AP Macro Unit 1 Basic Economic Concepts

Scarcity

Society has unlimited wants, but limited resources

Trade-offs

all given up alternatives when a choice is made

Opportunity Cost

most desirable alternative given up when a choice is made

Price

amount the buyer pays

Cost

amount the seller pays to produce a good

Investment

money spent by businesses to improve their product

consumer goods

direct consumption

capital goods

indirect consumption/used to make consumer goods

land

all natural resources

labor

any paid effort

physical capital

human-made resource used to create other goods

human capital

skills/knowledge gained through education and experiance

entrepreneurship

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

productivity

measure of efficiency that shows outputs per unit of input

production possibilities curve (PPC)

shows alternate ways an economy can use its scarce resources

key assumptions of the PPC

only two resources are being produced; all resources are being fully utilized; quantity of resources and technology are fixed

interpreting the PPC

on the curve: efficient, inside the curve: inefficient/represents unemployment, outside the curve: unattainable because there aren’t enough resources

constant opportunity cost

cost of producing each unit remains the same because resources are equally attainable, results in a straight line

law of increasing opportunity cost

more production = cost of producing additional units increases, resources aren’t perfectly attainable, results in “bowed out” PPC

shifting the PPC

shifts inward or outward based on a change in technology, trade, or in quality or quantity of resources

absolute advantage

when a person, business, or country can produce more of a good or service using the same amount of resources of someone else, or can produce the same amount using fewer resources

comparative advantage

when a person, business, or country can produce a good or service at a lower opportunity cost than someone else

input

measures time and resources

output

measures efficiency

law of demand

the quantity demanded by consumers decreases as prices rise, then increase when prices fall; a change in price of a product will move ALONG the curve, not shift it

determinants/shifters of demand (INSECT)

income, number of buyers, substitutes, expectations of future price, complements, tastes and preferences

supply

different quantities of goods and services that are willing to produce at various price levels

law of supply

rising prices give greater opportunities for suppliers to earn a profit

quantity supplied

amount of good or service that is produced at a particular price level, one point on the curve

determinants/shifters of supply (ROTTEN)

resources, other good prices, taxes, technology, expectations of supplier, number of competitors

market equilibrium

buyers buy the exact amount that sellers are willing to produce

market shortage

excess demand: quantity demanded exceeds quantity supplied, increased prices

market surplus

excess supply: quantity supplied exceeds quantity demanded, decreased prices

increase in demand

eq(price)=increases, eq(quantity)=increases

decrease in demand

eq(price)=decrease, eq(quantity)=decreases

increase in supply

eq(price)=decreases, eq(quantity)=increases

decrease in supply

eq(price)=increases, eq(quantity)= decreases