Unit 1: Basic Economic Concepts and the Supply and

Demand ModelChapters: 1 and 2

The Factors of Production

Entrepreneurs +Land + Labor + Capital = goods and services

• Entrepreneurs = risk takers who combine land, labor and capital into new products.

• Land = “gifts of nature”/natural resources

• Soil, minerals, water, forest, wind, plants, animals, solar energy, etc.

• Labor = physical effort

• Physical Capital = tools, equipment, machinery, and factories used in the production of goods and services.

• Human Capital = people with their skills, knowledge and experience.

Basic Economic Questions

• What should be made using available resources?

What to produce?

• What combination of resources should be used?

How to produce?

• Who will get those goods and services? How do we distribute goods and services?

Who will consume?

�Economic System – a system managing the factors of production�answers the three basic questions of WHAT, HOW, and FOR WHOM.

Command/Centrally Planned Economy

�A central authority makes the most of the WHAT, HOW, and FOR WHOM decisions. The government determines the needs, sets quotas for major industries and usually provides for the basic needs of the people.

�Examples:

�Cuba

�North Korea

�Soviet Union

�China under Mao Zedong

Market Economy

� People and firms act in their own best interest to decide the WHAT, HOW, and FOR WHOM. Buyers and sellers come together in order to exchange goods and services. Good and services are determined by supply and demand.

� Hong Kong

� Singapore

Mixed Economy

Market-based system in which the government plays a limited role.

�United States

TOTAL

economic

freedom

NO

economic

freedom

Pure market

economy

Pure command

economy

CapitalismSocialism

Mixed economies

Economic Systems

Economic Systems

Is America Number One?Command vs Market vs Mixed Economies

• http://www.youtube.com/watch?v=PZpDjxIPpFc - watch up t0 24:00

Is America Number One

Video Argument?

How do you explain why the GDP per capita is $1,800 in North Korea,

while just across the DMZ, the GDP per capita is $34,600?

S. Korea vs N. Korea

GDP $1.744 trillion

(2013 est.)

$40 billion

(2013 est.)

GDP per capita $34,600

(2013 est.)

$1,800

(2013 est.)

Real GDP

Growth

2.9%

(2013 est.)

1%

(2013 est.)

Unemployment 3.5%

(2014 est.)

25.6%

(2013 est.)

What are the key determinants

of economic growth?

Read Why Nations Fail, pages 75-83 ---Why did the South Korean economy prosper and the North Korean economy falter after the Korean War?

There will be a reading quiz – you can use handwritten notes.• Why Nations Fail book excerpt.pdf

Given what you learned from the video, Why Nations Fail and your personal opinion, how would you prioritize the following economic and social goals?

Why is it important for countries to have economic growth?

• Economic growth increases the standard of living.

• Correlation between GDP per capita and life expectancy and literacy

• The rate of economic growth depends largely on increasing productivity.

Cou ntry Name

GDP per capita (constant 2010 US$)

GDP per capita growth (annual %)

Life expectancy at birth, total (years)

Mortality rate, infant (per 1,000 l ive births)

A du lt l i teracy rate, popu lation 15+ years, both sexes (%)

Edu cational attainment, at least Bachelor's or equ ivalent, popu lation 25+, total (%) (cu mulative)

Edu cational attainment, at least completed post-secondary, popu lation 25+, total (%) (cu mulative)

Labor force with secondary edu cation (% of total)

Macao SAR, China $71,307 -2.54 80.55 .. .. .. .. ..A u stralia $54,233 0.99 82.25 3.2 .. 24.95 39.03 ..

Sweden $53,562 1.59 81.96 2.4 .. 22.54 36.58 47.20Singapore $51,441 1.93 82.65 2.2 96.72 27.74 51.15 ..United States $50,728 1.57 78.94 5.7 .. 31.96 .. 58.00

Canada $49,896 1.35 81.96 4.4 .. .. .. 38.20Germany $44,878 3.04 80.84 3.2 .. 24.18 33.42 59.70Japan $44,386 0.13 83.59 2.1 .. .. .. ..

France $41,204 -0.16 82.37 3.6 .. 16.39 28.66 45.10N ew Zealand $36,272 2.02 81.40 4.8.. 26.15 45.80 ..Hong Kong SAR, China $35,625 1.91 83.98.. .. .. 26.93 ..Korea, Rep. $24,479 2.92 82.16 3 .. .. .. ..

Greece $22,480 1.02 81.29 3.7 97.53 22.19 29.77 41.90Sau di Arabia $21,031 1.34 74.34 12.9 .. .. .. ..V enezuela, RB $13,750 -5.20 74.24 13.2 .. .. .. ..

Tu rkey $11,246 1.29 75.16 12.3 95.44 .. .. 20.30Mexico $9,403 0.90 76.72 11.9 94.56 13.96 .. ..Sou th Africa $7,623 0.00 57.18 34.4 94.14 7.14 14.62 ..

China $6,108 6.76 75.78 9.8.. .. .. ..Iran, Islamic Rep. $5,937 3.02 75.39 13.9 .. .. .. ..Philippines $2,532 4.54 68.27 22.8.. .. .. ..India $1,647 5.94 68.01 39.3 .. .. .. ..

Zimbabwe $830 1.48 57.50 47.6 .. .. .. ..Malawi $495 2.50 62.72 45.1 .. .. .. ..Korea, Dem. People’s Rep. .. .. 70.07 20.7 .. .. .. ..

http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#

2014

AP Microeconomics Essential Questions

How do we achieve economic efficiency and economic growth?

What role should government play in promoting economic efficiency and

economic growth?