services that
we produce are scarce, it implies
limited quantities of resources to
meet unlimited needs.

Shortage – when producers will not or

cannot offer goods and services at the
current prices.

Surplus - In excess of what is needed

or required
 Resources
Are all the things used in producing goods and
services.

They fall into four categories:

1 Land
.2 Labor
.3 Capita
.4 l
Entre
prene
urship

Also called factors of

production
 Four Factors of Production

We use four basic resources to satisfy our needs

and wants known as factors of production.
LAND

The entire material universe exclusive of people and their

products

Everything physical (other than human beings) which is

not the result of human effort is within the economic
definition of land.

This concept thus includes not merely the dry surface of

the earth, but all natural materials, forces and
opportunities.
The trees in a virgin forest are land; in a cultivated forest
LABOR
• All human efforts in the production of
wealth

• All who participate in production by their

mental and/or physical effort are laborers
in the economic sense. This would include
their efforts, abilities and skills.
CAPITAL
Wealth used to produce more wealth, or wealth in
the course of exchange.

A machine is wealth. If used to produce shoes or

other wealth, the machine is wealth that is capital
(capital good). So also would a merchant’s stock
(inventory) of goods in trade be capital because
the final exchange is not been completed.
 Four Factors of Production

Entrepreneurs – risk taking individuals in search of profit.

They are often thought of being the driving force in an
economy because they are the people who start new
businesses or bring new products to the market.
Functions of Entrepreneurs
Employ the other factors of
production
Take initiative.
Make strategic business decisions.
Innovate.
Take risk.
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 PRODUCTION
• When all factors of production (land, labor, capital
and entrepreneurship) are present, production, or
the process of creating goods and services, can
take place.
To be continued