AP Macro 1.1-1.3

Economics

Behavior science concerned with how scarce resources are allocated among unlimited needs, wants, and desires.

What does it mean to be scarce?

Limited and Wanted

Scarcity

Fundamental concept of economics; leads to trade-offs

Opposite of Scarcity

Abundance

• Unlimited Resources

• No need for trade-offs

Trade-offs

Descisions regardong the efficient allocation of resources

Resources

• Something used to produce something else

• Limited

• Wanted

What are the four factors of production economic resources are classified into?

• Land

• Labor

• Capital

• Entrepreneurship

Land

• Natural Resources

• Payment: Rent

Labor

• Workers

• Payment: Wages

Capital

• Physical capital (machinery, equipment, etc.)

• Human capital (intellect, skill-set, ability of workers, etc.)

• Financial capital (money)

• Payment: Interest

Entrepreneurship

• Ability to combine resources to satisfy society’s needs, wants, desires

• Requires risk-taking and decision making

• Payment: Profit

Opportunity cost

• The highest valued, foregone alternative to any decision made

• What you could have done

• What you could have acquired

• What you could have earned

What is a Production Possibilities Curve?

• A simplified model of an economy producing only two goods (or two categories of goods)

• Potential output combinations measured along x-y coordinate plane

  • The curve represents output combinations which occur due to efficient sustainable use of available resources

• Gives a “snapshot of an economy at a given time

  • Are resources being used efficiently?

  • To what end? What are the priorities at that time?

• Illustrates the concepts of trade-offs and opportunity costs: In a world of scarcity, in order to gain something, something else must be given up

  • As society’s priorities change, how are resources reallocated?

  • What are the opportunity costs of reallocating resources?

Efficient

cannot produce more of one good without decreasing production of another good.

What do changes in output along a PPC reflect?

Trade-offs

What does an outward shift of the PPC reflect?

Economic growth (increased productive capacity)

What does a linear PPC represent?

A constant opportunity cost

What does a PPC that’s concave to the originrepresent?

Increasing opportunity cost

Absolute Advantage

Advantage realized by the producer able to generate greater output with a given amount of time or resource (if Producer 1 can make more than Producer 2, producer 1 has absolute advantage)

Comparitive Advantage

Advantage realized by the producer able to generate a given output at a lower opportunity cost (Producer 1 can make it while giving up less than Producer 2)

Terms of trade

An agreed upon exchange rate of two goods between two producers (often nations)

How do we determine if terms of trade are mutually beneficial?

• Short version: do the terms of trade for a particular good/service fall between the opportunity costs of the two producers?

• Longer version: do the terms of trade result in gains from trade?

  • Will output exceed each producer's individual productive capacity?

  • Will the ability to consume beyond production possibilities be realized?