AP Economics - Summer Work

Intro Topics + Supply and Demand

Scarcity

The inability of limited resources to satisfy unlimited wants - if there is less than is wanted the item is scarce - this is the fundamental problem of economics

Items that are scarce

Less of it then people want, positive price, Opportunity cost - Ex. Goods and services

Items that are NOT Scarce

more of it then wanted, negative price, can be obtained without cost, knowledge - ex. Air and Garbage

Factors of Production (aka resources)

• Land: resources from nature (tree, light, space)

• Labor: mental or physical work from people

• Capital: Goods used to produce other goods and services

• Entrepreneurship: business owners who produce a producct

*Goods and services are scarce because resources are scarce

Trade Offs/Opportunity Cost

allocating scarce resources involves trade offs - the item that we sacrificed for the other good production is the opportunity cost

Scarcity VS Shortage

Scarcity is always true because it’s land vs all land uses and shortage is when at a given price the quantity demanded exceeds quantity supplied (usually price increases and demand decreases and the shortage evens out)

3 Essential Question of Economics

Scarcity forces these questions to be answered

• What to produce? (consumer goods or capital goods)

• How to produce? (sustainable resources or lowest cost)

  • For whom to produce? (people in need or people with money)

3 Economic Systems

1. Traditional Economies (Answers questions about custom + culture)

2. Command Economies (centrally planned - communism)

3. Market Economies (capitalism)

*Every economy in the world is a mix of these 3 today

Traditional Economies

produce same products from the past using generational methods, usually produced for family, tribe, social unit - ex. Amish community

Command Economies

Government officials make decisions/answer questions which leads them to rarely meet the supply and demand which results in common surpluses and shortages so wasted resources - ex. North Korea

Market Economies

The desires of people are used to answer the 3 economic questions as self interest is the driving force, pretty efficient as they make the most of their resources, and the most important thing is property rights - ex. United states

Production Possibilities Curve

A graph that shows all combinations of 2 goods or categories of goods that can be produced with fixed resources

Shape of PPC Graph

Concave Shape = increasing Opportunity costs coming from resources not being perfectly adaptable

Linear Shape = constant opportunity costs meaning resources to make 2 items are perfectly adaptable

Properties of PPC

Long-Run Equillibrium - any point of PPC graph cause it’s efficient use of all resources

Recession - insufficient use of resources

scarcity prevents points outside of PPC (without trade and specialization)

Law of Demand

All other things held constant, consumers buy more at low prices and less at high prices

Demand = entire curve | Quantity Demand = specific quantity at a price aka a single price

Deman curve shape

negative inwards shape because:

• Substitution Effect

• Income Effect

• Diminishing Margnial Utility

Substitution Effect (Demand)

an increase in price makes the alternatives more attractive + Vice Versa

Income Effect (demand)

an increase in price decreases purchasing power + Vice Versa

Diminishing Marginal Utility (demand)

satisfaction gained with each additional unit decreases as each unit is consumed

Individual to Market Demands

Market demand comes from individual demand [Market Demand = sum of Individual demand]

Determinants of Demand (Demand curve shifters)

1. Tastes and Preferances in consumers (an item gains popularity)

2. Market size (increase in the #of buyers = increase in demand curve)

3. Price of Related goods

   1. substitutes = increase in price of alternative = increase demand

   2. compliments = decrease price of compliment = increase demand

4. Changes in Income

   1. Normal goods: increase consumer income = increase in deman

   2. Inferior Goods: decrease in consumers income = increase in demand (ex. canned foods)

5. Consumer Future Expectation: in consumers believes price will increase they will buy more now increasing the demand

Law of Supply

When nothing changes but price producers sell more at high prices and less at low prices

Individual to Market Supply

Market supply comes from individual supply [Market supplu = sum of Individual supply]

Supply Curve

Upwards concave shape

change in price changes quantity suppy not supply

change in quantity at every single point = change in supply

Determinants of Supply = Supply shifters

1. Input prices - whencosts of raw materials for production decrease then supply increases

2. Government Tools

   1. increase in taxes = decrease in supply

   2. increase in subsidies (pays business) = increase in supply

   3. increase in regulations (usually) = decrease supply

3. Number of sellers (competition) increases = increase in supply

4. Technology increases = (usually) increase in productivity so increase in supply

5. Prices of other goods - when price of one item decreases and become less profitable, the other item supply increases because people move towards it’s production