Unit 1 review- APMACRO
1. Basic Economic Concepts
Scarcity: The fundamental problem of economics, arising because people have unlimited wants but resources are limited.
Opportunity Cost: The value of the next best alternative that must be given up when a choice is made.
Example: If you spend time studying for economics, the opportunity cost might be the time you could have spent working or socializing.
Production Possibilities Curve (PPC) / Frontier (PPF): A model that graphically demonstrates scarcity, opportunity cost, and efficiency.
Points on the curve: Efficient allocation of resources.
Points inside the curve: Inefficient use of resources (unemployment or underutilization).
Points outside the curve: Currently unattainable with existing resources and technology.
Shifts in PPC: Outward shift indicates economic growth (e.g., more resources, better technology); inward shift indicates a decrease in productive capacity.
Economic Systems: Different ways societies organize to allocate scarce resources.
Traditional Economy: Based on custom and historical tradition.
Command Economy: Central government makes all economic decisions (e.g., Communism).
Market Economy: Decisions made by individuals and firms interacting in markets (e.g., Capitalism).
Mixed Economy: A combination of command and market elements.
2. Factors of Production
These are the resources used to produce goods and services.
Land: All natural resources used in production (e.g., raw materials, real estate).
Labor: The mental and physical efforts of people used in production.
Capital: Human-made resources used to produce other goods and services.
Physical Capital: Tools, machinery, buildings.
Human Capital: The knowledge and skills acquired by workers.
Entrepreneurship: The ability to combine land, labor, and capital to create new products or processes, bearing the risks and uncertainties.
3. Demand
Definition: The quantity of a good or service that consumers are willing and able to purchase at various prices during a given period.
Law of Demand: States that, all else being equal, as the price of a good or service increases, the quantity demanded decreases, and vice versa.
This inverse relationship is why the demand curve slopes downwards.
Demand Curve: A graphical representation of the law of demand. Illustrates the quantity demanded at each price point.
4. Change in Demand vs. Change in Quantity Demanded
Change in Quantity Demanded: A movement along a single demand curve caused only by a change in the product's own price.
Example: If the price of coffee drops from 3.00, consumers demand more coffee, moving from point A to point B on the same curve.
Change in Demand: A shift of the entire demand curve (either to the left or right) caused by changes in factors other than the product's own price.
Determinants of Demand (TRIPE - Tastes, Related Goods, Income, Population, Expectations):
Tastes and Preferences: Changes in consumer preferences for a good.
Related Goods' Prices:
Substitutes: Goods that can be used in place of another. If the price of a substitute rises, demand for the original good increases (e.g., if coffee prices rise, demand for tea increases).
Complements: Goods that are consumed together. If the price of a complement rises, demand for the original good decreases (e.g., if hot dog prices rise, demand for hot dog buns decreases).
Income: Changes in consumer income.
Normal Goods: Demand increases as income increases (e.g., cars, vacations).
Inferior Goods: Demand decreases as income increases (e.g., instant noodles, public transport).
Population/Number of Buyers: An increase in the number of potential consumers increases demand.
Expectations: Consumers' expectations about future prices or availability.
Example: If consumers expect prices to rise in the future, current demand may increase.