AP Macroeconomics Unit 1 Flashcards

Economics

The study of scarcity and choice

Trade-off

When you give up something to get something else

Resource or Factor of Production

Anything that can be used to produce something else

Land

Refers to all resources that come from nature, such as timber, wind, and petroleum

Labor

The effort of workers

Capital

Manufactured goods used to make other goods and services (eg. buildings, machinery, tools)

Entrepreneurship

The efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes

Scarcity

When something is desired in quantities that are beyond the available supply

Opportunity cost

The value of the next best alternative that you must give up in order to get the item

Microeconomics

The study of how individuals, households, and firms make decisions and how those decisions interact

Household

A person or group of people who share their income

Firm

Any organization that produces goods or services for sale

Macroeconomics

The study of the overall ups and downs of the economy

Positive

Deal with indisputable facts or predictions

Normative

Deals with debatable or subjective statements

Model

A simplified representation used to better understand a real-life situation

Other things equal assumption

Means that all other relevant factors remain unchanged. This is also known as the ceteris paribus assumption

Production possibilities curve

Illustrates the necessary trade-offs in an economy that produces only two goods. It shows the maximum quantity of one good that can be produces for each possible quantity of the other good produced.

Efficient

There is no way to make anyone better off without making at least one person worse off

Y-intercept of PPC

The maximum number of goods on the y-axis that can be produced (no x good is produced)

X intercept of PPC

The maximum number of goods on the x-axis that can be produced (no y good is produced)

Point inside the PPC

Inefficient use of resources (feasible, but not preferable)

Point outside the PPC

Unfeasible level of production

Slope of PPC

The opportunity cost of the good measured on the x axis in terms of the good measured on the y axis.

Straight-line (linear) PPC

Opportunity cost of one unit of a good does not change with how much of the other good is produced. There is no specialization of resources

Concave (bowed-out) PPC

Depicts increasing opportunity costs. There is specialization or resources

Economic growth

An increase in the maximum amount of goods and services an economy can produce

Economic growth on the PPC

Results in an outward shift of the PPC (can produce more of everything)

Two ways economic growth occurs:

1. An increase in the availability of resources used to produce goods and services

2. Improved technology. This only affects resources specific to the improved technology; resources which are not affected by the technology will be shifted outwards less

Technology

The technical means for producing goods and services

Shrinking economy on the PPC

Results in an inward shift of the PPC

Trade

Providing goods and services to others and receiving goods and services in return

Specialization

Each person specializes in the task that they are good at performing

Comparative advantage

When a person’s opportunity cost in producing a good is the lowest among the people who could produce the good or service

Absolute advantage

When a person' can make more of the good or service with a given amount of time and resources

Terms of trade

Indicates the rate at which one good can be exchanged for another. To find it, pick any number between the opportunity cost of the producer and that of the buyer.

Supply and Demand model

A model of how competitive markets work

Demand

The amount of a good people are willing and able to buy at different prices

Demand schedule

A table that shows how much of a good or service consumers will be willing and able to buy at different prices

Quantity demanded

The actual amount of a good or service consumers are willing and able to buy at some specific price. It is shown as a single point in a demand schedule or along a demand curve

Demand curve

A graphical representation of the demand schedule. It shows the relationship between quantity demanded and price, with price on the y-axis and quantity demanded on the x-axis

Law of demand

Says that a higher price for a good or service, all other things held constant, leads people to demand a smaller quantity of that good or service.

• There is an inverse relationship between price and quantity demanded

Change in demand

A shift of the demand curve, which changes the quantity demanded at any given price

Movement along the demand curve

A change in the quantity demanded of a good that is the result of a change in that good’s price

Shifters/Determinants of Demand

TRIBE:

• Tastes and preferences

• Related goods

• Income

• Number of buyers

• Future expectations

Substitutes

Goods that are bought interchangeably. A rise in the price of one good leads to an increase in the demand for the other good

Complements

Goods that are bought together. A rise in the price of one of the goods leads to a decrease in the demand for the other good

Normal good

When a rise in income causes demand for the good to increase (eg. luxury goods, higher-end food, etc.)

Inferior good

When a rise in income causes demand for the good to decrease (eg. used clothes, thrifting)

Quantity supplied

The actual amount of a good or service people are wiling and able to sell at some specific price

Supply schedule

Shows how much of a good or service producers would supply at different prices

Supply curve

Shows the relationship between the quantity supplied and the price

Law of supply

Says that, other things held constant, the price and quantity supplied of a good are positively related

Change in supply

A shift of the supply curve, which indicates a change in the quantity supplied at any given price

Movement along the supply curve

A change in the quantity supplied of a good arising from a change in the good’s price

Input

A good or service that is used to produce another good or service

Substitutes in production

Producers can use the same inputs to make either one good or the other. An increase in the price of a substitute in production decreases the supply of the other good, as the producers dedicate more resources to produce the good they will make more money off of

Complements in production

If increased production of either good creates more of the other. An increase in the price of a complement in production increases the supply of the other good, as doing so increases the supply of both goods, which gives producers more profit

Shifters/Determinants of Supply

I-RENT:

• Costs of inputs

• prices of related goods or services

• producer expectations

• number of producers

• technology

Equilibrium

An economic situation when no individual would be better off doing something different. Equilibrium in a competitive market occurs where the supply and demand curves itnersect

Equilibirum price

The price for which quantity supplied equals quantity demanded

Equilibrium quantity

The quantity at which quantity supplied equals quantity demanded

Disequilibrium

When the market price is above or below the price that equates the quantity demanded with the quantity supplied

Surplus

When the quantity supplied exceeds the quantity demanded. They occur when the price is above its equilibrium level. As producers do not have enough consumers, they lower their prices to attract consumers until equilibrium is reestablished.

Shortage

When the quantity demanded exceeds the quantity supplied. They occur when the price is below its equilibrium level. As is too much demand for a good, producers increase price to make more profit until equilibrium is reestablished

Impact of a demand shift on equilibrium

Equilibrium price and quantity both increase or decrease

Impact of a supply shift on equilibrium

• Supply increases: Equilibrium price decreases, equilibrium quantity increases

• Supply decreases: Equilibrium price increases, equilibrium quantity decreases