Unit 1 - AP Macro

Scarcity

we have unlimited wants but limited resources

Because of scarcity choices need to be made

trade-offs + opportunity cost

Consumer Goods

Direct consumption (pizza)

Capital Goods

Indirect Consumption (cheese, knives, bowl)

Factors of Production

Land, Labor, Capital (Human +Physical), Entrepreneurship

Physical Capital

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

Human Capital

Any skills or knowledge gained by a worker through education and experience. ​

Productivity

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

Price vs Cost

Amount buyer pays for product vs Amount seller pays to make good

Constant Opportunity Cost

Resources are easily adaptable for producing either good.​ (pizzas and calzones)

3 shifters of PPC

1. Change in resource quantity or quality ​

2. Change in Technology​

3. Change in Trade (allows more consumption)​

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.​

Output Questions

OOO=​ Output: Other goes Over​

Input Questions​

IOU = Other goes Under​

Demand

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

Demand Shifters

1. Change in Disposable Income (DI) Spendable income after taxes and debts are paid​

2. Change in spending (domestic/foreign)​

3. Change in interest rates​

4. Change in population​

5. Change in preferences​

Prices don’t shift demand unless price of another good changes.

1. Substitutes are goods used in place of one another. (coke + pepsi)

2. ​Complements are two goods that are bought and used together. ​(hot dogs + buns)

Supply

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

Law of Supply

DIRECT (or positive) relationship between price and quantity

Supply Shifters

1. Prices/Availability of inputs (resources)​

2. Number of Sellers​

3. Technology​

4. Government Action: Laws, Taxes & Subsidies​

5. Expectations of Future Profit

Surplus or Shortage in a Free Market

Prices automatically move towards equilibrium; surplus: producers will lower prices shortage: producers will raise prices

Price Ceiling

Maximum legal price a seller can charge for a product.​

Goal: Make affordable by keeping price from reaching Eq.

Result: Shortage —> Black Markets (demand is higher than the quantity)

Price Floor​

Minimum legal price a seller can sell a product.​

Goal: Keep price high by keeping price from falling to Eq.​

price control

Price ceilings and price floors result in a misallocation of resources

Circular Flow Model

(CFM) The Product Market

The “place” where goods and services produced by businesses are sold to households.​

(CFM) The Resource (Factor) Market

The “place” where resources (land, labor, capital, and entrepreneurship) are sold to businesses.​

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

Subsidies

Government payments to businesses.​