AP Macro U1 + U2

Scarcity

Scarcity

-most fundamental problem of economics

-limited amount of resources for an unlimited amount of needs

Opportunity Costs

• What must be given in order to be received

• How much is lost or gained each unit of something

Supply

Relationship between quantity supplied and price

• sum of supply curves in firms in the market

Demand

Relationship between quantity demanded and price

• sum of all demand curves by consumers

• Mainly represented by shifts to the left or right

Comparative Advantage

• if OC is lower for a certain good from one country compared to another

• Organization has this if OC of production is lower than other organizations

Absolute Advantage

• if an organization can produce more output than the other

Terms of Trade

How much of a good is to be given and accepted and is mutually beneficial for both organizations based on output, comparative advantage, and opportunity costs

Demand shifters

Left shift(decrease) right shift(increase)

• price of related goods(complimentary or substitute)

• Income - more income more purchasing power & vice versa

• Tastes - cultural wise, media wise, seasonal

• Future Expectations - anticipated increase or decrease

• # of Consumers( large # leading to higher demand)

Supply shifters

Left shift(decrease) right shift(increase)

• Input Prices(if price of needed supply increases then there will be a smaller supply output, vice versa)

• Tech(cheaper/more tech more supplies vice versa)

• Expectations(seasonal wear)

• # of Producers(workers in form)

Law of demand

A higher price for a good —> lower quantity demanded

Law of supply

Higher price —> higher quantity supplied

Quantity supplied

Actual amount of a good or service firms supply at a given price

Quantity demanded

Actual amount of good or service consumers are willing to buy at a given price

Graph displayed on PPC

Equilibrium

Point on S-D graph where the supply and demand meet. Equilibrium price and quantity demanded and supplied meet

Excess demand

When quantity demand is higher than quantity supplied on Equilibrium graph

Shortages = demanded - supplied

Excess Supply

When quantity supplied is higher than quantity demanded on Equilibrium graph

Surplus = supplied - demanded

Normal good

As income increases you buy more normal goods(name brand)

Inferior good

As income decreases you buy more inferior goods(off brand or bus instead of uber)

Production Possibilities Curve(PPC)

Graph showing diff combos of output for 2 goods using resources and tech given

• if on ppc then its allocated efficiently(efficient)

• If below ppc then its inefficient

• In above PPC its not possible, using resources they don’t have or an economic shift

Factors of Production

Land, Labor, Capital, Entrepreneurship

Output

OC = loss/gain, units produced

OC of good X = (Units of Y)/(Units of X) = # of Y

Output questions the Opposite good goes Over

Input

OC = gain/loss, time to make 1 unit

OC of Good X = (Time to make X)/(Time to make Y) = # of Y

Input questions, the Opposite goes Under

Linear PPC

Straight line meaning opportunity costs are constant

• same amount of each good is given up in production

Bowed out PPC

Increasing opportunity cost(when the OC of a good increases the output does as well)

• law of increasing costs

Command economy

Factors of production publicly owned by government, no competition as gov. controls supply & demand

Market/FreeEconomy

Factors of production, privately owned by individual producers in competition dictating supply and demand

Mixed Economy

Spectrum of command and market economies, all modern economies

Economics

Study of how society allocates limited resources to meet unlimited needs and wants(trade offs, incentives, costs & benefits)

Specialization

Which good a country/organization has the comparative advantage in, specializing in the task

Economic indicators

• GDP- market value of goods & services produced within a nation’s borders over a given period of time

• Unemployment- unemployment rate, percentage of ppl struggling to look for work

• Inflation- rate of change of overall price in economy

• Interest Rates- prices at which money can be borrowed

Circular Flow Model

Illustrates continuous flow of money, goods, and services between households & businesses in economy

GDP(Gross Domestic Product)

Total market value of goods and services produced within a country’s border

• if GDP goes up the economy grew, if GDP goes down then economy shrinks

Inflation

General rise in prices, decreases purchasing power, amnt of goods or services 1 unit of money can buy

Nominal GDP increases/overestimates output value compared to real output

Deflation

General fall in prices, increases purchasing power, amnt of goods or services 1 unit of money can buy, decreases incomes & business profit, decrease in employment

Nominal GDP decreases/underestimates output value compared to real output

Unemployment

Frictional + structural + seasonal + cyclical

Households

Provides factors of production, supply labor & demand goods and services

Firms

Use factors to produce goods and services, supply goods & demand labor

Expenditure Approach

C + I + G + (X - M)

Consumption(C) - goods and services ppl buy

Private Investment(I) - business spending on capital like land, buildings, equipment, investment in unsold inventory, purchases of homes

Government Expenditures(G) - spending by fed, state, & local govs providing goods and services(sold & roads)

Net Exports - the value of exports to other countries minus imports into another country

Income Approach

W + I + R + P

Wage - money paid to employees by employers

Interest - the amnt earned by an investor’s money that the investor places in an investment or project(lending money)

Rent - The money a business earns from leasing real estate or another type of asset

Profit - Revenue generated from a business activity minus the expenses, costs, & taxes in sustaining the activity

GDP per capita

Shows a country’s GDP divided by its total population

GDP/TTL pop.

GNI(gross national income)

TTL market value of all final goods & services produced during a year by resources owned within a certain country, regardless of where resources are located

Product Market

Households demand, Firms supply

Factor Market

Households supply, Firms demand

Expanded Circular Flow

With the government involved regarding taxes and government spending

Injections

Investments & exports

Money inputted into the circular flow by external factors

Leakages

Savings & imports

Money exported from the circular flow from the circular flow

Nominal GDP

Value of a nation’s output expressed in the value of the prices charged for that year

• nominal does just adjust for inflation/can measure for inflation

Current prices * current quantity of output

Real GDP

Measures the actual value of nation’s output expressed in the value of prices charged at base year

• real gdp adjusts for inflation

Base year prices * current quantity of output

Business Cycle

Overall economic trends

Cost-Push Inflation

Rise in prices on a supply based on the amount of supply compared to demand or some input price

CPI(Consumer Price Index)

Most common measure of inflation

Housing, food & bev, transport, recreation, medical care/education, apparel

Reflects changes in cost of living of typical household

CPI equation

(Market basket price current year/market basket price base year)*100

Inflation Rate

Percentage changed in price level over time(annual)

(CPI2 - CPI1)/CPI1

Demand-Pull

Inflation occurs when the production of goods & services can not keep pace with demand

GDP Deflator

Complementary measure of inflation, measures changes in goods & services by expenditure

<100 = neg inflation

>100 = pos inflation

nominal/real(100)

Market price

TTL amnt/sum spent una given time

Hyperinflation

Extreme & rapid increase in general price level of goods & services

Caused by excessive money supply growth, loss of confidence in currency, economic or political instability

Labor Force

Employed + unemployed

Labor Force Participation rate

Measures % of adult pop. in a country, employed or unemployed, % of ppl in labor force

(Unemployed + employed)/pop.

Frictional unemployment

When someone new enters labor market or is inbetween jobs, has employable skills, soon to be employed

Structural unemployment

Caused by fundamental, underlying changes in economy creating job loss for skills no longer in demand

Cyclical unemployment

Jobs gained and losses as business cycle improves & worsens when the economy is expanding or contracting

Seasonal unemployment

Emerges as the periodic & predictable job loss that follows calendar

Natural rate of unemployment

Frictional + structural

Unemployment rate

Dictate economic wellbeing

(Unemployment pop./ labor force) *100

Recession

Output & employment are falling decreasing

Lead to unemployment, reduced production/GDP, reduced incomes, lower living standards

Trough

Lowest unemployment & output rate

Followed by expansion

Expansion/recovery

Output & employment rise

Unemployment falls, increased GDP, increased incomes, better living standards

Peak

Highest employment & output rate

Followed by recession

Potential output

Max level of output using all available resources @ full employment, only estimated, output gap

Actual output

Business cycle

Land

Resources from Nature

Factor of Production

Labor

Effort and productivity of a pool of workers

Factor of Production

Capital

Physical capital(machinery) and human capital(skill and resources offered)

Factor of production

Entrepreneurship

Technical means for production of goods and services

Markets

Where buyers and sellers of the same good or service interact

• buyers(households) demand, sellers(firms) supply