AP Macro

Chapter 1 Reading Guide

Economics: social science concerned with efficient use of scarce resources to
achieve max satisfaction of economic wants
Economic perspective: economic way of thinking
Marginal analysis: comparisons of marginal benefits and marginal costs
(marginal benefit ALWAYS is associated with marginal cost because of
scarce resources)
o Implies that there can be too much of a good thing - obtain beyond the
point where marginal cost = marginal benefit
scientific method
Hypothesis: explanation of cause and effect
Theoretical economics: establish economic theories by systemically arranging
facts, interpreting them, and generalizing from them
Principles or generalizations:
ceteris paribus or “other things equal” assumption:
policy economics
Aggregate: collection of specific econ units treated as if they were one unit
economic goals
Positive economics: facts and cause-and-effect relationships
o Description, theory development, theory testing
Normative economics: incorporates value judgments about what economy
should be like or what particularly policy actions should be recommended
loaded terminology
fallacy of composition
post hoc, ergo propter hoc, or “after this, therefore because of this” fallacy
correlation and causation

How does the idea of “there is no free lunch” relate to the study/definition of

At the core - opportunity cost: to get more of one thing, you forgot the opportunity of getting
something else

In what ways is rational behavior a reasonable assumption of economics? In what
ways is it not a reasonable assumption?

“Rational self-interest”: individuals pursue actions that will enable them to achieve their greatest
o Rational - individuals make different choices under different circumstances
Individuals make diff choices

Explain your decision to complete this reading guide in terms of marginal analysis.

Marginal cost: my sleep

needs initial testing  Theory .better analytical skills. laws.compare outcomes of specific events to outcome predicted by hypothesis Accept. theories. reject. explain the meaning of “resources” and “wants. better buying decisions What are the elements of the scientific method?      Observation of facts/real-world data Based on facts.tested but needs more testing  Law/principle . or modify hypothesis Continue testing o Favorable results accumulate  hypothesis evolves into theory o Theory tested and widely accepted  law/principle o Laws combined into models: simplified representations of how something works.illiteracy widespread.laws less certain Define economics in both a less and a more sophisticated way.   Theoretical economics: establishing econ theories by gathering. so I do the reading How is economics similar to sciences like chemistry or physics? How is it different?   Similar . form hypothesis (explanation of cause and effect) Test explanation . systemically arranging. such as market Define and explain the relationships between economic theory and policy economics. and generalizing from facts Policy economics: using econ laws and principles to formulate econ policies What are the differences and similarities between hypotheses. In your latter definition. but voters can influence elected officials’ decisions Professional applications . higher possibility of getting a good grade on the Unit 1 test Marginal analysis tells me that marginal benefit outweighs marginal cost. principles.”  Economics: using what you have to maximize achievement of what you want What are the three interrelated features of the economic perspective? 1) Scarcity and choice 2) Rational behavior 3) Marginalism: benefits and costs What is the difference between rational self-interest and selfishness?    Rational self-interest = behavior that enables a person to achieve personal satisfaction. and models? After testing during scientific method…  Favorable results accumulate  hypothesis evolves into theory  Theory tested and widely accepted  law/principle  Laws combined into models: simplified representations of how something works. however it is derived Selfishness = entirely based on the self--personal purchase of goods or services For example. but self-interested because it gives the parents pleasure What are the principal reasons for studying economics?    For citizenship .Scientific method Differences . over and over  Model .combines principles into simplified representation of reality .not a selfish act.strong predictive accuracy. a parent could help pay for children’s education .business Personal applications . such as market Defined according to confidence in generalization Hypothesis .  Marginal benefit: greater understanding of the economic perspective.

“consumers” as a broad term o Ex: total output. business sectors.different value judgments about what society should be like What are some current examples of positive economic statements and normative economic statements? Positive econ statements = what is  Unemployment in EU is higher than in US Normative econ statements = what ought or should be  European nations ought to undertake policies to reduce unemployment rates Explain each of the following terms: fallacy of composition.e.gives practical meaning to otherwise overwhelming maze of facts What does it mean to say that economic principles can be used for prediction?  May be possible to moderate or avoid undesirable event through econ policy What procedure should be followed in formulating sound economic policies? 1) State goal 2) Determine policy options 3) Implement and evaluate the selected policy Research each of the economic goals. but higher education isn’t the sole cause of higher income . therefore because of this Use an example to describe how correlation differs from causation. How is the United States doing right now in achieving those goals?  Economic growth: The production of more goods and services and the development of a higher standard of living How can the concept of “tradeoffs” be applied to the discussion of economic goals? Give an example. not necessarily causation Ex: People with more education earn higher income. 2) basic subdivisions or aggregates. but control is less than perfect Assumption used because it can better test the one variable under examination Why are economic principles and models necessarily generalized and abstract?   Generalization . the post hoc. economic growth Explain the difference between macroeconomics and microeconomics.all other factors other than one tested are held constant Econ not a laboratory science . i. govmt.   If goals conflict/are mutually exclusive. we might have to sacrifice one to achieve the other Ex: Low-income individuals may be less motivated to work when government stands ready to subsidize them . ergo propter hoc fallacy    Fallacy of composition: assuming that what is true for one individual or part of whole is true for group of individuals or the whole Loaded terminology: when econ terminology in newspapers and magazines is emotionally biased Post hoc. price of a specific product Why do economists disagree?  Normative economics . aggregate expenditures. ergo propter hoc fallacy: after this.  Correlation = only an association in some way. general level of prices Microeconomics: specific economic units o Ex: number of workers employed by a single firm.What is a “laboratory experiment under controlled conditions”? Does the science of economics have any kind of laboratory? Why do economists use the “other-thingsequal” assumption?    Lab experiment under controlled conditions . loaded terminology.equitable distribution of income vs.   Macroeconomics: 1) economy as a whole. household.econ facts too diverse to measure individually Abstraction .statistics try to hold other things equal.