AP Macro Unit 1-4

Scarcity

Unlimited wants and needs but limited resources

What does the Production Possibilities Curve show?

It reveals the different combinations of two goods that can be produced using all of the country’s resources to its fullest

Why can’t you produce anything outside of the PPC graph?

Scarcity

A point inside the PPC curve is __?

Inefficent

What does a point on the PPC curve reveal about the economy?

It’s operating with all of it’s resources

Opportunity Cost(definition)

the amount you give up for producing a single unit of good

What does a liner PPC curve reveal about the Opportunity Costs?

It’s constant

What does a Bowed out PPC curve reveal about the Opportunity Costs?

It’s increasing

What effect does having more resources have on the PPC curve?

It increases the PPC curve

Factors of Production

it’s when businesses uses the four essential inputs land, labor, capital, and entrepreneurship to produce goods and services, that act as a foundation for economic activity and growth

What is considered as land when it comes to Factors of production?

Natural resources used in the production of goods and services

What is considered labor when it comes to Factors of production?

any physical or mental human effort used to produce goods and services, for which workers are paid wages

what is considered capital when it comes to factors of production?

man-made, tangible, or produced assets used to create other goods and services, rather than money

Examples of Capital goods when it comes to factors of production

machinery, buildings, tools, computers, and infrastructure

what is considered entrepreneurship when it comes to factors of production?

the human resource that organizes other resources to produce goods and services

What is a Marginal Analysis?

an economic framework of comparing the additional (marginal) benefits to the additional (marginal) costs of a specific decision or action

Marginal Costs(definition)

the additional cost incurred by producing one more unit of a good or service.

Marginal Costs equation

Change in total costs/change in quantity

Absolute Advantage(definition)

Producing more of a specific good or service than another competitor using the same amount of resources

In an Input scenario, what individual would have the absolute advantage?

When they produce a good in a lower amount of hours compared to another individual

In an Output scenario, what individual would have the absolute advantage?

The individual that produced more goods compared to another individual using the same amount of resources

Comparative Advantage(definition)

the ability of an individual, firm, or nation to produce a specific good or service at a lower opportunity cost than competitors when using the same resources

What does it mean when an individual or firm has a lower opportunity cost compared to the other individual or firm?

That they have a comparative advantage over them

Jacobland= 

2 cars 20 boats

Paulastan= 

8 cars 40 boats

What is a good terms of trade for cars?

1 car : 6-9 boats

Jacobland= 

2 cars 20 boats

What is the opportunity Costs of making 1 car?

10 boats

What is the definition for Mutual benefits of trade?

when two parties (countries or individuals) engage in exchange, allowing both to increase their consumption possibilities beyond their own production capabilities.

Gains from trade

When countries specialize in goods with a lower opportunity cost and exchange them

When should a country specialize in their resource?

When they’re producing and exporting goods or services for which it has a lower opportunity cost compared to other nations

When can you tell that we’re dealing with an output situation?

When it compares the amount of goods being produced from both individuals or firms given with the same resources

Opportunity cost in an Output situation for good A

Resource Good B/Resource Good A

When can you tell that we’re dealing with an Input situation?

When it compares the hours that these Individuals or firms have done producing one good

Opportunity cost in an Input situation for good A

Resource Good A/Resource Good B

What does the Law of Demand state?

It states that there is an inverse relationship between the price of a good and the quantity demanded meaning that when the price of a good goes up the quantity demanded goes down.

What are the reasons for Law of Demand happening?

Substitution Effect, Income effect, and the law of diminishing marginal Utility

Substitution effect

The changes in price motivate consumers to buy relatively cheaper substitutes goods

Income effect

The changes in price affect the purchasing power of consumers income

The law of diminishing marginal utility

As you continue to consume a given product, you will eventually get less addition utility(satisfaction) from each unit you consume

The shifters of the Demand curve

Tastes/preferences, Number of consumers, Price of related goods, Income, and Expectations

Tastes/Preferences

consumer likes, dislikes, and trends that directly shift the demand curve

What is the definition of the Number of consumers?

the total count of individuals or entities willing and able to purchase a good or service

What does the Price of related goods explain?

It explains how the price change of one good impacts the demand for another

What does Normal goods say about the relationship between Income and Demand?

They’re both directly related

What does Inferior goods say about the relationship between Income and Demand?

Inversely related

Expectations

the beliefs or forecasts held by consumers and firms regarding future economic conditions, such as inflation, income, interest rates, or sales

How is a change in the Quantity demanded shown?

A movement along the demand curve

What effects the Quantity Demanded

The price

When the Demand curve changes, it shifts __

right or left

What doesn’t effect the demand curve, but affects the quantity demanded?

The price

What does the Law of Supply describe the relationship between Price and Quantity?

Price and Quantity supplied is directly related

The Supply curve is __ sloping

Upward

What are the shifters of supply?

Price of resources(input prices), number of producers, change in technology, taxes and subsidies, and future expectations

Price of resources(input prices)

the costs of inputs—specifically labor (wages), raw materials, energy, and capital—used in the production of goods and services.

Number of producers(or sellers)

It refers to the total count of firms or individuals offering a specific good or service in a market

Change in Technology

refers to improvements in the methods, tools, and knowledge used to produce goods and services, resulting in higher productivity

Taxes and subsidies

government fiscal tools used to influence market behavior, aggregate supply, and income distribution.

Future expectations

refer to the beliefs or anticipations households and firms hold regarding future economic conditions

Quantity Supplied(definition)

the specific amount of a good or service producers are willing and able to sell at a particular price during a given time period

What effects the supply curve

Changes in production costs(Input prices), technology, number of sellers, taxes/subsidies, and producer expectations

What is the Market Equilibrium?

when the demand and Supply intersects

Disequillibrium

a market condition where the quantity demanded does not equal the quantity supplied at a given price level, resulting in either a shortage (excess demand) or a surplus (excess supply)

Surplus(definition)

when the quantity supplied of a good, service, or resource exceeds the quantity demanded at the current market price

What is a Shortage in an supply and demand graph?

quantity demanded is greater than the quantity supplied

How does an economist measure the health of an economy?

by looking at the GDP, the unemployment rate, and the consumer price index, which measures inflation

The Unemployment rate(definition)

the percentage of the labor force (not the total population) that is jobless, actively seeking work, and available to take a job

Unemployment rate equation

(Unemployed/Labor Force) x 100

Labor force Equation(not the rate equation)

Employed + Unemployed

Who is excluded from the Labor Force?

The retired, discouraged workers, and those who aren’t seeking employment

What does the Consumer Price Index(CPI) measure?

the average change over time in prices paid by consumers for a fixed "market basket" of goods and services

Consumer Price Index(CPI) formula

(Cost of basket in the current Year/cost of the basket in base year) x 100

What is the equation for a Cost of a basket in a CPI for both the current and base years

Price x amount of goods

What does the CPI measure?

It measures the average change over time in the prices paid by consumers for a basket of goods and services commonly purchased by households

When the CPI is less than 100, what happened to the price after the base year?

It decreased from the base year

When the CPI is more than 100, what happened to the price after the base year?

It increased

When the CPI is at 100, what happened to the price after the base year?

The price stayed the same

What is the substitution Bias?

It’s when the CPI fails to account for consumers switching to cheaper alternatives as prices change, leading to an overestimate of the cost of living

What does the Circular flow model show?

How goods and services all flow in the economy

In the Circular flow model, what do households act as in the factor market?

They act as the sellers (suppliers) of factors of production—land, labor, capital, and entrepreneurship- where they work in these factories

In the Circular flow model, what do producers do in the factor market

They act as demanders, where they purchase or hire inputs—specifically labor, land, capital, and entrepreneurship—from households to produce goods and services, paying wages, rent, interest, and profit in return

In the Circular flow model, what do Consumers do in the product market?

They act as buyers/demanders in the product market, purchasing final goods and services produced by firms

In the Circular flow model, what do Producers do in the product market?

They act as sellers in the product market, supplying finished goods and services to households in exchange for revenue

What is happens in the factor market in terms of the relationship between households and businesses?

It’s where households sell and businesses buy factors of production—land, labor, capital, and entrepreneurship—to produce goods and services

What happens in the product market between businesses and the consumers?

the arena where businesses sell finished goods and services to households, government, and other businesses, while households buy from them

What are households?

They’re individuals or groups living together (e.g., families or individuals in one home) who act as the primary economic agents.

What is GDP?

the dollar value of all final goods and services produced within a country in one year

Name the three types of unemployment?

Frictional, structural, and cyclical unemployment

What is Frictional unemployment?

It’s when people are between jobs, or in better words looking for jobs

What’s an example of Frictional unemployment?

College student graduates, people relocating, parents returning to work, or workers quitting to find higher pay

What is Structural unemployment?

People that don’t have jobs anymore because it’s not needed

What’s an example of structural unemployment?

Factory workers being replaced by technology

What’s cyclical unemployment?

It’s when people become unemployed because of a recession happening

What’s seasonal unemployment?

It’s when a specific job is needed because of a specific weather/season of the year

An example of seasonal unemployment?

Christmas workers, lifeguards during the summer

The economy is at full employment when a specific type of unemployment isn’t happening?

Cyclical unemployment

When Real GDP is adjusted for inflation, it’s expressed in?

Constants or unchanging dollars

Nominal interest rate isn’t adjusted for __

Inflation

What are Factor payments?

are the income households receive from businesses in exchange for supplying the four factors of production (land, labor, capital, and entrepreneurship) in the factor market.

In a Mixed economy, what does it include?

private enterprise with government intervention, featuring both private and public ownership of resources

Why do government tax households and businesses?

Because they can use that money to pay goods and services, while also paying for resources

What are Transfer payments?

They’re payments made by the government without goods or services being exchanged, such as welfare, unemployment compensation, or subsidies.

What does the expenditure approach measure for GDP?

It calculates a country's total economic output by summing all spending on final goods and services