AP Macroeconomics – Unit One Exam Review (Updated Spring 2025)

Scarcity

The fundamental economic problem of limited resources and unlimited wants.

Efficiency

Using resources in the best way possible to maximize output.

Allocative Efficiency

Resources are used to produce the combination of goods most desired by society.

Productive Efficiency

Producing goods at the lowest possible cost on the production possibilities curve.

Marginal Benefit

The additional satisfaction or utility gained from consuming one more unit of a good or service.

Marginal Cost

The additional cost incurred from producing one more unit of a good or service.

Positive Statements

Objective, fact-based statements that can be tested or proven.

Normative Statements

Value-based statements that express opinions about what should be.

The Four Factors of Production

Economic resources used to produce goods/services: land, labor, capital, and entrepreneurship.

Land (Factor of Production)

Natural resources with payment being rent.

Labor (Factor of Production)

Human effort and skills with payment being wages.

Capital (Factor of Production)

Tools, machinery, and technology with payment being interest.

Entrepreneurship (Factor of Production)

Risk-taking and innovation with payment being profit.

Microeconomics

Focuses on individuals and firms.

Macroeconomics

Looks at the entire economy.

Law of Increasing Opportunity Costs

As production of one good increases, the opportunity cost of producing additional units rises.

Opportunity Cost

The value of the next best alternative given up when making a decision.

Circular Flow Model

Diagram showing the flow of money, resources, and goods/services in an economy.

Factor Market

Where households sell resources (land, labor, capital) to firms.

Product Market

Where firms sell goods/services to households.

Demand

The quantity of a good or service that consumers are willing and able to buy at different prices.

Quantity Demanded

The amount of a good consumers are willing to buy at a specific price.

Law of Demand

As price decreases, quantity demanded increases.

Income Effect

Lower prices increase consumers’ purchasing power.

Substitution Effect

Consumers switch to relatively cheaper goods.

Diminishing Marginal Utility

Each additional unit of a good provides less added satisfaction.

Determinants of Demand

Factors that influence demand: Tastes & Preferences, Related Goods, Income, Population, Expectations.

Supply

The quantity of a good or service producers are willing and able to sell at different prices.

Quantity Supplied

The amount producers are willing to sell at a specific price.

Law of Supply

As price increases, quantity supplied increases.

Law of Increasing Costs

As more of a good is produced, the cost of producing additional units rises.

Determinants of Supply

Factors that influence supply: Government intervention, Resource costs, Opportunity cost, Technology, Expectations. (GROTE)

Equilibrium

The point where supply and demand meet; no shortage or surplus.

Disequilibrium

When supply and demand are not balanced.

Surplus

Quantity supplied > Quantity demanded (prices too high).

Shortage

Quantity demanded > Quantity supplied (prices too low).

Price Ceiling

A legal maximum price set below equilibrium, causing shortages.

Price Floor

A legal minimum price set above equilibrium, causing surpluses.

Elastic Demand Curve

More horizontal; quantity demanded changes greatly with price changes.

Inelastic Demand Curve

More vertical; quantity demanded changes little with price changes.