AP Macroeconomics – Unit One Exam Review (Updated Spring 2025)

• Scarcity – The fundamental economic problem of limited resources and unlimited wants.

• Efficiency – Using resources in the best way possible to maximize output.
  

  • Allocative Efficiency – Resources are used to produce the combination of goods most desired by society.

  • Productive Efficiency – Producing goods at the lowest possible cost (on the production possibilities curve).

• Marginal Benefit – The additional satisfaction or utility gained from consuming one more unit of a good or service.

• Marginal Cost – The additional cost incurred from producing one more unit of a good or service.

• Positive Statements – Objective, fact-based statements that can be tested or proven.

• Normative Statements – Value-based statements that express opinions about what should be.

• The Four Factors of Production – Economic resources used to produce goods/services:
  

  • Land – Natural resources (payment = rent).

  • Labor – Human effort and skills (payment = wages).

  • Capital – Tools, machinery, and technology (payment = interest).

  • Entrepreneurship – Risk-taking and innovation (payment = profit).

• Microeconomics vs. Macroeconomics – Micro focuses on individuals and firms; Macro looks at the entire economy.

• Law of Increasing Opportunity Costs – As production of one good increases, the opportunity cost of producing additional units rises.

Things to Compute/Graph

• Opportunity Cost – The value of the next best alternative given up when making a decision.

• Circular Flow Model – Diagram showing the flow of money, resources, and goods/services in an economy.
  

  • Factor Market – Where households sell resources (land, labor, capital) to firms.

  • Product Market – Where firms sell goods/services to households.

  • Firms – Businesses that produce goods/services.

  • Households – Owners of resources and consumers of goods/services.

Supply and Demand

• Demand – The quantity of a good or service that consumers are willing and able to buy at different prices.

• Quantity Demanded – The amount of a good consumers are willing to buy at a specific price (movement along the demand curve).

• Law of Demand – As price decreases, quantity demanded increases (inverse relationship).
  

  • Income Effect – Lower prices increase consumers’ purchasing power.

  • Substitution Effect – Consumers switch to relatively cheaper goods.

  • Diminishing Marginal Utility – Each additional unit of a good provides less added satisfaction.

• Determinants of Demand (TRIPE):
  

  • Tastes & Preferences

  • Related Goods (substitutes & complements)

  • Income

  • Population (number of buyers)

  • Expectations of future prices

• Supply – The quantity of a good or service producers are willing and able to sell at different prices.

• Quantity Supplied – The amount producers are willing to sell at a specific price (movement along the supply curve).

• Law of Supply – As price increases, quantity supplied increases (direct relationship).

• Law of Increasing Costs – As more of a good is produced, the cost of producing additional units rises.

• Determinants of Supply (GROTE):
  

  • Government intervention (taxes, subsidies, regulations)

  • Resource costs

  • Opportunity cost of alternative production

  • Technology

  • Expectations of future prices

• Equilibrium – The point where supply and demand meet; no shortage or surplus.

• Disequilibrium – When supply and demand are not balanced.

• Surplus – Quantity supplied > Quantity demanded (prices too high).

• Shortage – Quantity demanded > Quantity supplied (prices too low).

• Price Ceiling – A legal maximum price set below equilibrium → causes shortages.

• Price Floor – A legal minimum price set above equilibrium → causes surpluses.

• Elastic Demand Curve – More horizontal; quantity demanded changes greatly with price changes.

• Inelastic Demand Curve – More vertical; quantity demanded changes little with price changes.