AP Macro - Unit 1: Basic Economic Concepts

Macroeconomics

The study of the economy as a whole

Economics

The study of how people seek to satisfy their needs and wants by making choices

Scarcity

Limited quantities of resources to meet unlimited wants

factors of production

land, labor, capital, entrepreneurship

land

all natural resources used to produce goods and services

labor

Human effort directed toward producing goods and services

capital

factories, machines, the tools used to produce

entreprenship

the organization needed to produce

trade-offs

alternative that must be given up when one choice is made rather than another

Opportunity Cost

the cost of the next best alternative when making a choice

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

law of increasing opportunity cost

to produce more of one good, a successively larger amount of the other good must be sacrificed

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

Output Method (Comparative Advantage)

unit lost/unit gained

Input Method (Comparative Advantage)

unit gained/unit lost

Demand

Consumer willingness and ability to buy products

Law of Demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

Normal Goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Inferior Goods

Goods for which demand tends to fall when income rises.

Complementary Goods

Goods that are commonly used with other goods

Substitute Goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

Supply

The quantity of something that producers have available for sale

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

Subsidies

Financial support from the government to encourage production

Surplus

quantity supplied > quantity demanded

Shortage

Quantity Supplied

Efficient

producing in a way the uses all resources in the best manner

Inefficient

producing in a way that wastes or ignores valuable resources