AP Macro

Unit 1: Scarcity and Opportunity Cost

  • Definition of Economics: Behavior science about allocation of scarce resources to unlimited needs.

  • Scarcity: Limited resources that are desired; causes trade-offs.

  • Factors of Production:
      1. Land: Natural resources (rent).
      2. Labor: Workers (wages).
      3. Capital:
         - Physical Capital: Machinery, equipment.
         - Human Capital: Skills and intellect.
         - Financial Capital: Money (interest).
      4. Entrepreneurship: Combines resources for production (profit).

Unit 1.2: Production Possibilities Curve (PPC)

  • Opportunity Cost: The highest value foregone for a decision made.

  • PPC: Model showing combinations of two goods produced efficiently in an economy.

  • Points on PPC:
      - Under curve: Inefficiency.
      - On curve: Efficiency.
      - Beyond curve: Unattainable without growth.

  • Horizontal Axis: Quantity of good A; Vertical Axis: Quantity of good B.

  • Efficiency: Cannot produce more of one good without sacrificing another.

  • Factors affecting PPC: Technology improvements increase capacity.

Unit 1.3: Comparative Advantage

  • Absolute Advantage: Ability to produce more than another producer.

  • Comparative Advantage: Lower opportunity costs in production than another producer.

  • Terms of Trade: Exchange rates beneficial for increased production.

Unit 1.4: Demand

  • Competitive Market: Many consumers/producers; individual cannot affect price.

  • Law of Demand: Higher price = lower quantity demanded.

  • Change in Demand Factors:
      - M: Market size
      - E: Expectations
      - R: Related prices
      - I: Income
      - T: Tastes

  • Types of Related Goods: Complements (demand moves inversely) and Substitutes (demand moves inversely).

Unit 1.5: Supply

  • Law of Supply: Higher price = higher supply.

  • Factors affecting Supply: T.R.I.C.E (Technology, Related Prices, Input Prices, Competition, Expectation).

Unit 1.6: Market Equilibrium

  • Equilibrium: Intersection of supply and demand curves; establishes equilibrium price.

  • Disequilibrium:
      - Surplus: Price above equilibrium.
      - Shortage: Price below equilibrium.

Unit 2: GDP and Economic Indicators

  • GDP: Total market value of all final goods/services produced in a year.

  • Components of GDP: C + I + G + Xn.

  • Limitations of GDP: Does not account for non-market activities or measure well-being.

  • Unemployment: Definition and types; U3 vs U6 measurements.

Unit 2.4: Price Indices and Inflation

  • CPI (Consumer Price Index): Measures changes in prices over time for a fixed basket of goods.

  • Inflation: Overall increase in prices; erodes purchasing power.

  • Real vs Nominal Values: Real values are adjusted for inflation.

Unit 2.5: Cost of Inflation

  • Inflation affects purchasing power and can distort economic decisions.

Unit 2.6: Real vs Nominal GDP

  • Nominal GDP: Current prices; not adjusted for inflation.

  • Real GDP: Inflation-adjusted measure.

  • GDP Deflator: Price index measuring changes in the economy.

Unit 3: Aggregate Demand and Supply

  • AD/AS Model: Measures real GDP and aggregate price levels.

  • Aggregate Demand: Total demand for goods/services in the economy.

  • Short Run Aggregate Supply (SRAS): Upward sloping; determined by fixed input prices.

  • Long Run Aggregate Supply (LRAS): Vertical line indicating full employment output; no trade-off.

Unit 4: Financial Assets and Banking

  • Money vs Wealth: Money = medium of exchange; Wealth = accumulated savings.

  • Financial Assets: Claims to future income.

  • Interest Rates: Nominal vs Real; impact on investments and savings.

  • Monetary Policy: Central bank's management of money supply to influence economy.