AP Macro Unit 1

Fundamental economic problem

society has unlimited wants and needs but limited resources

Tradeoffs

required because everything has a cost

Positive Economics

focuses on objective, measurable, and testable outcomes

Normative Economics

involves ethical value judgments and opinions on what should be done

Factors of Production

land, labor, capital, entrepreneurship

Human Capital

the knowledge, education, skills, and experience embodied in the workforce

Opportunity Cost

the value of the next best alternative give up

Points on PPC Curve

represent efficiency; resources are being fully used

Points Inside the PPC Curve

represent underutilization of resources/high unemployment

Points Outside the PPC Curve

represent combinations currently unattainable given the current resource constraints

Bowed Out PPC

represents increasing opportunity costs; occurs because resources are not perfectly adaptable to alternative uses

Linear PPC

represents constant opportunity costs; resources are perfectly adaptable between the production of both goods

Bowed In PPC

represents decreasing opportunity costs

Outward Shift of PPC

represents economic growth; caused by an increase in the quantity or quality of the factors of production

Inward Shift of PPC

represent economic contraction; caused by a destruction of resources

Absolute Advantage

the ability to produce more of a good overall or produce it using fewer resources

Comparative Advantage

the ability to produce a good at a lower opportunity cost

Terms of Trade

must fall between the opportunity costs of both countries

Law of Demand

as prices rises, quantity demanded falls

Demand Curve

downward-sloping; a change in price causes movement along the curve (quantity demanded)

Shifters of Demand

consumer taste, number of buyers, income, price of related goods, future consumer expectations

Law of Supply

as price rises, quantity supplied increases because firms seek higher profits

Supply Curve

upward-sloping; a change in price causes movement along the curve (quantity supplied)

Shifters of Suupply

input prices, technology, government policies, number of sellers, expectations of future prices

Equilibrium

when quantity demanded = quantity supplied

Surplus

when quantity supplied > quantity demanded; market forces will push prices down

Shortage

when quantity demanded > quantity supplied; market forces push prices up