AP Economics Unit 1

Law of Increasing Costs

As more of a product is produced, the opportunity cost of that product increases.

Production possibilities frontier

the combinations of two goods that can be produced if the economy is efficient (concave to the origin because of law of increasing costs)

Constant Opportunity Cost

Require similar resources

Increasing Opportunity Cost

Require very different resources

comparative advantage

the ability to produce something with lower opportunity cost

absolute advantage

the ability to produce something more efficiently

efficiency

using resources to maximum potential

Economic Resources

Land, labor, Capital, and Entrepreneurship

labor

all productive human activity

Command economy

the government decides what, and how much is produced, and who receives the goods

Law of demand

when the price of a product increases, the quantity demanded decreases

Law of supply

when the price increases, the supplied quantity increases

change in quantity demanded

occurs when the price of a good changes, no shift in curve, just a movement along the curve (inverse relationship with changes in price of good)

Determinants of demand (SPICE)

S-ubstitute goods, P-references and population, I-ncome, C-omplementary goods, E-xpectations

change in quantity supplied

occurs after a price change, no shift in supply curve (direct relationship with changes in price of good)

Determinants of supply (COTTEN)

C-ost of inputs, O-pportunity cost of alternative production, T-echnology, T-axes/ subsidies, E-xpectations, N-umber of sellers

Equilibrium price

price at which quantity supplied equals quantity demanded

Income effect

purchasing power of income is inversely related to product price; as price decreases, consumer may buy more because of increased buying power of income

shortage

when quantity demanded is greater than quantity supplied

surplus

when quantity demanded is less than quantity supplied

Substitution effect

as the price of a good decreases, a consumer buys more of this good relative to other, more expensive goods (as apples rise, buy oranges (ceteris paribus))

Substitute Goods

goods are substitutes if CPED X increases and Y increases (positive sign on ratio)

Compliment Goods

goods are compliments if CPED X increases and Y decreases (negative sign on ratio)

Shifters of the PPC

Production Method, Technology, and New Resources

Shortage

Qd > Qs

Surplus

Qd < Qs

Equilibrium

Qd = Qs

Price Floor

Go over equilibrium and result in Surplus

price ceiling

Go under equilibrium and result in Shortage

Increase/Decrease of both supply and demand

may result in an indeterminate value

A point outside of the production possibilities frontier is unattainable

True

A person has an absolute advantage in an activity if the person can perform the activity at a lower opportunity cost than every else

False

A person has an comparative advantage in an activity if the person can perform the activity at a lower opportunity cost than every else

True

If the quantity of ice cream demanded at each price increases, there is a movement along the demand curve for ice cream

False

If the quantity of ice cream demanded at each price increases, there is a shift of demand for ice cream

True

When Sue's income increases, her demand for movies increases. For Sue, movies are a normal good.

True

If people's incomes fall and all other influences on buying plans remain the same, the demand for computers will decrease and there will be movement along the demand curve.

False

If people's incomes fall and all other influences on buying plans remain the same, the demand for computers will decrease and there will be a shift of the demand curve.

True

If the price of coffee is expected to rise next month, the supply of coffee this month will decrease

True

The supply of a good will increase and there will be a movement up along the supply curve of a good if the price of one of its substitutes in production falls

False

The supply of a good will increase and there will be a shift of the supply curve of a good if the price of one of its substitutes in production falls

True

If the price of asparagus is below the equilibrium price, there're a shortage of asparagus and the price of asparagus will rise until the shortage disappears

True

When the demand for skateboards decreases and the supply of skateboards remains unchanged, the quantity supplied of skateboards decreases as the price rises

False

When the demand for skateboards decreases and the supply of skateboards remains unchanged, the quantity supplied of skateboards decreases as the price falls

True

Gasoline refiners expect the price of oil will fall next month. If the supply of oil does not change, the equilibrium price of oil today falls and the equilibrium quantity today decreases (ep decrease and eq decrease)

True