Chapter 2 Outline- AP Microeconomics: Thinking Like an Economist Frances Coronel: Bell 4 1.

Economics trains you to Think in terms of alternatives, Evaluate cost of individual & social choices, Examine & understand how certain events & issues are related 2. Economic way of thinking Involves thinking analytically & objectively, Makes use of scientific method, Develops theories, collects, & analyzes data to evaluate theories 3. Role of Assumptions Economists make assumptions in order to make world easier to understand art in scientific thinking is deciding which assumptions to make Economists use different assumptions to answer different questions 4. Economic Models Circular Flow Diagram & Production Possibilities Frontier 5. First Model: Circular-Flow Diagram shows how dollars flow through markets among households & firms Firms Produce & sell goods & services Hire & use factors of production Households Buy & consume goods & services Own & sell factors of production Markets for Goods & Services Firms sell Households buy Markets for Factors of Production Households sell Firms buy Factors of Production Inputs used to produce goods & services Land, labor, & capital 6. Second Model: Production Possibilities Frontier shows combinations of output that economy can possibly produce given available factors of production & available production technology Concepts Illustrated by Production Possibilities Frontier Efficiency, Tradeoffs, Opportunity Cost, Economic Growth 7. Microeconomics & Macroeconomics Microeconomics focuses on individual parts of economy How households & firms make decisions & how they interact in specific markets Macroeconomics looks at economy as whole Economy-wide phenomena, including inflation, unemployment, & economic growth 8. Positive versus normative analysis Positive statements are statements that attempt to describe world as it is Called descriptive analysis Normative statements are statements about how world should be Called prescriptive analysis 9. Why Economists Disagree disagree about validity of alternative positive theories about how world works different values &, therefore, different normative views about what policy should try to accomplish

Chapter 3 Outline- AP Microeconomics: Interdependence & Gains from Trade Frances Coronel: Bell 4 1. Interdependence & Gains from Trade How do we satisfy our wants & needs in global economy? We can be economically self-sufficient We can specialize & trade with others, leading to economic interdependence Individuals & nations rely on specialized production & exchange as way to address problems caused by scarcity 2. Why is interdependence norm? Interdependence occurs because people are better off when they specialize & trade with others 3. What determines pattern of production & trade? Patterns of production & trade are based upon differences in opportunity costs 4. Self-Sufficiency By ignoring each other: Each consumes what they each produce production possibilities frontier is also consumption possibilities frontier Without trade, economic gains are diminished consumption Opportunities 5. Principle of Comparative Advantage Differences in costs of production determine following: Who should produce what? How much should be traded for each product? 6. Two ways to measure differences in costs of production: number of hours required to produce unit of output opportunity cost of sacrificing one good for another 7. Comparison among producers of good according to their productivityabsolute advantage Describes productivity of one person, firm, or nation compared to that of another producer that requires smaller quantity of inputs to produce good is said to have an absolute advantage in producing that good 8. Opportunity Cost & Comparative Advantage Compares producers of good according to their opportunity cost Producer who has smaller opportunity cost of producing good is said to have comparative advantage in producing that good 9. Comparative Advantage & Trade Comparative advantage & differences in opportunity costs are basis for specialized production & trade Whenever potential trading parties have differences in opportunity costs, they can each benefit from trade 10. Benefits of trade allows people to specialize in activities in which they have comparative advantage 11. Each country has many citizens with different interests International trade can make some individuals worse off, even as it makes country as whole better off Importsgoods produced abroad & sold domestically Exportsgoods produced domestically & sold abroad

Summary: Chapter 2

Economists try to address their subjects with scientists objectivity They make appropriate assumptions & build simplified models in order to understand world around them Two simple economic models are circular-flow diagram & production possibilities frontier Economics is divided into two subfields: Macroeconomists study decision-making by households & firms in marketplace Macroeconomists study forces & trends that affect economy as whole positive statement: assertion about how world is normative statement: assertion about how world ought to be When economists make normative statements, they are acting more as policy advisors than scientists Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values At other times, economists are united in advice they offer, but policymakers may choose to ignore it Summary: Chapter 3 Each person consumes goods & services produced by many other people both in our country & around world Interdependence & trade are desirable because they allow everyone to enjoy greater quantity & variety of goods & services There are two ways to compare ability of two people producing good person who can produce good with smaller quantity of inputs has an absolute advantage person with smaller opportunity cost has comparative advantage gains from trade are based on comparative advantage,not absolute advantage Trade makes everyone better off because it allows people to specialize in those activities in which they have comparative advantage principle of comparative advantage applies to countries as well as people

Key Concepts Defined- Chapter 2 1. circular flow diagram: shows how $ flow through markets among households & firms 2. production possibilities frontier: shows combinations of output that economy can possibly produce given available factors of production & available production technology 3. microeconomics: focuses on individual parts of economy 4. macroeconomics: looks at economy as whole 5. positive statements: statements that attempt to describe world as it is 6. normative statements: statements about how world should be

Key Concepts Defined- Chapter 3 1. absolute advantage: describes productivity of one person, firm, or nation compared to that of another producer that requires smaller quantity of inputs to produce good is said to have an absolute advantage in producing that good 2. opportunity cost: Whatever must be given up to obtain some item 3. comparative advantage: Producer who has smaller opportunity cost of producing good is said to have comparative advantage in producing that good 4. imports: goods produced abroad & sold domestically 5. exports: goods produced domestically & sold abroad