AP MACRO UNIT 1

Economics

The science of scarcity.

Scarcity

The condition in which our wants are greater than our limited resources.

Choices

Decisions made on how to use limited resources.

Economics Defined

Social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants.

Microeconomics

Study of small economic units such as individuals, firms, and industries.

Macroeconomics

Study of the large economy as a whole or in its basic subdivisions.

Theoretical Economics

The use of the scientific method to make generalizations and abstractions to develop theories.

Policy Economics

Application of economic theories to fix problems or meet economic goals.

Positive Statements

Based on facts and avoids value judgments.

Normative Statements

Includes value judgments about what ought to be.

Marginal Analysis

Making decisions based on the additional benefit vs. the additional cost.

Key Economic Assumptions

Five principles that guide economic decision-making.

Unlimited Wants

The idea that society's desires for goods and services are endless.

Limited Resources

The finite availability of resources to meet society's unlimited wants.

Trade-offs

All alternatives given up when choosing one course of action over others.

Opportunity Cost

The most desirable alternative given up as a result of a decision.

Self-Interest

The goal of individuals to make choices that maximize their satisfaction.

Rational Decision-Making

The process of comparing marginal costs and marginal benefits.

Marginal Benefit

The additional benefit received from consuming one more unit of a good or service.

Marginal Cost

The additional cost incurred from consuming one more unit of a good or service.

Economic Goals

Objectives that economists aim to achieve through policy economics.

Flight Choices

Options available for travel that involve cost and benefit analysis.

Watching Movies Example

An illustration of marginal analysis using the benefits and costs of watching movies.

Production Possibilities Curve (PPC)

A production possibilities graph (PPG) that shows alternative ways that an economy can use its scarce resources.

Efficiency

A situation in which the economy is getting the maximum benefits from its resources.

Full Employment of Resources

All available resources are being used in the most efficient way.

Fixed Resources

The assumption that the quantity and quality of resources available for production are constant.

Fixed Technology

The assumption that the technology used in production remains unchanged.

Constant Opportunity Cost

Resources are easily adaptable for producing either good, resulting in a straight line PPC.

Law of Increasing Opportunity Cost

As you produce more of any good, the opportunity cost of producing another good increases.

Bowed Out (Concave) PPC

A production possibilities curve that reflects increasing opportunity costs.

Per Unit Opportunity Cost

The opportunity cost of producing one additional unit of a good.

Example of Opportunity Cost from a to b

2 Bikes.

Example of Opportunity Cost from b to d

7 Bikes.

Example of Opportunity Cost from d to b

4 Computers.

Example of Opportunity Cost from f to c

0 Computers.

Point G

Unattainable given current resources.

Shifters of the PPC

Factors that can cause the production possibilities curve to shift, including changes in resource quantity or quality, and changes in technology.

Production Possibilities Table

A table that shows the different combinations of two goods that can be produced with available resources.

Graphing the PPC

Putting bikes on the y-axis and computers on the x-axis to visualize production possibilities.

Production Possibilities Graph (PPG)

A graphical representation of the production possibilities curve.

Opportunity Cost of moving from a to b

1 Bike.

Opportunity Cost of moving from b to c

1.5 (3/2) Bikes.

Opportunity Cost of moving from c to d

2 Bikes.

Opportunity Cost of moving from d to e

2.5 (5/2) Bikes.

Production Possibilities Curve

A graphical representation showing the maximum combinations of two goods that can be produced with available resources and technology.

Productive Efficiency

Products are being produced in the least costly way, represented by any point ON the Production Possibilities Curve.

Allocative Efficiency

The products being produced are the ones most desired by society, determined by the optimal point on the PPC based on societal desires.

New robot making technology

A shift only for Robots on the Production Possibilities Curve.

Decrease in the demand for pizza

The curve doesn't shift; a change in demand doesn't shift the curve.

Mad cow disease kills 85% of cows

A shift inward only for Pizza on the Production Possibilities Curve.

BP Oil Spill in the Gulf

Decrease in resources decreases production possibilities for both Capital Goods and Consumer Goods.

Faster computer hardware

Quality of a resource improves, shifting the curve outward.

Many workers unemployed

The curve doesn't shift; unemployment is just a point inside the curve.

Significant increases in education

The quality of labor is improved, causing the curve to shift outward.

Resource Market

The market where resources are supplied and demanded by businesses and individuals.

Product Market

The market where goods and services are supplied and demanded, involving costs and income related to resources.

International Trade

The exchange of goods and services between countries, often driven by the benefits of specialization.

Specialization

The process by which individuals or groups focus on a limited scope of production to gain greater efficiency.

Capital Goods

Goods that are used in the production of other goods, such as machinery and tools.

Consumer Goods

Goods that are intended for final consumption by consumers.

Production Possibilities

The various combinations of goods that can be produced given available resources and technology.

Curve Shift

A change in the Production Possibilities Curve due to changes in resources or technology.

Inward Shift

A decrease in production possibilities, indicating a reduction in available resources.

Outward Shift

An increase in production possibilities, indicating an improvement in resources or technology.

Demand

The desire and ability of consumers to purchase goods and services.

Supply

The total amount of a good or service available for purchase at any given price.

Per Unit Cost

The total cost incurred to produce one unit of a good.

Ronald's Opportunity Cost for One Pizza

1 pizza costs 10 burgers.

Ronald's Opportunity Cost for One Burger

1 burger costs 1/10 pizza.

Papa John's Opportunity Cost for One Pizza

1 pizza costs 2 burgers.

Papa John's Opportunity Cost for One Burger

1 burger costs 1/2 pizza.

Comparative Advantage

The ability of a producer to produce a good at a lower opportunity cost than another producer.

Absolute Advantage

The ability of a producer to produce more output or require fewer inputs than another producer.

Benefits of Specialization and Trade

Countries should trade if they have a relatively lower opportunity cost and specialize in the goods that are cheaper for them to produce.

Trade Example

1 Wheat for 1.5 Sugar.

PPC (Production Possibility Curve) Shift

Trade shifts the PPC, indicating changes in production capabilities.

Comparative Advantage in Wheat

The country that can produce wheat at a lower opportunity cost.

Export Sugar

The country that produces sugar at a relatively lower opportunity cost should export sugar.

Export Wheat

The country that produces wheat at a relatively lower opportunity cost should export wheat.

Import Wheat

The country that has a higher opportunity cost for producing wheat should import wheat.

Output Questions

OOO = Output: Other goes Over.

Input Questions

IOU = Input: Other goes Under.

Absolute Advantage Example

Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20.

Comparative Advantage Example

Ronald has a comparative advantage in burgers because he has the lowest per unit opportunity cost.

Units Gained Per Unit Opportunity Cost

The number of units of one good that can be produced for each unit of another good that is given up.

Cost to Produce T-shirts

It costs $50 to produce 5 t-shirts, resulting in a per unit cost of $10 per shirt.

Per Unit Opportunity Cost for Shirts in Terms of Hats

1 shirt costs 2 hats.

Per Unit Opportunity Cost for Hats in Terms of Shirts

1 hat costs a half of a shirt.

Centrally-Planned Economy

An economic system where the government owns all resources and makes all decisions about production and distribution of goods and services.

Free Market Economy

An economic system characterized by little government involvement, where individuals own resources and answer economic questions.

Mixed Economy

An economic system that incorporates elements of both free market and centrally-planned economies.

Economic System

The method used by a society to produce and distribute goods and services.

Government Role in Economy

The government must step in to help allocate resources when there is scarcity.

Three Economic Questions

What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

Advantages of Communism

Low unemployment, great job security, equal incomes, and free health care.

Disadvantages of Communism

No incentive to work, no incentive to innovate, poor quality of goods, corruption, and few individual freedoms.

GDP of North Korea

North Korea's GDP is $40 Billion.

GDP of South Korea

South Korea's GDP is $1.3 Trillion, which is 32 times greater than North Korea's.

Characteristics of Free Market

Little government involvement, individual ownership of resources, profit incentives, variety of goods, and competition regulating the economy.