AP Macroeconomics Unit 1 Review

Scarcity

• The condition resulting from the inability of finite resources to satisfy unlimited wants

Resources

• Land

• Labor

• Capital

• Entrepreneurship

Land

• All natural resources used to produce goods and services in an economy

Labor

• Human skill and effort needed to produce goods and services

Capital

• Objects such as tools and machinery used to make goods and services

Entrepreneurship

• The ideas of an individual or group of people used to combine the other factors of production to make new goods and services

Trade Offs

• A circumstance in which one course of action is taken over another

Things to Remember

• Individuals and societies are forced to make choices because the finite resources of land, labor, capital, and entrepreneurship are scarce.

• Choices result in trade-offs regarding how to use those resources and what to produce.

Opportunity Cost

• The next best alternative someone gives up when choosing one option over another

Capital Goods

• Objects, such as equipment or machinery, are used to produce goods and services.

• They are sometimes called “physical capital”.

Consumer Goods

• Goods bought by individuals or households (consumers) for personal use

Production Possibilities Curve

• A model indicating the possible quantities that can be produced of two different products if they require the same available factors

Opportunity Cost with a PPC

• The opportunity cost can be calculated by subtracting the units remaining from the units previously produced

Opportunity Cost

• The amount of one good given up creating another good, due to scarce resources.

Increasing Opportunity Cost

• As the production of consumer goods increases, more capital goods must be given up

• Each consumer good, gained costs more capital goods

Decreasing Opportunity Cost

• As the production of consumer goods increases, fewer capital goods have to be given up

• Each consumer good, gained costs fewer capital goods

Constant Opportunity Cost

• As the production of consumer goods increases, the same amount of capital goods have to be given up

• Each consumer good gained costs the same amount of capital goods

Three Causes of Economic Growth

• Increased quantity of available resources

• Increased quality or productivity of avaliable resources

• Technology

Long Run Economic Growth

• More capital goods now will allow the economy to produce more of both capital and consumer goods in the future

Two causes of Loss, Long Run Economic Loss

• Decreases quantity of available resources

• Decreased technology

Increases in Techonolgy

• If ______ of one good increases the PPC will only shift for that good.

Things to Remember

• The production possibilities curve (PPC) illustrates the concepts of scarcity, choice, trade-off, and opportunity cost. A PPC can be used to show efficient use of resources, underutilized or inefficient use of resources, economic growth, and economic contraction.

• The shape of the PPC depends on whether opportunity costs are increasing, decreasing, or constant.

• Changes in the quantity of resources, quality or productivity of resources, and technology will cause shifts in the PPC.

Absolute Advantage

• A producer can make more of a product than another producer using the same amount of resources

Absolute Advantage

• A country can have the absolute advantage in the production of both goods, one good, or neither good.

Comparative Advantage

• To gain from trade countries must specialize in the production of a single good.

• Is used to determine which country specializes in which good.

• Exists when one producer can make a good at a lower opportunity cost than another producer.

Comparative Advantage

• Opportunity cost is measured by how much of the next best alternative is given up.

• The same country cannot have a _________ in producing both goods.

• Opportunity Cost / Units Gained

Input Problems

• The information given represents the number of resources used to make one good

Absolute Advantage for Input Problems

• In an input problem, who can make the good with the least amount of resources has the absolute advantage.

Comparative Advantage for Input Problems

• Comparative advantage is still determined by the lower opportunity cost

• Input problems calculate the number of hours it takes to produce one good by the number of hours it takes to produce the other good.

Input Problems

• Once opportunity cost and comparative advantage are established, finding the terms of trade is done the same way as an output problem.

• Find the terms of trade between the two opportunity costs.

Things to Remember

• Absolute advantage - compares the total number of each product made by two producers using the same amount of resources.

• Comparative advantage - determines which country should specialize in each good.

  • Output - Other goes Over – OOO

  • Input - Other goes Under – IOU

• Terms of trade - located in between the opportunity costs.

• Trade will allow countries to consume outside their PPCs.

Demand

• Consumers’ willingness and ability to buy an item at a given price

• Does not refer to a number but instead to a behavior

Willingness

• Means that buyers must want the item

Ability

• Means that buyers must have the money to buy the item

Law of Demand

• The price of an item determines the quantity demanded

• The price of a good/service is inversely (negatively) related with the quantity demanded

Law of Demand

• The lower the price the higher the quantity demanded

• The higher the price the lower the quantity demanded.

Change in Quantity Demanded

• When the PRICE changes from P1 to P2, the quantity demanded changes from Q1 to Q2 and the point moves ALONG the demand curve.

Change in Demand

• When something other than price changes, the DEMAND for the good will change at ever price, causing the entire curve to shift

• Willingness and ability to buy the good increases or decreases regardless of the price

Detriments of Demand: Factors other than the product’s price that cause changes to demand curve

• Number of consumers

• Price of substitute goods

• Price of complementary goods

• Change in income- normal and inferior goods

• Tastes and preferences

• Expectations of future price

Number of Consumers

• More consumers = more demand

• ­Less consumers = less demand

Substitute Goods

Goods/services used in lieu of other goods/services

Substitute Goods Examples

• ­When the price of white bread increases, the demand for wheat

• bread increases.

• ­When the price of electric vehicles decreases, the demand for gas vehicles decreases.

Complementary Goods

• Goods/services used in conjunction with one another

Complementary Goods Examples

• When the price of salsa increases the demand for its complement, tortilla chips, decreases

• ­When the price of movie tickets decreases, the demand for theatre candy increases

Change in Income for a Normal Good

• When consumers’ income increases:

  • Demand for normal goods/services increases

• ­When consumers’ income decreases

  • Demand for normal goods/services decreases

Change in Income for a Normal Good Example

• More income means more demand for luxury cars

• Less income means less demand for restaurant meals

Change in Income for an Inferior Good

• When consumers’ income increases:

  • Demand for inferior goods/services decreases

• ­When consumers’ income decreases

  • Demand for inferior goods/services increases

Change in Income for an Inferior Good Examples

• More income means less demand for public transportation

• Less income means more demand for public transportation

Taste and Preference

• Are affected by advertising, trends, health considerations, etc.

Taste and Preference Examples

• Demand for the vegetable, kale, has increased because it has been found to be good for you

• Demand for skinny jeans has decreased because they are no longer popular

Taste and Preference

• If consumers expect prices to rise in the future, then demand increases now

• If consumers expect prices to fall in the future, then demand decreases now

Things to Remember

• According to the law of demand, there is a negative or inverse relationship between price and quantity demanded. Therefore, higher prices for a good or service will result in lower quantity demanded.

• A change in price causes a change in quantity demanded (movement along the curve), while a change in a determinant of demand will cause a change in demand (shift in the curve).

• Increased income increases demand for normal goods and decreases demand for inferior goods

Supply

• Producers’ willingness and ability to sell a good/service

• Is not an amount but a behavior

Willingness

• Means that producers want to make the item

Ability

• Means the producers have the resources available to make the item

Law of Supply

• The price of an item determines the quantity supplied

• The price of a good/service is directly/positively related to the quantity supplied

Law of Supply

• The lower the price the lower the quantity supplied

• The higher the price the higher the quantity supplied

Change in Quantity Supplied

When the PRICE changes from P1 to P2, the quantity supplied changes from Q1 to Q2, and the point moves ALONG the supply curve.

Change in Supply

• When something other than price changes, the SUPPLY of the good will change at every price, causing the entire curve to shift.

• Willingness and ability to produce the good increases or decreases regardless of the price.

Determinants of Supply: Factors other than the product’s price that cause changes to its supply

• Input costs

• Expected prices

• Profitability of complementary goods in supply

• Profitability of substitute goods in supply

• Technology

• Number of sellers

Input Costs

• Prices of raw materials or other factors of productions

• Changes in productivity (efficiency gains/losses)

Input Costs Examples

• When the price of fertilizer increases, the supply of corn decreases

• If the weather is favorable to growing potatoes, the supply of French fries increases

Expected Prices

• If producers expect prices to rise in the future, then they supply less now, so that they can sell their good/service at the future higher price

• If producers expect prices to fall in the future then they supply more now while prices are still

Profitability of Complementary Goods in Supply

• If the price of beef increases, then the supply of leather increases

• If the price of 2 x 4’s decreases the supply of sawdust will decrease

• Think by-products

Profitability of Substitute Goods in Supply

• The producer will supply more of the good or service that makes them the most money.

• Remember, it's all about profit!

Technology

• Technology is economically defined as anything that makes us more efficient in production.

Technology Examples

• When the robots used to make cars are more efficient, the supply of cars increases.

Number of Sellers

• More producers = more supply

• Less producers = less supply

Number of Sellers Example

• As the number of farmers growing tomatoes increases, so does the supply of tomatoes

• As the number of restaurants in an area decreases, so does the supply of restaurant meals

Things to Remember

• According to the law of supply, there is a positive relationship between price and quantity supplied.

• Therefore, higher prices for a good or service will result in higher quantity supplied.

• A change in price causes a change in quantity supplied (movement along the curve), while a change in a determinant of supply will cause a change in supply (shift in the curve).