AP Macro Unit 1

Scarcity

a huge problem, not having enough

Theoretical economics

a scientific method to make generalizations about economic behavior and outcomes; putting stuff into an equation

Policy Economics

theories applied to fix problem or meet economic goals

Positive statements

facts, avoids value judgements ( what is )

Normative Statements

included value judgements; equality ( what ought to be)

Marginal Analysis

what it costs to make something not just money; more common used than “all or nothing”

benefit

variable of marginal analysis

margin

variable of marginal analysis; additional doing seeing something again

Trade-off

every choice has a cost; all alternative decisions that we give up when we chose 1 course of action over others

5 Key Economic Assumptions

Scarcity, Trade-off, Self-Interest, Marginal Analysis, Anything can be graphed

Opportunity cost

most desirable alternative given up as a result of a decision; all are tradeoff’s

Utility

satisfaction

Marginal

addition

Allocate

distribute

shortage

when producer will not or can not offer goods or services at current price; these are temporary

Price

amount buyers pay

Cost

amount seller pays to produce product

Investment

money spent by businesses to improve production

Goods

physical objects that satisfy needs and wants

Consumer Goods

created for direct consumption; used in house

Capial Goods

created for indirect consumptions; used to make consumer goods used in businesses

Services

actions/activities that one person performs for another

4 Factors of Production

Land, Labour, Capital, and Entrepreneurship

Land

anything natural

Labour

work, effort from people to a task which that person is payed for

Physical Capital

Capital Goods, human-made resources

Human Capital

skill/knowledge gained by worker through education and experiences

Entrepreneurship

buisness owner, take initiative, innovate, act as risk bearers, obtain profit

Profit

?= Revenue-costs

Explicit Costs

traditional “out-of-pocket costs” of decision making

Implicit Costs

oppurtunity costs such as forgone time and forgone income; what is lost to do explicit costs

Production Possibilities Curve/Graph/Frontier (PPC)

either inefficient, efficient, or impossible; shows alternative ways an economy can use scarce resources; shows scarcity, trade-offs, oppurtunity costs, and efficency;

4 Key Assumptions of PPC

2 goods produced, full employment of resources, fixed resources, and fixed technology

inside the curve of PPC is…

inefficient

outside curve of PPC is…

impossible

On curve of PPC is…

maximum efficiency

On PPC oppurtunity cost is…

always losing; it can lose 0

Constant Opportunity Cost

resources easily adaptable for producing either good, results in straight line PPC

Law of Increasing Opportunity Cost

as you produce more of any good, the opportunity cost will increase, result is a concave PPC

Cost of Marginal Unit

?= Opportunity Cost/Units Gained ( count like opposite of rise/run )

Productive Efficency

(quantity); products being produced in least costly way; any point on PPC

Allocative Efficency

(quality); products being produced are ones most desirable; optimal point changes based on society

3 Shifters of PPC

changes in resources quantity or quality, changes in technology, changes in trade

Does demand or unemployment shift curve

No

3 Economic Questions

What goods/services produced? How should goods/services be produced?, and Who consumes goods-services produced?

Economic System

method used by a society to produce and distribute goods and services Centrally-Planned (communism), Free Market Economy(capitalism), Mixed Economy, and Traditional Economy

Demand

…is the different quantities of goods that consumers are willing and able to buy at different prices

Law of Demand

inverse relationship between price and quantity demand, price goes up/down demand goes down/up, substitution effect, income effect, law of diminishing marginal utility

Substitution Effect

(Law of Demand) if price goes up for a product, consumers buy less of that product and more of another substitute product

Income Effect

(Law of Demand) if price goes down for product the purchasing power increases for consumers allowing them to purchase more

Law of Diminishing Marginal Utility

(Law of Demand) the more you buy of any good the less satisfaction you get from each new unit

Shifts in demand

tastes and preferences, number of consumers, price of related goods, future income, future expectations

increase is to right

decrease is to left

Number of Consumers

more/less people more/less demand

Price of Related Goods

substitutes are goods used in place of one another; complements are two goods that are bought and used together

Income

…of consumer changes the demand, but how depends on type of good

Normal Goods(Income)

as income increases demand increases and vice versa ex: New cars, seafood, homes, luxury restaurants

Inferior Goods (Income)

income increases demand falls and vice versa; ex:Top Ramen, used cars

Supply

different quantities of a good that sellers are willing and able to sell (produce) at different prices

Law of Supply

direct relationship between price and quantity supplied

6 Determinants (Shifters) Of Supply

1) Prices/Availability of inputs(resources

2) Number of Sellers

3) Technology

4) Government Action; Taxes and Subsidies

5) Opportunity Cost of Alternative Production

6) Expectation of Future Profit

Equilibrium

when price and quantity are same for supply and demand

Disequilibrium

quantity demanded is greater or less than quantity supplied for same price

Double shifts

if two curves shift at same time either price or quantity will be indeterminate( not known )

Voluntary Exchange

in free-market, buyers and sellers voluntarily come together to seek mutual benefits

Consumer Surplus

difference between what you are wiling to pay and what you actually pay

Consumer surplus formula is…

?=Buyer’s Maximum-Price

Producers surplus

difference between price seller recieved and how much they were willing to sell it for

Production surplus formula is…

?=Price-Seller’s Minimum

Price Ceiling

maximum legal price a seller can charge for a product, must be below equilibrium

Price Floor

Minimum legal price a seller can sell a product, must be above equilibrium

Quota

a limit on number of imports, the governments sets the max amount that can come in country

Subsidies

government just gives producers money,

goal is for them to make more of the goods that teh government thinks are improtant

Excise Taxes

for every unit made, producre must pay money, NOT a lump sum ( one time only )

goal: is for them to make less of the goods that the government deems dangerous or unwanted

Absolute Advantage

the producer that can produce the most output OR requires the least amount of input (resources)

Comparative Advantage

The producer with the lowest oppurtunity cost