AP Microeconomics Unit 1: Basic Economic Concepts
Scarcity, production possibilities and marginal analysis.
Unit overview
Economics studies choice under scarcity. Because resources are limited, every choice has an opportunity cost: the value of the next best alternative given up. A production possibilities curve shows the combinations of two goods an economy can produce with its resources and technology; points inside are inefficient, and points outside are unattainable without growth.
Comparative advantage explains why trade benefits both sides. A producer has a comparative advantage in a good if it has the lower opportunity cost of producing it, even if another producer is better at everything. Specialising according to comparative advantage and trading lets both consume beyond their own curves. Decisions are made at the margin: do more of an activity while marginal benefit exceeds marginal cost.
Key topics
- Scarcity and opportunity cost
- The value of the best alternative forgone.
- Production possibilities curve
- Efficiency, growth and increasing opportunity cost.
- Comparative advantage
- Lower opportunity cost, specialisation and terms of trade.
- Marginal analysis
- Choose the quantity where marginal benefit equals marginal cost.
Worked example
Country A can make 10 cars or 40 tons of wheat. What is its opportunity cost of one car, in tons of wheat?
- Giving up all 40 tons of wheat yields 10 cars.
- One car costs tons of wheat.
Answer: tons of wheat
Common mistakes
- Confusing absolute advantage with comparative advantage.
- Calculating opportunity cost upside down; it is what you give up per unit gained.
- Saying a shift outward of the curve is caused by moving resources between goods.
Exam tips
- For input or output problems, write both opportunity costs before deciding who specialises.
- Label PPC axes and points clearly; many points are lost for unlabelled graphs.
More practice on this site
See the AP Microeconomics exam format and every unit on the course page.