AP Macroeconomics Unit 1

Scarcity

Scarcity

when society has unlimited wants, but limited resources, so choices must be made

Macroeconomics

Study of large economy as a whole/economic aggregates

5 Key Economic Assumptions

1) Scarcity exists

2) Trade-offs must be made b/c of scarcity

3) Everyone acts in their self-interest

4) People make decisions by comparing marginal cost

5) Real-life situations can be explained with graphs and charts

Marginal Analysis

making decisions based on increments: when marginal benefit > marginal cost, you should take the opportunity

Trade-offs

alternatives that are given up to make a choice

Opportunity Costs

Most desirable alternative given up when a choice is made

Utility =

satisfaction

Marginal =

additional

Consumer vs Capital Goods

Consumer = created for direct consumption

Capital = created for indirect consumption, to make more consumer goods

4 Factors of Production

1) Land

2) Labor

3) Capital (Physical & Human)

4) Entrepreneurship

Land (as factor of production)

all natural resources that are used to produce goods & services (ex: water, sun, plants)

Labor (as factor of production)

any paid-for effort towards a task by a person

Physical Capital

any human-made resources used to create other goods/services

Human Capital

any skills or knowledge gained by a worker through education & experience

Entrepreneurship (as factor of production)

lenders that combine the other factors of production to create goods & services

Requirements for an Entrepreneur

1) take initiative

2) innovate

3) act as risk bearers

Goal of an Entrepreneur

to earn profits

Profit =

Revenue - Cost

Productivity

a measure of efficiency that shows the number of outputs per unit per hour (# output/unit/hour)

• better productivity = more stuff w/ fewer resources

Production Possibilities Curve

a model that shows the alternate ways an economy can use its scarce resources—demonstrates scarcity, trade-offs, opportunity cost & efficiency

Four Key Assumptions for PPC

1) only 2 goods can be produced

2) all resources can be utilized

3) fixed resources (ceteris paribus)

4) fixed technology

Constant Opportunty Costs

when the resources needed for 2 goods are relatively similar so the loss of one is equal to the gain of the other

Straight PPC =

constant opportunity cost

Increasing Opportunity Cost

when the resources needed for 2 goods are very different, so as you produce more of one, the opportunity cost of the other keeps increasing

Bowed Out/Curved PPC =

increasing opportunity costs

3 Shifters of PPC

1) change in resource quantity/quality

2) change in technology

3) change in trade (allows for greater consumption)

Relationship between capital goods and future growth

Countries that produce more capital goods will have more future growth

Per Unit Opportunity Cost =

(opportunity cost)/units gained

Absolute Advantage

the benefit of one option over the other w/o comparing opportunity cost (producer that makes the most output/needs the least input)

Comparative Advantage

the benefit of one option over the other when comparing opportunity cost (producer w/ lowest OC)

Demand (consumer perspective)

the different quantities of goods that consumers are willing & able to buy @ different prices

Law of Demand

there is an inverse relation between price & quantity demanded by nature

Law of Diminishing Marginal Utility

as you consumer something, the additional satisfaction that you received will eventually start to decrease

Demand Curve

a graphical representation of demand schedule, slopes downward to show inverse relation between price & quantity demanded

Change in Price for Demand & Supply Curves

results in a change in QUANTITY demanded/supplied (it’s a movement along the curve and doesn’t move the curve itself)

5 Determinants of Demand (RIPEN)

1) related goods (prices of substitutes/complements)

2) income

2) # of consumers

4) income

5) future expectations

Substitutes

if price of one increases and demand of other increases /vice-versa (P1 decrease = D2 decrease)

Complements

if price of one falls and demand for other increase /vice-versa (P1 decrease = D2 increase)

Normal Goods

when, as income increases, demand increases and vice-versa

Inferior Goods

when, as income increases, demand decreases and vice-versa

Examples of Normal Goods

seafood, jewelry, homes

Examples of Inferior Goods

fast food, cup noodles, used clothes

Supply (consumer perspective)

different quantities of a good that sellers are willing & able to sell

Law of Supply

there’s a direct relationship between price and quantity supplied

Six Determinants of Supply (ROTTEN)

1) resource cost/availability

2) other products (price of related goods)

3) technology

4) taxes & subsidies (govt. action)

5) expectation of future profits

6) number of sellers