AP Macro Unit 1

scarcity

• a limit in the amount of goods and services

• causes us to make choices because of restricted options

opportunity cost

• sacrificing some goods or services in favor of another

• getting something at the cost or expense of another thing (the actual good)

• usually the best option

utility

benefits of consuming a good or service, usually after making a purposeful, rational decision

marginal

extra, additional, or a “change in”

trade-off

• exchanging one good or service for another

• making a choice!

Opportunity Cost Graph

• linear graph

• linear = constant

attainable

• inside of linear graph

• NO OPPORTUNITY COST AVAILABLE

unattainable

• outside of linear graph

• OPPORTUNITY COST AVAILABLE

4 Factors of Production:

• Land

• Labor

• Capital

• Entrepreneurial Ability

PPC

Production Possibilities Curve

Why does the PPC graph have a “bowed” shape?

the Production Possibilities Curve shows a “bowed” shape to it due to it representing INCREASING OPP. cost

efficiency

ON PPC curve

inefficiency (“inside”)

inside PPC curve

Unemployment Rate

• 4-5%: acceptable rate of unemployment; still on curve

• 7%: unacceptable rate of unemployment

Growth represented on PPC

outward shift on PPC

Ways to create an outward shift (showing growth) on PPC:

• produce more goods & services

• increase either the quantity OR quality of the factors of production

savings

don’t consume all of your resources

investment

firms purchase capital equipment to expand production of goods & services

ex: govt. spending on INFASTRUCTURE

What may cause Economic Growth?

• a higher-educated workforce

• increased imports from foreign countries

• increased exports to foreign countries (to facilitate modern trade)

• increased production of goods and services

• keeping unemployment rate at the correct level

• supporting new businesses and startups

As the production of goods increases, what happens to the opportunity cost?

opp. cost INCREASES

ex: As output of scooters increased, the opportunity cost of additional scooters increases

(Khan Academy): Which of the following best captures the idea of the fundamental economic problem?

limited resources and unlimited wants

(Khan Academy): Business profits should be redistributed through taxes to benefit more of society.

yes; a society benefits through taxes, because most societal goods and services are paid for by the taxes the government collects from the society itself.

(Khan Academy): Which of the following is an accurate representation of economic growth?

an increase in both the potential and actual level of output of goods and services over time

supply

price - QUANTITY supplied are directly related

demand

price - QUANTITY demanded are inversely related

law of supply

price & quantity supplied are DIRECTLY related

law of demand

price & quantity demanded are INVERSELY related

diminishing marginal utility

• “decreasing additional satisfaction”

• ex: the 1st slice of pizza is always the best; however, the more you eat, the more you satisfaction decreases

Consumer behavior when the price suddenly goes down…

ex: Moe’s Monday

Description: Moe’s is a burrito/Mexican fast food chain, similar to Chipotle. Every Monday, they lower the price of a burrito, drink, and complementary side from the original price of $12 to $6.

Outcome: More consumer demand on Monday at Moe’s

Why: More people going to Moe’s on Monday doesn’t mean more people suddenly like Moe’s; since the price is suddenly low, more people are willing to buy from Moe’s on Monday, thus increasing demand at Moe’s and decreasing consumer demand at substitutes, such as Chipotle.

Changing Demand on Demand Curve

• changing demand: getting more consumers to regularly buy/consume certain goods

• left-sided shift on Demand Curve

Decreasing Demand on Demand Curve

right-sided shift on Demand Curve

5 ways to increase Demand (Acronym):

Preferences

Related Goods: Substitutes & Complementary Goods

Income: Superior (Normal) & Inferior Goods

Consumer #’s

Expectations

5 ways to increase Supply (Acronym):

Resource Prices

Other Goods (Similar in Price)

Technology (Production)

Taxes & Subsidies

Expectations (of Producers)

Number of Sellers/Suppliers

substitute

a SIMILAR business

complementary good

something that goes with the good being bought

What would happen if a substitute business happened to lower its prices?

If a substitute lowers its prices, the other substitutes would get less customers, whether this price change was temporary, weekly, monthly, yearly, or permanent. Consumer behavior is all based on their expectations, the price, and the quality.

Supply Curve Features

• right: increase of supply

• left: decrease of supply

subsidy

• you pay a reduction of the original price; therefore, someone else must pay the rest of the original price

• ex: MRHS acquires laptops from Lenovo. Each laptop is $800, but you pay $400 instead. The remaining $400 that is paid for by the school is the subsidy.

equilibrium

where supply and demand are EQUAL

equilibrium price

point where demand and supply curve meet

dual movements

• you can only have either supply or demand!

• if one is different, then it’s INDETERMINATE