AP Macro Unit 1

Scarcity:

limited resources, unlimited wants → must make choices

Economics:

study of choices + consequences

Land:

natural resources (oil, water)

Labor:

human work

Capital:

tools/machines (NOT money)

Entrepreneurship:

risk + business ideas

Opportunity cost

next best choice given up

Incentives

rewards/punishments affect choices

Agents

decision makers (people, firms, gov)

Rational:

choose what’s best for yourself

Simplify reality (graphs/math)

Use ceteris paribus = all else equal

Positive: facts (can prove)

Example: Price ↑ → demand ↓

Normative: opinions (should)

Example: Prices should be lower

Micro

individual markets (buyers/sellers)

Macro

whole economy (inflation, unemployment, growth

Economics

≠ business/stock market

People aren’t always

rational (real life)

Production Possibilities Curve (PPC)

Graph showing max combinations of 2 goods
Shows scarcity + tradeoffs

Opportunity Cost

What you give up to get something

Efficiency

Using all resources fully (point ON PPC)

Inefficient Use

Not using all resources (point INSIDE PPC)

Impossible (Unattainable)

Cannot produce (point OUTSIDE PPC)

Growth

Economy can produce more
PPC shifts outward

Contraction

Producing less (unused resources)
Move inside PPC

Productivity (Technology)

Better ways to produce
Causes growth (shift out)

Constant Opportunity Cost

Always give up same amount
PPC = straight line

Increasing Opportunity Cost

Give up more and more
PPC = curved (bowed out)

PPC Points

• On curve → Efficient

• Inside → Inefficient

• Outside → Impossible

Opportunity Cost Formula

(Y₁ − Y₂) ÷ (X₁ − X₂)

Growth =

New resources or better tech

Moving inside → on PPC

= efficiency, NOT growth