AP MacroEconomics UNIT 1

Scarcity

Limited nature of society's resources. Example: OIL

Choice

Human behavior to choose how to spend/use the world's scarce resources.

Trade Offs

1st Principle of Economics-the fact that people's choice results in losing one quality or aspect of something in exchange for a quality or aspect of another

Private Property

Goods or Services owned by a person for exclusive use

Opportunity Cost

Whatever must be given up to obtain a good or service

There's no such thing as a free lunch!

Milton Friedman famous quote explaining that even in a free lunch, you are still paying opportunity cost (gas to get somewhere, time it takes, etc)

Efficiency

Society getting the most out of its scarce resources

Equality

The property of distributing economic prosperity uniformly among the members of society

Incentive

4th principle of economics. Something that induces a person to act a certain way (cigarette tax increase in the hopes to stop smoking)

Marginal Change

Small incremental changes to a plan of action (why buying in bulk is sometimes a better deal)

Circular Flow Model

The illustration representing the flow of goods and services between firms and households

Production Possibilities Frontier/ Production Possibility Curve

a graph that shows the combinations of output that an economy can possibly produce given the available factors of production and the available production technology

Imports

Goods produced abroad and sold domestically

Exports

Goods produced domestically and sold abroad

Absolute Advantage

One nation produces a good at a lower resource cost than another nation

Comparative Advantage

One nation produces a good a lower opportunity cost than another nation

Market

A group of buyers and sellers of a particular good or service

Quantity Demanded

The amount of a good that buyers are willing and able to purchase (change results in a movement along demand curve)

Demand

The amount of a good that buyers want to purchase based on underlying conditions (change results in shift in demand curve)

Quantity Supplied

The amount of a good that sellers are willing and able to sell (change results in movement along supply curve)

Supply

The amount of a good that sellers are willing and able to sell based on underlying conditions (change results in shift in supply curve)

Factors that affect demand

Income, Preferences, Price of Related Goods, Number of Buyers, Expectations

Factors that affect supply

Resource Prices, Technology, Taxes, Subsidies, Quotas, Number of sellers in market, Weather, Government Regulations

Substitute Goods

Two goods for which an increase in the price of one leads to an increase in the demand for the other

Complementary Goods

Two goods for which an increase in the price of one leads to a decrease in the demand for the other

Income effect

The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve. More simply: when someone makes less, they will spend less.

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded

Supply Schedule

A table that shows the relationship between the price of a good and the quantity supplied

Normal Good

A good in which an increase in income will result in an increase in demand (ex. TVs)

Inferior Good

A good in which an increase in income will result in a decrease in demand (ex. McDonalds)

Neutral Good

A good in which an increase in income will not result in a change in demand (ex. Toilet Paper)

Equilibrium

A situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Law of Diminishing Marginal Utility

Maximum amount of money he or she is willing to pay for one more unit of the good or service

Elasticity of Demand

A measure of how much the quantity demanded changes with a change in price

Elasticity of Supply

A measure of how much the quantity supplied changes with change in price

Total Revenue Test

An decrease in price and decrease in total revenue means inelastic. A decrease in price and an increase in total revenue means elastic. (remember the ACDC video)

Law of Supply

Price and Quantity supplied have a direct relationship. As price rises, so does quantity supplied

Ceteris Paribus

All other things are the same. When you compare two things, you keep in mind that all other things stay the same.

Economics

How society manages its resources

Margin

Each additional unit

Implicit

Unintended consequence

Law of Demand

As the price of goods increases, the quantity demanded decreases. Price and Quantity demanded have an inverse relationship