AP Macroeconomics Unit 1

economics

the study of resources that have alternative uses that are used to fulfill nearly unlimited human desires.

utility

satisfaction

scarcity

less than what we want

marginal

additional

trade offs

giving up one thing for another

allocate

to distribute

opportunity cost

the next best use for resources

positive statements

fact; avoids value judgement (what is)

normative statements

opinion; includes value judgement (what ought to be)

microeconomics

study of small economic units such as individuals, firms, and industries (competitive MARKETS, labor markets, personal decision making, etc.)

macroeconomics

study of the large economy as a whole or in its basic subdivisions (NATIONAL ECONOMIC GROWTH, government spending inflation, unemployment, etc.)

adam smith

known for the first comprehensive system of political economy: “An Inquiry into the Nature and Causes of the Wealth of Nations”

Command Economy

a central authority makes most of the what, how, and for whom decisions. Economic decisions are made by the government and the people have little, if any, influence over how the basic economic questions are answered. Ex. North Korea, Soviet Union

Advantages: can change direction drastically in a relatively short time, many health and public services are available to everyone for little cost

Disadvantages: not designed to meet the wants of consumers, does not incentivise people to work hard because everyone is paid the same wages

market economy

an arrangement that allows buyers and sellers to come together in order to exchange goods and services. People’s decisions act as votes and supply/ demand power the economy.

Advantages: can adjust to sudden change, high degree of individual freedom on what and how, small degree of government interference, and decision making is individual choice

Disadvantages: can fail if there isn’t consistent competition, reasonably free resources, and adequate Info for consumers to make wise choices. Doesn't provide for everyone’s basic needs, does not provide enough services that people highly value, high degree of uncertainty for workers and businesses as a result of change

traditional economy

the allocation of scarce resources and nearly all other economic activity stems from ritual, habit, or custom. Habits and custom tend to dictate social behavior.

Advantages: everybody knows which role to play, you know what to produce and how, for whom the products are made is dictated by the traditions of the society.

Disadvantages: discouragement of new ideas, those who break rules are often punished, little growth, distinct lack of progress which equates to a lower living standard

mixed economy

any combination of traditional, market or market economy

production possibility curve (PPC)

shows opportunity cost and trade offs (how much you must give up of one thing for another)

Increasing opportunity cost

bowed line

constant opportunity cost

linear fit

full employment

any point on the PPC line

inflation

a sustained rise in the general price level in an economy

recession

a decline in economic activity

right shift

economic growth

left shift

economic decrease

key four things necessary to make more

labor, resources, capital (the machine that makes the product), and technology/ productivity

capital

machine that makes the product

the product market

the place where goods and services produced by businesses are sold to households

the resource (factor) market

the place where resources (land, labor, capital, and ent.) are sold to buisnesses

four factors of production

land, labor, capital, entrepenuership

land

all natural resources that are used to produce goods and services. Anything from nature (water, sun, oil, etc.)

labor

any labor for which a person in paid (manual laborers, teacher, lawyers, doctors, etc.)

three types of capital

physical capital, human capital, and financial capital

physical capital

human made resource used to create other goods/ services (tools, tractors, machines, buildings, factory, etc.)

human capital

skills/ knowledge gained by a worker through education and experience (college, vocational training, etc.)

financial capital

money companies use to buy resources

entrepreneurship

ambitious leaders that combine the other factors of production to create goods and services

the law of demand

quantity demanded of a good is inversely proportional to its price

the demand curve

the demand curve represents the demand for a product at a given price

income effect

when things are more expensive, we buy less. When things are cheaper, we buy more.

substitution effect

when apples are expensive and their substitute (pears) are relatively cheap, I buy fewer apples and more pears

diminishing marginal utility

each additional unit of a product purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower

shifters of demand

consumer tastes/ preferences, prices of related goods, consumer income, number of consumers, change in expectations of future prices.

consumer tastes/ preferences

advertising

prices of related goods

complements (fries with burger), substitutes

consumer income

normal goods vs inferior goods

normal goods

want to buy and have money

inferior goods

forced to buy and don’t have money

number of consumers

more consumers equals more demand

change in expectations of future prices

expecting lower price= left shift, expecting higher price= right shift

law of supply

quantity supplied of a good is proportional to its price

the law of increasing marginal cost

its more costly to produce two than one. Therefore, I must collect a higher price if I am going to produce more.

supply curve

the supply curve shows the quantity supplied at a specific price.

sifters of supply

price of resources (land, labor, capital), number of suppliers, price of other goods, productivity (ex. technology), government policies, expectation of future prices

government policies which may shift supply

taxes (money taken from businesses), subsidies (money to businesses), and regulations (rules for businesses)

equilibrium

when supply equals demand

surplus

when the supply is greater than the demand

what happens in event of a surplus

companies will lower their prices

shortage

when the demand is greater than the supply

what happens in the event of a shortage

companies will raise prices

demand shifts to the left

price and quantity both go down

demand shifts to the right

price and quantity both go up

supply shifts to the left

Price goes up while quantity goes down. Worst thing to happen to a market

supply shifts to the right

price goes down while quantity goes up. good thing to happen to a market

oil market

price goes down and quality is indeterminate

price ceiling

highest price you’re allowed to charge for an item. If it’s below equilibrium it can create a shortage. Demand is greater than supply

price floor

the lowest price you’re allowed to charge for an item. If it’s above equilibrium it can create a surplus. Demand is less than supply

consumer surplus

the difference between what a customer would have paid and what they actually paid

producer surplus

the difference between what a producer sold their good for and the minimum they would have sold it for

dead weight loss

the lost value/ surplus due to a market interference, usually by the government