AP Macro - Unit 1 Flashcards

What is economics?

What is economics?

The science of managing scarcity

What is the definition of scarcity?

The idea that we have unlimited wants but limited resources

What is opportunity cost?

The most desirable alternative given up when you make a choice

Ex. Peeta vs Gale: Gale is the opportunity cost

What are the 5 KEY ECONOMIC ASSUMPTIONS?"

• Scarcity

  • Everything is LIMITED, our wants are UNLIMITED

• Tradeoff

  • Everything has a cost BECAUSE of scarcity

• Incentives

  • Humans act in self-interest: incentives are good

• Cost-Benefit Analysis

  • We make decisions based on our perception of if costs outweigh benefits

• Math

  • We can explain stuff with graphs

What’s the actual definition of investment?

IN ECON: investment is when businesses buy stuff to improve their business

What are the 3 types of goods?

• CONSUMER GOODS

  • Created for direct consumption (like pizza)

• CAPITAL GOODS

  • Created for indirect consumption (like ovens)

  • Capital goods make consumer goods

• HUMAN CAPITAL

  • Knowledge required to produce things (ex. education)

What are the 3 main factors of production?

Land, labor, and capital

What questions determine our economic system?

What goods and services should be produced?

HOW should we produce them?

WHO consumes them?

What are the 3 types of economic systems?

• Centrally Planned

  • Government owns EVERYTHING!!! From marx: communism.

• Free Market: Capitalist

  • Adam Smith: individuals decide whatever: the market does everything!

• Mixed Economies

  • Capitalist (free market), BUT the gov intervenes sometimes

  • Ex: The US

What is the invisible hand of capitalism?

• The Invisible Hand of Capitalism

  • Society’s goals met while individuals seek their goals (self interest benefits the people)

  • Business wants to make money? Gotta make awesome stuff!

  • COmpetition and self interest regulate the free market system.

What is the production possibilities curve: what is the x and y axis?

Def

Logics out the best way to use scarce resources

Demonstrates scarcity, tradeoff, opportunity cost, efficiency

Point Represents…

A specific combination of goods that be produced under a certain allocation of resources (ex. This many bikes and this many computers) given FULL employment of resources

On the x axis goes one resource and on the y axis goes another: represents how much of one thing you can produce while ONLY producing that thing, the other way around, and everything in between.

What do points outside or inside the PPC imply?

Outside: impossible (we dont have enough resources to produce that much)

Inside: inefficient (we aren’t using all our resources)

What is a CONSTANT opportunity cost, and what does it look like on a PPC?

you give up 1 of one thing for 1 of the other thing: result is a linear/straight line PPC>

What is the law of increasing opportunity cost?

• Produce more of one good = opportunity cost (lost production of a different good) Increases. 

• Reason

  • Resources for production aren’t shared between two products (ex. Pizzas and robots)

• Examples

  • 20 pizzas, 0 robots = scientists making pizzas

  • 16 pizzas, 2 robots = perfect balance (everybody is doing what they are good at)

  • All robots = best pizza makers making robots

  • Forks/Spoons is a straight line PPC (sme resources to make both)

  • Forks/Apples is a bowed out PPC (diff resources)

Which is more condusive to economic growth: capital or consumer production?

CAPITAL as it allows you to produce more consumer in the future (its an investment).

What is absolute advantage?

The producer with the capability of producing the most of a product

What’s comparative advantage? Can two trading countries have it?

The country/producer with the lowest opportunity cost when choosing to produce a good

One country can never have both comparative advantages in a product.

Why is trade beneficial? Conjure up a real life example.

• EXAMPLE

  • The US has an absolute advantage in shoes (we’re really big), but a comparative advantage in airplanes (we’re really high tech), and airplanes make boatloads of money

  • Means we should TRADE if we have lower opportunity cost with other people that make shoes, while we keep specializing in movies

• Advantage of Trade

  • Allows you to produce, even though you aren’t producing yourself: US/Brazil example

  • Here, US has absolute advantage in wheat AND sugar: but, they choose to specialize in only wheat and brazil specializes in only sugar. By trading at a specific rate, they both experience economic growth.

For example: in this example, US specializes in only wheat and brazil specializes in only sugar bc they have lower opportunity costs respectively: by trading, they both get combos OUTSIDE of their PPC’s, which is economic growth.

How do you find comparative advantage? Give the quick AND the long way of doing it.

• First: make a chart

  • Extremes of production: ex: US makes 30 wheat and 30 sugar, brazil makes 10 wheat and 20 sugar

  • See who has absolute advantage

  • EX: see picture

• Comparative advantage

  • Find Opporunity cost

    • US: 1 wheat costs 1 sugar, 1 sugar costs 1 wheat

    • Brazil: 1 wheat costs 2 sugars, 1 sugar costs ½ wheat

  • Thus…

    • The US should produce wheat: it costs them less sugar to produce 1 wheat

    • Brazil should produce sugar: costs less wheat per sugar

Find comparative advantage by reducing the numbers down so one of them = 1: for example, mass production of 30 x’s and 20 y’s becomes 3/2 x’s and 1 y. From there, you know 1 y costs 3/2 x’s (obvious) and 1 x costs 2/3 y (just divide it again, this time by 3/2).

QUICK AND DIRTY:

• You can never have a comparative advantage in both, so there’s always two scenarios

• Just multiply the numbers in each scenario together (ex: 40x20, 50x10)

  • one scenario means country x produces a’s and country y produces b’s, the other is flipped

  • that means multiply the absolute advantages of each scenario together.

• Whichever scenario produces more units/stuff = that’s the best option

• Here: Mexico produces planes, Canada produces cars

• In INPUT questions: go for the lower option (remember: protect capital)

What are “terms of trade”

The agreed upon trade to provide econ growth to both countries.

How do you find optimal terms of trade?

First: figure out who’s producing what, and the opportunity costs of each scenario.

From there: analyze ONE column, and pick a number between the two opportunity costs: (ex 1 and 3) and check it with the other column. If it works, yay!

What’s the law of demand, and how can it shift?

• Law of Demand

  • INVERSE relationship between price and QUANTITY deamdn

    • Ex: price is super high, people won’t buy ito

    • Price super low, tons want it

• Outside Factors SHIFT the law of demand

  • Ex: milk makes you smarter = more people want it = curve moves right

  • Milk makes you stupid = less people want it = curve moves left

What are the 5 shifters of demand?

• Taste and preferences

• Number of consumers

• Price of related goods

• Income

• Future expectations

#F-Pit

What is the law of supply?

DIRECT (positive) relationship between price and quantity supplied

• Shift of Supply (shift right or left)

  • New tech produces milk faster = more quantity of milk. right

  • Cows die = less quantity of milk. left

What are the shifters of supply?

Prices and availability of inputs

# of sellers

Tech

Government action (taxes/subsidies)

Expectations of Future Profit

#PEG+ (the + is a t, remember like peg + cat)

What is “equilibrium”

Where the demand hits the supply!! YAA

What could cause a shortage or surplus?

• Surplus

  • If price suddenly spikes, we produce more (law of supply), but people dont wanna buy it (law of demand)

  • = more than we need (surplus)

• Shortage

  • Price low = people wanna buy more = producers dont wanna produce (supply)

  • Shortage

What is a double shift?

Demand increases AND supply increases = end at equilibrium, but everything is more

*When curves two curves shift at the same time, either th eprice or quantity will be indeterminate

When they both increase: the quantity goes up, price is indeterminate

When they both decrease: quantity falls, price is indeterminate.

What happens when supply goes up?

Prices goes down, quantity goes up

What happens when supply goes down?

Price goes up, quantity goes down.

What happens when demand goes up?

Supply stays the same, price increases, quantity increases

What happens when demand goes down?

Supply stays the same, price and quantity decrease