AP Economics: Micro & Macro Basics

Studying economics in high school with the intent to take the AP Microeconomics and/or Macroeconomics exam for college credit or placement into advanced coursework in college calls for understanding the basic premise and language of the subject.

When thinking of economics, you should be aware of one simple synonym — choices. Economics is a social science involving the study of choices and what necessitates those choices. Macroeconomics is the branch of economics that examines the behavior of the whole economy at once. Microeconomics is the branch of economics that examines the choices and interaction of individuals producing and consuming one product, in one firm or industry.

When making a choice, you automatically have created a cost and a benefit. The cost is what has been relinquished, and the benefit is what has been gained. The term opportunity cost refers to the next best alternative. For example, if you have $500 and you go to the mall and see a game system, a jacket, a television each costing $500, which would you choose? If you rank the game system as your first choice, the jacket as your second, and the TV as your third choice, which would be the opportunity cost? The jacket is the opportunity cost because it is your next best alternative. Note that the jacket and TV together are not the cost because there can only be one opportunity cost.

All participants in an economy must make choices. The basic economic problem that necessitates choices is scarcity, which occurs when limited resources are not sufficient to meet demand. Scarcity forces individuals, firms, and other members of society to decide how to use the three factors of production: land, labor, and capital. Land represents natural resources, such as oil and coal. Labor represents human resources, like manual work, capital represents anything that can help produce these resources, such as education and machines. If a farmer has ten acres of land, she must decide how to use those ten acres. If a factory owner has three workers, then she must decide how to use her workers. If you have $100 in your pocket, you have to decide how to use these resources.

Some people confuse capital with money, In economics, capital is an economic resource, and money is a medium of exchange. What allows countries to produce more in the long run is an increase in their factor of production, not necessarily an increase in money. Increasing the factors of production allows a country to expand its production possibilities, which then allows that country's economy to grow for its population. It is important to note that a country can't afford to become satisfied with its goods and services — they must continually grow to meet the demands of the population. In economics, there is no such thing as stagnant. Wants and needs of people are always growing; therefore, if an economy is not expanding then it is contracting.