AP Macroeconomics Unit 1: Basic Economic Concepts

Definition of Economics: Economics is defined as the study of how people satisfy their unlimited wants in an environment where there are only scarce resources available.
Concept of Scarcity: In an economy, if resources are limited and wants are limited, choices must be made. This condition leads to scarcity.
Scarcity Definition: Scarcity exists when there are limited goods and services available for an unlimited amount of wants. Because of scarcity, people must make choices to satisfy the specific wants that are most important to them.

Macroeconomics Overview: Macroeconomics is the study of factors that affect the whole economy. We analyze the economy as a whole on a macro level rather than focusing on individuals or specific markets.
Key Areas of Study in Macroeconomics: * Inflation * Price levels * Gross Domestic Product (GDP) rate * Economic growth * National income * Changes in unemployment

Opportunity Cost: In life and in macroeconomics, choosing to do one thing results in the loss of the next best alternative. * Named Example: If an individual chooses to watch a movie for $2$ hours, they lose $2$ hours of time that could have been spent on homework. * By making a choice, we choose the alternative best opportunity for ourselves.
Gain/Loss Dynamics: Our choices lead to the loss of some opportunities, but there is also a gain achieved from selecting the chosen option.
Trade-offs: In a trade-off, selecting one option results in losing all other available options.

Production requires four specific categories of resources: 1. LAND: Natural resources used in production. 2. LABOR: Human effort used in the production process. 3. CAPITAL: This is divided into two illustrative categories: * Capital Goods: These are goods made not for direct consumption but to aid in the production of other goods. * Specific Examples: A straw used to drink a soda; an oven used to bake cookies for sale. * Human Goods (Human Capital): These are human skills that benefit production. * Specific Example: Education. Companies require workers to possess a high school diploma because the greater knowledge and skill acquired through education increases the level of production. 4. ENTREPRENEURSHIP: The leadership and innovation required to combine the other factors.

PPF Definition: The Production Possibility Frontier displays the reality of how there is an unlimited amount of wants vs. a limited amount of goods.
Types of Production Possibility Frontiers: * Increasing Opportunity Cost * Constant Opportunity Cost * Decreasing Opportunity Cost

Absolute Advantage: This refers to the ability to produce a greater total number of a specific good.
Comparative Advantage: This is the ability to produce the same product(s) at a higher level of efficiency (lower opportunity cost).

Country	Cars	Bikes
Country A	$10$	$5$
Country B	$8$	$2$

Absolute Advantage Analysis: In the production of cars, Country A has the absolute advantage because it produces a greater number ( $10$ vs. $8$ ).
Ratio Comparisons: * Country A: $10 : 5 \rightarrow 2 : 1$ * Country B: $8 : 2 \rightarrow 4 : 1$
Comparative Advantage Logistics: * Producing Cars: When producing cars, Country A gives up $1$ bike to make $2$ cars. Country B gives up $4$ cars to make $1$ bike. * Producing Bikes: In producing bikes, Country A gives up $2$ cars to make $1$ bike. Country B gives up $4$ cars to make $1$ bike. * Conclusion: Country A has the comparative advantage in producing bikes. Country B has the comparative advantage in producing cars.

Definition: The price and the quantity demanded of goods and services are inversely related to each other.
Mechanism: When the price of a product increases, the demand for that product will decrease.
Specific Example: If the price of cupcakes triples due to a shortage of flour, the demand for cupcakes will decrease because of the higher price.
Shifters of Demand: 1. Number of consumers 2. Change in tastes and preferences 3. Change in income 4. Change in the price of substitute goods 5. Change in the price of complementary goods 6. Future expectations

Definition: The price and quantity supplied of a good are directly related to each other.
Mechanism: When the price of a good increases, suppliers increase the supply of that good in the market.
Price and Quantity Correlation: * Price Increase: As price increases, quantity increases. For example, more expensive cupcakes result in more cupcakes on the shelf and more left to buy. * Price Decrease: As price decreases, quantity decreases. Decreasing the price on cupcakes results in more being bought and less supply remaining in the store.
Supplier Logic: When the price of cupcakes rises, suppliers produce more because fewer people may be buying them, meaning more cupcakes will be left to buy at the store.
Shifters of Supply: 1. Cost of inputs 2. Change in productivity/Technology 3. Number of sellers 4. Government Action: Taxes 5. Government Action: Subsidies 6. Government Regulations 7. Expectation of future profit

Equilibrium: This occurs when market supply and demand balance each other. As a result of this balance, prices become stable.
Graphing Requirements: * It is vital to always label all parts of the graphs. * Labeling helps maintain organization and is a mandatory requirement on AP tests.