Unit 1_ Basic Economic Concepts

Unit 1: Basic Economic Concepts

• AP Macroeconomics

• AP Exam Weighting: 5-10%

Unit 1.1: The Problem With Scarcity

• Economics defined as the study of how individuals, organizations, or societies deal with scarcity.

What is Economics?

Key Concepts

• Scarcity: The fundamental problem of economics; limited resources vs. unlimited wants.

• Ceteris Paribus: Latin for "all else equal"; helps in understanding the relationship of variables while isolating one.

  • Examples illustrating ceteris paribus:

    • Decrease in pizza price leads to an increase in pizza purchases, assuming no other changes.

    • Falling interest rates increase borrowing, assuming access to loans and no economic shocks.

    • Sleep correlates to energy levels, holding other factors constant.

    • Homework affects free time, assuming no other responsibilities.

Rational Decision Making

• Rational agents make choices that maximize their well-being.

  • Example: Prioritizing study time for more difficult subjects for better grades.

  • Example: Deciding how to utilize limited lunch time effectively.

Microeconomics vs. Macroeconomics

• Microeconomics: Focus on individual units (individuals, households, organizations).

• Macroeconomics: Focus on whole economies (countries, states); concerned with aggregate utility.

  • Core questions:

    • What to produce?

    • How to produce?

    • Who gets the product?

Utility and Decision Making

• Utility: Satisfaction gained from a product based on needs and desires.

  • Examples of preferences leading to decisions:

    • Preference for participation in Dance vs. NHS for academic growth.

    • Choosing food based on immediate satisfaction vs. health.

Scarcity and Its Implications

Types of Scarcity

1. Time Scarcity

2. Scarcity of Attention

3. Resource Scarcity

Factors of Production Responsible for Resource Scarcity

1. Land: Natural resources; includes buildings and energy used in production.

   • Example: School buildings and natural resources.

2. Labor: Human resources; encompasses skills and time committed to production.

   • Example: Staff at a school.

3. Capital: Divided into:

   • Physical Capital: Tools and technology for production.

   • Human Capital: Knowledge and skills acquired by workers.

4. Entrepreneurship: Management and risk-taking in combining production factors.

   • Example: A school principal making resource allocation decisions.

Unit 1.2: Opportunity Cost & The Production Possibility Curve

• The Production Possibility Curve (PPC) depicts maximum combinations of two goods/services an economy can produce.

• Illustrates key concepts: efficiency/inefficiency, opportunity cost, scarcity, economic growth/contraction.

Opportunity Cost

• Defined as the utility of the next best alternative forgone when making choices.

  • Law of Increasing Opportunity Cost: As production of one good increases, opportunity cost in terms of the other good increases because resources are not all equally efficient.

Evaluating PPC Scenarios

• Points on the PPC indicate efficiency, within the curve indicates inefficiency, and outside indicates scarcity.

• Shifts in PPC indicate economic growth (outward shift) or contraction (inward shift) due to changes in resources and technology.

Unit 1.3: Comparative Advantage and Trade

Historical Context of Trade

• Ancient civilizations specialized in certain goods and traded what they lacked.

• Modern examples illustrate specialization:

  • USA: Machinery, Cars, Weapons

  • Saudi Arabia: Crude Oil

Understanding Advantage

• Absolute Advantage: Ability to produce more with given resources.

• Comparative Advantage: Ability to produce at a lower opportunity cost.

Practical Applications in Trade Decisions

• Benefits of specialization lead countries to trade despite having absolute advantages in multiple areas.

• Finding terms of trade that mutually benefit trading partners.

Unit 1.4: Demand

Basics of Demand

• Demand: Quantities of goods that consumers are willing/able to buy at different prices.

• Distinctions exist between ability/willingness and how these affect purchasing decisions.

Law of Demand

• Inverse relationship between price and quantity demanded:

  • Higher prices generally lead to less quantity demanded and vice versa.

• Graphical representation is pivotal for understanding demand curves.

Factors Shifting Demand

• Shifters of Demand (INSECT):

  • Income: Increase shifts demand for normal goods right.

  • Number of Buyers: More buyers increase demand.

  • Substitutes: Price increases of substitutes can shift demand towards the original good.

  • Expectations: Consumer expectations can shift demand curves.

  • Complements: Price changes in complementary goods can impact the demand for related goods.

  • Taste/Preferences: Shift demand based on consumer trends and interests.

Unit 1.5: Supply

Fundamentals of Supply

• Supply: Quantities of goods/services that producers are willing and able to sell at differing prices.

Law of Supply

• Direct relationship between price and quantity supplied.

Shifters in Supply (ROTTEN)

• Changing Resources: Costs of production inputs.

• Other Goods’ Prices: Shifts due to profitability changes of alternative goods.

• Taxes: Government interventions impacting overall supply.

• Technology: Advances affect the ability to produce goods.

• Expectations of Future Prices: Anticipated changes influence current supply.

• Number of Sellers: Increased competition can increase supply.

Unit 1.6: Market Equilibrium

Understanding Equilibrium

• Market Equilibrium: Occurs when quantity demanded equals quantity supplied at a given price.

• Concept of equilibrium price (PE) and quantity (QE).

Market Dynamics Affecting Equilibrium

• Price Increases and Decreases lead to surplus and shortage conditions, respectively, fostering market adjustments back to equilibrium.

Shifts in Equilibrium

• Factors affecting market equilibrium include changes in demand/supply, necessitating an understanding of dynamics to predict shifts and outcomes.