Unit 1: Basic Economic Concepts

AP Macroeconomics

Scarcity

Limited resources for production relative to wants for goods & services

Factors of Production

Land, Labor, and Capital (Physical & Human)

Trade-Offs

Choice between alternative uses of a given quantity of a resource

Opportunity Cost

Value of the best alternative not chosen

Production Possibilities Frontier: Curve

Used to illustrate the impact if scarcity on the economy

Production Possibilities Frontier: Constant Cost

Always the same; resources are not perfect substitutes for one another

Production Possibilities Frontier: Increasing Cost

As you produce more of a given product, use best resources first; resources are not perfect substitutes for one another

Basic Economic Questions

What to produce? How to produce? For whom to produce?

Market Economy

Economic system in which the basic economic questions of what, how, and for to produce are resolved primarily by buyers and sellers interacting in markets

Command Economy

Economic system in which the basic economic questions are resolved by the government

Mixed Economy

Economic system which the basic economic questions are resolved by a mixture of market command

Macroeconomic Goals: Full Employment

Almost everyone that wants a job has a job; 5% unemployment

Macroeconomic Goals: Price Stability

Avoid huge fluctuations in the general price level of goods and services

Macroeconomic Goals: Economic Growth

Continued increase in the capacity to provide goods and services

Law of Absolute Advantage

One producer can produce a product more efficiently than another producer

Law of Comparative Advantage

Both producers gain when they produce the goods they have the lower opportunity cost in producing

Input Problem

Resources to produce a constant output (into/under)

Output Problem

Production given a constant resource (over)

Specialization

Situation in which workers concentrate their efforts in areas they have an advantage; leads to greater output and efficiency

Law of Demand

Consumers will tend to purchase more of a good or service at lower prices and less at higher prices

Law of Supply

Producers are willing to sell more of a good or service at higher prices and less at lower prices

Equilibrium

Price at which the quantity that consumers would like to buy is identical to the price quantity that producers would like to sell

Determinants of Demand

Tastes/Preferences, Income, Price of substitute goods, Price of complementary goods, Population, Consumer expectations

Increase in Demand Graph and its Effect

Shift to the right; each and every price consumers wish to purchase more of a good or service

Decrease in Demand Graph and its Effect

Shift to the left; each and every price consumers wish to purchase less of a good or service

Determinants of Supply

Costs of production, Changes in technology, Events that could cause an inc/dec in production, Government policies, Number of sellers, Producer expectations

Increase in Supply Graph and its Effect

Shift to the right in the curve; at each and every price producers offer more for sale

Decrease in Supply Graph and its Effect

Shift to the left; at each and every price producers offer less for sale

Price Ceiling

Legal maximum price that may be charged for a commodity; set below equilibrium price (Shortage)

Price Floor

Legal minimum price that may be charged for a commodity; set above equilibrium price (Surplus)