AP Macroeconomics

Scarcity

Limited Resources

What causes Scarcity?

Factors of Production

Factors of Production

Land, Labor, Capital, and Entrepreneurship

Market Based Economy

Property Rights, Prices

Command Economy

Controlled by Government, Central Planners

Opportunity Cost

The alternative you give up when you make a choice

Production Possibilities Curve (PPC)

A graph that shows the maximum combinations of goods and services that can be produced in an economy, illustrating trade-offs and opportunity costs.

PPC is straight when

Constant

PPC is curved when

Increasing (not perfectly adaptable)

Point ON PPC

Economy is productively efficient

Point IN PPC

Ineffiecient, Some Idle Resources, Economy Going through Recession, Unemployment High

Point OUTSIDE PPC

Impossible due to scarce resources

Economic Growth

Increase in quantity/quality of resources

Economic Decline/Decrease

Decrease quality/quantity of resources.

Absolute Advantage

Ability to produce more with less resources/time than others

Comparative Advantage

Ability to produce at a lower opportunity cost than others (trade benefits)

Output Formula for Advantages

Other - Over (i:e Opportunity Cost of 1A = B/A)

Input Formula for Advantages

It - Over (i:e Opportunity Cost of 1A = A/B)

Law of Demand

Consumers Buy More at Lower Prices and Less at Higher Prices

Demand

Downward Sloping Line on Graph

Demand Shifters

1. Taste/Preferences

2. Market Sizes

3. Price of Related Goods (Substitutes Same, Complements Inverse)

4. Income Change (Normal Goods Same, Inferior Goods Inverse)

5. Expectations for Future

Law of Supply

Producers sell more at higher prices and less at lower prices.

Supply

Upward sloping line on graph

Supply Shifters

1. Input Prices

2. Gov Tools

3. # of Sellers

4. Tech

5. Prices of Other Goods

6. Producer Expectations

Market Equilibrium

Where Supply + Demand Intersect (QS = QD)

Price Above Equilibruim

Surplus (QS > QD), price shifts down

Price Below Equilibrium

Shortage (QS < QD), price shifts up

Increase Demand

Equilibrium Rises

Decrease Demand

Equilibrium Falls

Increase Supply

Price goes Down, Quantity goes Up

Decrease Supply:

Price goes Up, Quantity goes Down

Gross Domestic product (GDP)

Total value of all goods and services produced within a country in a calendar year.

Income Approach/Formula For GDP

Rent + Wages + Interest + Profit

Expenditure Approach/Formula For GDP

Consumer Spending+ Investment Spending + Gov Spending + (Exports - Imports)

NOT counted as GDP

Used or Intermediate Goods, Financial Transactions

Per Capita GDP (Standard of Living)

GDP/Population

Why is standard of living limited?

Doesn’t account for:

1. Unknown Transactions

2. Non-Market Activity

3. Income Distribution

4. Bads Counted as Goods

Unemployed

Not working, but actively looking for job

Unemployment Rate

(Unemployed/Labor Force) * 100

Labor Force

All of the population eligible to work

Formula for Labor Force

Unemployed + Employed

Labor Force Participation Rate

(Labor Force/Eligible Population) * 100

Frictional Unemployment

Unemployed due to moving between jobs or looking for first job

Structural Unemployment

Unemployed due to changes in economy/technology, workers require skills unemployed don’t have.

Cyclical Unemployment

Overall Economic Downturn, Recession

Natural Rate of Unemployment

Frictional + Structural, 0 Cyclical

Inflation

General Increase in prices in the economy

Consumer Price Index (CPI)

Tracks price changes in market basket of goods

CPI Formula

(Current Year Price/Base Year Price) * 100

GDP Deflator

Tracks Price Changes in all products

GDP Deflator Formula

(Nomial GDP/Real GDP) * 100

Nomial GDP

Value of current years good * current years prices

Real GDP

Value current years goods * base years prices

Nomial → Real

(Nomial/GDP Deflator) * 100

Inflation Formula

{(New CPI - Old CPI) / Old CPI } * 100

Business Cycle

Output Up → Expansion, Output Down → Contraction

+6 month long Contraction

Recession

Above Potential Output Line

Inflationary Gap, Inflation

Below Potential Output Line

Recessionary Gap, unemployment

Multiplier

Spending that ripples through economy and will affect real GDP more.

Disaposable Income

Personal Income - Taxes

Marginal Propensity to Consume (MPC)

% of New Income spend by consumer

Marginal Propensity to Save (MPS)

% of New Income saved by consumer

Example of MPC & MPS

Income Increases by $1000

Spending Increases by $800, MPC = 0.8

Saving Increases by $200, MPS = 0.2

Multiplier Affect

New Consumption leads to possibility of additional future consumption

Spending Multiplier (Multiplier Formula)

1/MPS OR 1/1-MPC

Tax Multiplier (Formula to find how Gov changes taxes affects disposable income)

-MPC/MPS OR -MPS/(1-MPC)

Why is the absolute value one less than the Spending Multiplier?

Some tax decrease will be saved instead of Spent

Aggregate Demand (AD)

Demand for ALL goods and services in an economy. Downward sloping as price level and real quantity of output are inverses. (High Prices, Low Output, and vice versa)

AD slopes down because:

Wealth Effect (Price Falls, Real Wealth Increases, Increase in Costumer purchasing)

AD also slopes down because:

Interest Rate (IR) Effect: (Price Falls, Interest Rates fall, increase in gross investment)

AD additionally slopes down because:

Net Exports Effect: (Lower prices mean cheaper exports → increase in exports)

AD Shifters

Expenditure Formula for GDP

Short Run Aggregate Supply (SRAS)

Supply for all goods and services within an economy