AP Economics

Economics

Social Science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants

Scarcity

we have unlimited wants but limited resources

Microeconomics

Study of small economic units such as individuals, firms, and markets

Macroeconomics

Study of the large economy as a whole or economic aggregates

Theoretical economics

Economists use the scientific method to make generalizations and abstractions to develop theories

Policy economics

Theories are applied to fix problems or meet economic goals.

Positive statements

Statements based on facts and avoids value judgments

Normative Statements

Includes value judgements

What are the 5 economic assumptions

1.Society has unlimited wants but limited resources.

2.Due to scarcity, choices must be made; every choice has a cost

3. Everyone’s goal is to make choices that maximize their satisfaction

4.Everyone’s makes decisions by comparing marginal costs & marginal benefits of every choice

5.Real life situations can be explained and analyzed through simplified models and graphs

Marginal=

Additional

Marginal analysis

Making decisions based on increments

Trade offs

All the alternatives that we give up when we make a choice

Opportunity cost

Most desirable alternative given up when you make a choice

Price

Amount seller pays to produce a good

Cost

Amount seller pays to produce a good

Investment

The money spent by businesses to improve their production

Consumer goods

Created for direct consumption (ex:pizza)

Capital Goods

Created for indirect consumption (ex:oven)

Goods used to make consumer goods

What are the 4 factors of production

1.Land

2.Labor

3.Capital

-physical capital

-human capital

4.Entrepreneurship

Physical Capital

Any human made resource that is used to create other goods and services

EX:tools and tractors

Human capital

Any skills or knowledge gained by a worker through eduction and experience

Equation for profit

Revenue- Costs

Productivity

A measure of efficiency that shows the number of outputs per unit of input

Production possibilities curve (frontier)

A model that shows alternative ways that an economy can use its scarce resources

What does the PPC/ frontier graph show

Model graphically demonstrates scarcity, trade offs, opportunity costs, and efficiency

What are the 4 key assumptions

-Only two goods can be produced

-full employment of resources

-Fixed resources

-Fixed technology

Constant opportunity cost

Resources are easily adaptable for producing either good

-Result in a straight line PPC

What causes a straight line PPC

Constant opportunity cost

Law of increasing opportunity costs

As you produce more of any good, the opportunity costs will increase

What causes a bowed out (concave) PPC

Law of increasing a opportunity cost

3 shifters of the PPC

1.Change in resource quantity or quality

2.Change in technology

3.Change in trade

Per unit opportunity cost equation

Per unit opportunity cost= opportunity cost/ units gained

Absolute advantage

The producer that can produce the most output or requires the least amount of inputs (resources)

Comparative advantage

The producer with the lowest opportunity cost

Terms of trade

The agreed upon conditions that would benefit both countries (parties)

Demand

The different quantities of goods that consumers are willing and able to buy at different prices

Law of demand

There is an inverse relationship between price and quantity demanded

The substitution effect

If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)

The income effect

If the price forms down for a product, the purchasing power increases for consumers-allowing them to purchase more

Law of diminishing marginal utility

As you consume anything, the additional satisfaction that you will receive will eventually start to decrease

Does price shift the curve

No it does not but it can be affected by the price of another related good

5 shifters (determinants) of demand

-tastes and preferences

-Number of consumers

-Price of related goods

-Income

-Future expectations

Why does the law of demand occur

• The substitution effect

• The income effect

• The law of diminishing marginal utility

What’s the relationship between price and quantity demanded

Inverse relationship

Does price shift the demand curve

No price does not shift it

What happens to the demand for milk if the price of milk goes up

Demand stays the same

What does a change in price cause on the demand curve

Causes a shift along the curve

What are substitutes good for

They are good used in place of one another

Complements

Two goods that are bought and used together

If price of hot dogs falls, demand for hot dog dubs will

It will decrease

Normal goods

Goods that you don’t need (expensive goods)

• Ex: Luxury cars, seafood, jewelry, homes

-As income increased the demand for this type of good increases

-As income falls, demand for this falls

Inferior Goods

Cheap goods

• Ex:Top Ramen, used cars, used clothes

-As income increases, the demand for this falls

-As income falls, the demand for this increases

A decrease in income assuming that milk is a normal good would cause the

Demand for milk to decrease

Which of the following will cause the quantity demanded of milk to decrease

• An increase in the price of milk

Supply

The different quantities of a good that sellers are willing and able to sell (produce) at different prices

What is the Law of Supply

There is a direct (or positive) relationship between price and quantity supplied

• As price increases the quantity producers make increases

• As price falls, the quantity producers make falls

If supply increases does the price change or the amount produced change?

The amount of product produced increases

What are the 5 shifters of supply

• Prices/Availability of inputs (resources)

• Number of Sellers

• Technology

• Government Action: Taxes and Subsides

• Expectations of future profits

True or False; a change in price shifts the supply curve

It is false

Which of the following will cause the quantity supplied of milk to decrease

A decrease in the price of milk

The supply curve for automobiles will shift to the left in response to

An increase in wages in the automobile industry

Double Shift rule

If two curves shift at the same time, either price or quantity will be indeterminate

If ¼ of a nations wheat crop is destroyed by a flood in a given season then the price of wheat and the quantity sold will change in the short run in which of the following ways

Price:increase

Quantity Sold: decrease

Which of the following will occur in a competitive market when the price of a good is less than the equilibrium price

Price will increase to eliminate the shortage and restore equilibrium

Which of the following changes in the supply and the demand for a good will definitely result in a decrease in both the equilibrium price and quantity of the good?

Supply; no change

Demand; decrease

Price Ceiling

Maximum legal price a seller can charge for a product

Price floor

Minimum legal price a seller can sell a product

Which of the following will occur if a legal price floor is placed on a good below its free market equilibrium?

The equilibrium price and quantity will remain the same

What statement about price control is true?

Price ceilings and price floors result in a misallocation of resources

Private sector

Part of the economy that is run by individuals and businesses

Public sector

Part of the economy that is controlled by the government

Factor payments

Payment for the factors of production, namely rent, wages, interest, and profit

Transfer payments

When government redistributes income (ex: welfare, social security)

Subsides

Government payments to businesses

On the circular flow model do individuals supply or demand

Both they demand products and supply resources

Who demands in the product market

Individuals and the governments

Who supplies in the product market

Businesses

For an economy consisting of households and businesses only which of the following is consistent with the circular flow of income and production

Households are suppliers of resources and consumers of goods and services

What are the three macroeconomic goals

• Promote economic growth

• Limit unemployment

• Keep prices stable (limit inflation)

How do we measure economic growth

• Collect statistics on productions income, investment, and savings

• This is called national income accounting

Gross Domestic Product (GDP)

Is the dollar value of all final goods and services produced within a country in one year

Dollar Value

GDP is measured in dollars

Final goods

GDP only counts new goods and services

What does GDP tell us?

Measures how well a country is doing financially

% change in GDP equation

Year 2- year 1 / year 1 × 100

McMahonlands GDP in 2014 was $4000 McMahonlands GDP in 2020 was 5,000 calculate the % change in GDP

25

GDP per capita (per person)

GDP divided by the population. It identifies on average how many products each person makes

What’s the best measure of a nations standard of living

GDP per capita

Economic System

Capitalism promotes innovation and provides incentives to improve productivity

Capital stock

Countries that have more machines and tools are more productive

Human capital

Countries that have better education and training are more productive

Natural resources

In general countries that have access to more natural resources are more productive

Productivity

Output per unit of input

What illustrates an improvement in a country’s standard of living

An increase in real per capita gross domestic product

What is not included in the GDP

• Intermediate goods

• Nonproduction transactions

• Nonmarket and illegal activities

Intermediate goods

Goods inside the final goods don’t count

Nonproduction transactions

• Financial transactions (nothing produced)

  -Ex: Stocks, bonds, real estate

• Used goods

Nonmarket and illegal activities

Things made at home-Household production

Unpaid work, black markets, drugs

What are the three ways of calculating GDP

• Expenditures approach

• Income approach

• Value added approach

Expenditures approach

Add up all the spending on final goods and services produced in a given year