ap macro unit one - basic economic concepts

scarcity

something that is LIMITED and WANTED.

ex: resources

four factors of production

• Land

• Labor

• Capital

• Entrepreneurship

(LLCE - Let’s Laugh Cus Economics!)

types of capital

• physical capital (machinery, tools)

• human capital (skills, training, education)

• financial capital (money)

PPC

Production Possibilities Curve. Illustrates opportunity cost.

• every point is a combination of output level

PPC Curve - A, B, C

Full Employment - Efficient

PPC Curve - D

Not efficient production, has not reached full employment

PPC Curve - E

Beyond production possibilities, unattainable

Movement along the PPC Curve

Demonstrates trade offs

Outward shift of the PPC Curve

Demonstrates economic growth

Inward shift of the PPC Curve

Demonstrates economic contraction

Comparative Advantage

When a producer can create a given amount of product at a lower opportunity cost.

Ex: Producer 1 can make it while giving up less than Producer 2

Output problems, calculating comparative advantage

OOO

Output: Other goes Over

Input problems, calculating comparative advantage

IOU

Input: Other goes Under

Demand Shifters

MERIT

• Market Size (number of consumers)

• Expectations about the product

• Related Prices (Prices of Complementary or Substitute products)

• Income (normal and inferior goods)

• Tastes

Complementary Products in Consumption

Products that go well with each other. Like burger buns and burger patties. If the price for one goes down, demand for that item goes down, and so the demand for the complementary products also goes down.

Substitute Products in Consumption

Products that can be substituted for one another. If the price of one product goes up, the demand for that product goes down, and instead the demand for the substitute goes up.

Market Size

number of consumers

Normal goods

Goods whose demand increases as one’s income increases.

Ex: The richer you are, the more demand for clothes.

Inferior goods

Goods whose demand decreases as one’s income increases. You don’t have to settle for these goods anymore.

Ex: The richer you are, the less you need to buy a used car.

Shifters of Supply

TRICE

• Technology

• Related Prices (Complements and substitutes)

  • Complements in production: by-products of something. For example you can sell cow meat from cows but also their milk. If the price of one complement increases, the supply of it will increase and thus the supply of the other complement will also increase.

  • Substitutes in production: Co-produced goods, so producers can choose to produce either. If the price of one substitute goes up, suppliers will supply more of that.

• Input Prices (ex: wages)

• Competition (number of producers)

• Expectations (ex: if a farmer feels soybeans will be expensive next season, they will supply more soybeans next year)

Complements in Production

By-products of something. For example you can sell cow meat from cows but also their milk.

If the price of one complement increases, the supply of it will increase and thus the supply of the other complement will also increase.

Substitutes in Production

Co-produced goods, so producers can choose to produce either. If the price of one substitute goes up, suppliers will supply more of that.

Price Floor

When the government institutes a MINIMUM price value for a product, thereby creating a surplus for the product.

Surplus

Quantity supplied is greater than quantity demanded. Can be caused by a Price Floor being instituted by the government

Price Ceiling

Government instituted MAXIMUM price value for a product, creating a shortage in the product.

Shortage

Quantity supplied is less than the quantity demanded. Can be caused by a Price Ceiling being instituted by the government.