AP Micro unit 1 and 2 review

scarcity

the inability of our limited resources to satisfy human wants

How to tell if an item is scarce?

1. positive price

2. system of allocation (distribution)

3. Less available than wanted

4. opportunity cost

Factors of Production

1. Land

2. Labor

3. Physical Capital (Machines and tools used to produce)

4. Entrepreneurship

PPC (Production Possibility curve)

Maximizing combinations of 2 different goods (or categories of goods) that can be produced with fixed resources

Increasing costs PPC

Resources used to make robots are not adaptable with the product with corn

Constant costs PPC

resources used to make both goods are well adapted to each other

Efficient PPC

Any point on the curve is considered efficient

Inefficient PPC

Any points inside the curve are inefficient. The resources aren't being used correctly. Less production

Scarcity PPC

Impossible, you cannot produce these. Must have economic growth to reach them

PPC Shifts

with changes in the quality or quantity of resources

Growth PPC

Increases in productivity, better resources, or more resources can cause the curve to go outwards

Loss of resources PPC

Loss of resources causes a shift inward

Technology PPC

produces in one curve but not the other

Absolute Advantage

ability to produce more or using fewer resources

Comparative advantage

The ability to produce something at a lower opportunity cost

Input opportunity cost equation

“It’s over” A = A/B

Input opportunity cost examples

AMY:

1 Break job = 1/6 painted cars

1 Painted Car = 6 break jobs

ERIC:

1 break job = 2/8 = ¼ painted cars

1 painted car = 8/2 = 4 break jobs

Output opportunity costs equation

“Other Over”

A = B/A

Output Opportunity Cost example

JASON:

1 T Strawberries = 4/8 = ½ Zucchini

1 T Zucchini = 8/4 = 2 T Strawberries

HENRY:

1 T Strawberries = 6/10 = 3/5 Zucchini

1 T Zucchini = 10/6 = 1 2/3 T Strawberries

Mutallt Beneficial terms of trade

will fall between opportunity costs. If outside of range, somebody is getting ripped off

Law of demand

Ceteris Paribus, consumers buy more at low prices and less at high prices. Inverse relationship

What does price change

quantity demand (not demand)

Demand shifters

1. Tastes and Preferences

2. Market size (buyers)

3. Prices of related goods

4. Changes in income

5. Expectations (Black friday)

Substitute

When the price of one good goes up, the demand for the substitute of that good goes up

Complements

When the price of one good goes up, the demand for the complement goes down

Normal goods

Increase in consumer income, increase demands and vice versa

Inferior goods

When income rises, demand for inferior good decrease

Demand curve right

Increase in demand (graph)

Demand curve left

decrease in demand (graph)

The law of supply

Ceteris Paribus, producers sell more at high prices and less at low prices

Price changes… (Supply)

Quantity (not supply)

Supply shifters

1. input prices (if price of resource goes up, supply goes down, vice versa)

2. Government tools (subsidies)

3. Number of sellers (competition)

4. Technology

5. Prices of other goods (if price of wheat goes up, farmers make more wheat and decrease supply of corn)

6. Producer Expectations

Supply shift right

increase in supply (graph)

Supply shift left

decrease in supply (graph)

Price above equilibrium

Surplus - Price falls to equilibrium

Price below equilibrium

Shortage - price rises to equilibrium

Increase in demand (Changes in Equilibrium)

causes equilibrium price and the equilibrium quantity to increase

Decrease in demand (Changes in equilibrium)

causes equilibrium price and equilibrium quantity to decrease

increase in supply (changes in equilibrium)

causes equilibrium price to decrease and equilibrium quantity to increase

decrease in supply (changes in equilibrium)

causes equilibrium price to increase and equilibrium quantity to decrease