AP Macroeconomics Unit 1: Basic Economics Concepts

1.1: Scarcity 1.2: Opportunity Cost and the Production Possibilities Curve (PPC) 1.3: Comparative Advantage and Gains from Trade 1.4: Demand 1.5: Supply 1.6: Market Equilibrium, Disequilibrium, and Changes in Equilibrium

Economics

The study of how individuals and societies choose to allocate scarce resources.

Scarcity

The fact that there is a limited amount of resources to satisfy unlimited wants.

Economic Resources/Factors of Production

The land, labor, capital, and entrepreneurship that individuals and businesses use in the production of goods and services.

Land

Natural resources such as minerals and oil

Labor

Work contributed by humans

Capital

Tools, equipment, and facilities

Entrepreneurship

The capacity to organize, develop, and manage a business

Models

Graphical and mathematical tools created by economists to better understand complicated processes in economics.

Ceteris Paribus

A Latin phrase meaning “all else equal”

Economic Agent

Some entity making a decision; this can be an individual, a household, a business, a city, or even the government of a country.

Agents make decisions based off of ________________

Incentives

Incentives

Rewards or punishments associated with a possible action

Rational Decision Making

Using all available information to choose an action that makes an agent as well off as possible

Economic models assume that agents are __________

Rational

Positive Analysis

Analytical thinking about objective facts and cause-and-effect relationships that are testable, such as how much of a good will be sold when a price changes. This type of analysis is generally objective and fact-based.

Normative Analysis

Subjective thinking about what we should value or a course of action that should be taken, such as the importance of environmental factors and the approach to managing them.

Microeconomics

The study of the interactions of buyers and sellers in the markets for particular goods and services, the competitive structure of markets, and the markets for resources.

Macroeconomics

The study of aggregates and the overall commercial output and health of nations; includes the analysis of factors such as unemployment, inflation, economic growth and interest rates, and how countries can benefit from specialization and trade.

Economic Aggregates

Measures such as the unemployment rate, rate of inflation, and national output that summarize all markets in an economy, rather than individual markets

Economic aggregates are frequently used as _________________

Measures of the economic performance of an economy.

What are the four factors of production?

Land, Labor, Capital, and Entrepreneurship

In their use of models, economists usually make the assumption, when analyzing the effect of a particular change on a market or on a nation’s economy, that _______________

All else is held constant/ceteris paribus

Production Possibilities Curve (or Production Possibilities Frontier)

A graphical model that represents all of the different combinations of two goods that can be produced; it captures scarcity of resources and opportunity costs.

Opportunity Cost

The value of the next best alternative to any decision you make

Efficiency

The full employment of resources in production

Where are efficient combinations of output will always be on the PPC?

On the PPC

Inefficient Use (Under-Utilization) of Resources

The underemployment of any of the four economic resources

Where will inefficient combinations of production be represented on the PPC?

On the interior of the PPC

Growth

An increase in an economy's ability to produce goods and services over time

How is economic growth illustrated on a PPC Model?

A shift out of the PPC

Contraction

A decrease in output that occurs due to the under-utilization of resources

How is economic contraction illustrated on a PPC Model?

Moving to a point that is further away from, and on the interior of, the PPC.

Constant Opportunity Costs

When the opportunity cost of a good remains constant as output of the good increases

How is economic contraction illustrated on a PPC Model?

A straight line

Increasing Opportunity Costs

When the opportunity cost of a good increases as output of the good increases

How are increasing opportunity costs represented a PPC Model?

A PPC that is bowed out from the origin

Productivity (also called technology)

The ability to combine economic resources

An increase in productivity causes __________ even if economic resources have not changed

Economic growth

How is an increase in productivity represented on a PPC Model?

A shift out of the PPC.

Points beyond the PPC are __________

Unattainable

The opportunity cost of moving from one efficient combination of production to another efficient combination of production is ______________

How much of one good is given up in order to get more of the other good

The shape of the PPC also gives information on ______________

The production technology

Opportunity Cost Formula (finding the opportunity cost of any good X in terms of the units of Y given up)

(Y₁-Y₂) / (X₁-X₂)

Absolute Advantage

The ability to produce more of a good than another entity, given the same resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another entity.

Specialization

When an individual or a country allocates most or all of its resources towards the production of a particular good or service.

Trade

The exchange of goods, services or resources between one economic agent and another

International Trade

The exchange of goods, services, or resources between one country and another

Gains From Trade

The ability of two agents to increase their consumption possibilities by specializing in the good in which they have comparative advantage and trading for a good in which they do not have comparative advantage

Terms of Trade (also known as “trading price”)

The price of one good in terms of the other that two countries agree to trade at

Beneficial terms of trade allow a country to _______ a good at a lower opportunity cost than the cost for them to produce the good domestically

Import

The gains from trade can be shown in a PPC by _______________

Drawing a line originating at the point on the axis on which an agent is specializing its production (in the good it has a comparative advantage in) out to a point on the opposite axis beyond what it could have achieved without trade.

Assuming terms of trade are beneficial, an individual or country will be able to consume at a point beyond its PPC through _____________

Specialization and Trade

Demand

All of the quantities of a good or service that buyers would be willing and able to buy at all possible prices

Demand is typically represented graphically as ___________

The entire demand curve

Demand Schedule

A table describing all of the quantities of a good or service; the data on price and quantities demanded that can be used to create a demand curve.

Demand Curve

A graph that plots out the demand schedule, which shows the relationship between price and quantity demanded

Law of Demand

All other factors being equal, there is an inverse relationship between a good’s price and the quantity consumers demand

____________ is why the demand curve is downward sloping

The law of demand

When price goes down, people respond by _________________

Buying a larger quantity

Quantity Demanded

The specific amount that buyers are willing to purchase at a given price

Each point on a demand curve is associated with __________

A specific quantity demanded.

Change in Quantity Demanded

A movement along a demand curve caused by a change in price

A change in quantity demanded is represented by

A movement along the same curve

Change in Demand

When buyers are willing to buy a different quantity at all possible prices, which is represented graphically by a shift of the entire demand curve

What is a change in demand caused by?

A change in one of the determinants of demand.

Determinants of Demand

Tastes, Other Goods, Number of Buyers, Income, and Expectations (TONIE)

Normal Good

A good for which demand will increase when buyers’ incomes increase.

Inferior Good

A good for which demand will decrease when buyers’ incomes increase.

Substitute Goods

Goods that can replace each other

When the price of a good increases, the demand for its substitute will ________

Increase

Complement Goods

Goods that tend to be consumed together

When the price of a good increases, the demand for its complement will _______

Decrease

Demand changes only when ___________________

One of the determinants of demand change

True or False: A change in price does not cause demand to increase or decrease.

True

A change in the price of a good will cause _____________

The quantity demanded for that good to change

When a change in price for a good occurs, a change in the demand for related goods causes the demand curve to ___________

Shift

Supply

A schedule or a curve describing all the possible quantities that sellers are willing and able to produce, at all possible prices they might encounter in a particular period of time.

Supply is represented by _____________

A graphical model as the entire supply curve

Law of Supply

All other factors being equal, there is a direct, positive relationship between a good’s price and the quantity supplied.

As the price of a good increases ______________

The quantity supplied increases

As the price of a good decreases ____________

The quantity supplied decreases

Quantity Supplied

The amount of a good or service that sellers are willing to sell at a specific price

Quantity supplied is represented in a graphical model as ____________

A single point on the supply curve

How is a change in quantity supplied represented graphically?

A movement along a supply curve resulting from a change in a good’s price

Change in Supply

A movement or shift in an entire supply curve resulting from a change in one of the non-price determinants of supply

Determinants of Supply are ____________ that will ____________

Non-price factors; Cause an entire supply curve to shift

What are the determinants of supply?

• The number of sellers in a market

• The level of technology used in a good’s production

• The prices of inputs used to produce a good

• The amount of government regulation, subsidies or taxes in a market

• The price of other goods sellers could produce

• The expectations among producers of future prices.

In a competitive market, demand for and supply of a good or service determine ________________

The equilibrium price

Whenever markets experience imbalances—creating disequilibrium prices, surpluses, and shortages—market forces ___________________

Drive prices toward equilibrium

Changes in the determinants of supply and/or demand result in ______________

A new equilibrium price and quantity.

True or False: When there is a change in supply or demand, the old price will still be an equilibrium.

False

When supply increases, the equilibrium price ____________

Decreases

When supply increases, the equilibrium quantity ____________

Increases

When supply decreases, the equilibrium price ____________

Increases

When supply decreases, the equilibrium quantity ____________

Decreases

When demand increases, the equilibrium price ____________

Increases

When demand increases, the equilibrium quantity ____________

Increases

When demand decreases, the equilibrium price ____________

Decreases

When demand decreases, the equilibrium quantity ____________

Decreases