Krugman’s Module 1/Graphing Appendix Notes
AP Econ—Unit 1
Mr. Davey
1. Economics is focused on individual choice from a limited number of
alternatives. These choices are also not made in a vacuum—all individuals’
decisions effect the decisions of others in an interactive global economy.
2. Economics is the study of scarcity and choice—more specifically how
individuals make decisions to best satisfy their unlimited wants with limited
resources.
3. The economy is the system that coordinates choices about production with
choices about consumption, and accordingly distributes goods and services
to the people who want them.
a. Economic systems:
i. Market: production and consumption are the result of
decentralized decisions by many firms and individuals. Driven
by competition and freedom of choice.
ii. Command: industry is publically owned and there is a central
authority making production and consumption decisions.
Example: Soviet Union 1917-1991
4. Incentives motivate particular choices. Can be rewards or punishments to
drive people’s decision making toward a desired outcome. In market
economies people are driven by their desire for profits (producers will
produce the most desired goods because they can charge the most for them,
thus eliminating possible shortages). Incentives are VERY powerful
influencers of decisions. Examples: Speeding tickets, taxes, and sales.
a. Property rights establish ownership and grant individuals the right to
trade goods and services with each other. Property rights create the
biggest incentives in the marketplace. Ownership drives people to
produce things of value, to keep or to trade for mutual gain.
5. People are marginal decision makers. This idea is central to all economic
thinking and is interwoven in all facets of micro and macroeconomics. In
short, trade-offs at the margin—comparing the cost and benefit of doing a
little bit more of an activity versus a little bit less. This gain from doing the
activity a little bit more, marginal benefit. This cost of doing an activity a
little bit more, marginal cost. If the marginal benefit outweighs the marginal
cost the activity will be done more (specifically, until the cost outweighs the
benefit). This study of marginal decision making is refer to by economists as
marginal analysis. This term can be thought of as the “how much” rationale
behind all decision making.
6. All resources are scarce. This fundamental principle of economics creates the
need for decision-making. Income, time, and resources. Example: gold—if
everyone had it, it would not be valuable.
a. Categories of scarce resources (anything that can be used to produce
something else), or factors of production:
i. Land—resources that come from nature; exchanged for rent.
ii. Labor—effort of workers; exchanged for wages.
iii. Capital—all manufactured goods used to make other goods
and services; exchanged for investments.
iv. Entrepreneurship—individual risk-takers who innovate and
organize resources for production; done in search of profits.
b. Resources are deemed scarce when there is not enough of it available
to satisfy the various ways in which society desires to use them.
i. Example: Coal and oil are scarce--because of their scarcity they
are used by society to produce energy, which people have
deemed the most essential use of those resources.
c. Society’s decisions as a whole are dictated by the aggregate, or the
total, of individual’s choices. Each of the millions of individuals in the
economy makes his or her own choice about where to shop, and
society’s choice is simply the sum of those individual choices.
i. Exceptions: In a community where many people value
undeveloped land, it is the private owners of that land who
have the final decision on whether or not to sell that land for
development. In instances such as this, governments make
public purchases of land for preservation for the benefit of the
community.
7. Opportunity cost is the true cost of something: what you must give up in
order to obtain it. The foregone opportunity of the next best alternative. This
idea is crucial to individual decision-making. In economic terms, the
opportunity cost of something is what that decision has caused you to give
up. Money or time spent on one thing cannot be spent on something else. The
opportunity cost of something can be monetary or non-monetary.
a. For example, if you spend your Saturday afternoon at the park, you
cannot spend it at the movies; if you spend $15 on steak, you cannot
spend it on pizza.
b. Keep in mind, opportunity cost will include all the costs of a decision.
Therefore, opportunity cost includes explicit, and implicit costs
together.
i. Example: When deciding where to attend college, if a smaller
state college is $5,000 less than a large university the
opportunity cost of going to the large university is the
opportunity to attend the small college and the potential
benefit/enjoyment of the $5,000 spent on tuition.
Graphing Appendix Notes
1. Visual representations of key economic concepts. In the AP Micro/Macro
course, your understanding of the construction and interpretation of these
visuals is an essential component of your success.
2. A variable is a quantity that can take on more than one value. Example: the
number of years of education a person has, the price of a soda, or a
household’s income.
3. Economic analysis heavily relies on the use of economic models—simplified
descriptions of real situations. Most models describe the relationship
between 2 variables, the model being simplified by holding constant other
variables that may effect relationship.
4. Two variable models, or graphs, consist of a horizontal (x) axis and a vertical
(y) axis meeting at the origin, where all values are 0.
a. Along the horizontal—value increases as you move right.
b. Along the vertical—value increases as you move up.
5. On the grid itself, points are plotted by using a pair of numbers—the values
that the x-variable and y-variable take on for the given point.
a. The point’s value can be recorded by writing the x-value, followed by
the y-value. Accordingly the origin would have a value of (0,0).
6. Most graphs used for creating economic models will depict relationships
between two economic variables representing a causal relationship—a
relationship in which the value taken by one variable directly influences or
determines the value taken by the other variable. In a causal relationship, the
determining variable is called the independent variable—the variable it
determines is the dependent variable.
a. Typically, the rule is the independent variable will be placed on the
horizontal axis and the dependent on the vertical axis.
b. Exception: graphs showing the economic relationship between price
of a product and quantity of a product—price, the independent
variable, is always placed on the vertical axis.
7. A curve is simply a line drawn on a graph connecting predetermined points
in the x-y variable relationship, regardless of it being straight or curved.
a. If the curve is a straight line, or linear, the variables have a linear
relationship.
b. If the curve is not a straight line, or nonlinear, the variables have a
nonlinear relationship.
c. Reading the curve:
i. When an increase in one variable is associated with an increase
in the other variable, they are said to have a positive
relationship (curve slopes upward from left to right).
ii. When an increase in one variable is associated with a decrease
in the other variable, they are said to have a negative
relationship (curve slopes downward from left to right).
d. Where a curve hits the horizontal or vertical axis, the point at which
this occurs is called, respectively, the horizontal and vertical
intercepts (x and y intercepts).
8. Slope is a measure of a line’s steepness, and how sensitive the y-variable is to
a change in the x-variable. The slope allows us to form assertions about a
relationship, even without specific numbers.
a. Calculated by a change in the y value, divided by a change in the x
value (Δy⁄Δx = slope)
i. Curves with a positive slope increase vertical value while
moving to the right.
ii. Curves with a negative slope decrease in vertical value while
moving to the left.
b. Peculiarities:
i. Slope of a horizontal curve is 0—meaning that the value of y is
constant, regardless of x.
ii. Slope of a vertical curve is infinite—meaning that the value of x
is constant, regardless of y.
1. In summation, curves of this sort hold a special value to
one analyzing them: the x-variable and the y-variable
are unrelated. A change in one variable has no effect on
the other variable.
9. Nonlinear curves and slope calculation—a nonlinear curve has a slope that
changes as you move along the line. Students MUST read and examine the 4
potential slopes of nonlinear curves.
a. Student must be able to identify, calculate, and describe:
i. Positive increasing slope
ii. Positive decreasing slope
iii. Negative increasing slope
iv. Negative decreasing slope