AP Macro - Unit 1

AP Macroeconomics Unit 1 Basic Economic Concepts

Advice for Success

• Watch Jacob Clifford videos before class for better understanding.

• Keep the initial pages of your notes reserved for formulas to keep track of them in one place.

• Practice drawing and interpreting graphs to enhance comprehension of economic concepts.

• Use homework time effectively as study time.

1.1 Scarcity

Warm-Up Activity

• Reflect on daily choices: quantify how many choices you make and assess significance of control.

• Consider how to spend 2 hours of free time after school; share thoughts with a partner.

Understanding Economics

• Economics: The study of scarcity and choice involving:

  • Individuals deciding on goods/services to purchase, and employment choices.

  • Businesses determining goods/services to produce and their methods.

  • Governments deciding on taxation and purchases.

• Microeconomics: Focuses on individuals and firms; Macroeconomics: Concerns the larger economy and government impacts.

Why We Make Choices

• Unlimited Wants vs Limited Resources lead to Scarcity: finite resources necessitate choices.

  • Scarcity: Permanent state; distinct from Shortage: temporary situation.

Resources: Factors of Production

• Land: Natural resources used in production.

• Labor: Workforce and its dynamics (influenced by war, illness, immigration).

• Capital: Non-consumer goods aiding production, divided into:

  • Human Capital: Knowledge for production.

  • Physical Capital: Tools/machinery utilized for creating goods.

• Entrepreneur: Individual who combines and invests in the above factors.

Skills Practice Example

• Land: Corn for cornbread.

• Labor: Skilled worker fixing equipment.

• Capital: Mill grinding corn into flour.

1.2 Costs and Choices

Implications of Choices

• All choices involve Costs, not exclusively monetary.

  • Opportunity Cost: Value of the next best alternative foregone.

  • Trade-off: All possible choices available at a moment.

  • Opportunity Cost focuses on the best choice not taken.

Warm-Up Reflection

• When making a choice, consider the chosen activity, trade-offs involved, and the opportunity cost.

Incentives and Behavior

• Incentives: Rewards or penalties motivating behavior, can be positive or negative.

  • Behavior adjusts predictably to changes in incentives.

  • Self-interest often drives decision-making, although not always.

Decision-Making Process

• Percent Analysis: Decisions consider marginal costs vs. marginal benefits:

  • Costs: Negative consequences.

  • Benefits: Positive consequences.

  • Stop an activity when Marginal Cost exceeds Marginal Benefit.

• Externalities: Unintended consequences of economic decisions.

  • Positive Externalities: Added benefits with no costs.

  • Negative Externalities: Added costs with no benefits.

Externalities in Choices

• Externalities affect third-party stakeholders resulting from economic decisions, including government interventions when negative effects occur.

1.3 Production Possibilities Curve (PPC) & Opportunity Costs

Understanding the PPC

• Production Possibilities Curve: A model illustrating an economy's use of limited resources, depicting scarcity, opportunity costs, and efficiency.

  • Assumptions: Only two goods produced, full resource employment, fixed resources, and technology.

PPC Table & Graph

• Points on the PPC represent combinations of goods at maximum productivity levels. Any point outside is impossible with current resources, while inside indicates inefficiency.

Constant vs. Increasing PPCs

• Constant PPC: Resources interchangeable.

• Increasing PPC: Resources not easily interchangeable; reflects opportunity costs.

Shifts in PPC

• Shifts caused by:

  • Changes in resource quantity (inward/outward shifts).

  • Technological advances.

  • Changes in trade volume affecting consumption.

Skills Practice Summary

• Recognize examples illustrating the concepts of scarcity, growth, contraction, underutilization, and efficiency along the PPC.

1.4 Comparative Advantage and Trade

Relevant Concepts

• Absolute Advantage: Greater production capacity of goods due to superior resources.

• Comparative Advantage: Lower opportunity cost in producing goods; one cannot have comparative advantage in both goods.

Example Scenario

• Assess personal and comparative production capabilities when fishing and harvesting coconuts based on similar capacities.

Maximizing Benefits Through Trade

• Trading to better meet needs demonstrates comparative and absolute advantages. Determine fair trades based on opportunity costs.

1.5 Demand

Demand Overview

• Demand: Quantity of goods/services that consumers are willing and able to purchase at various prices.

  • Competitive Markets: Many buyers/sellers with no price influence.

Demand Law

• Law of Demand: Inverse relationship between price and quantity demanded due to:

  • Diminishing marginal utility.

  • Substitution and income effects.

Demand Schedule & Curve

• Visual representations showing quantities at various prices with downward slopes.

Determinants of Demand (MERIT)

• M: Market size.

• E: Expectations.

• R: Related goods (substitutes and complements).

• I: Income effects.

• T: Tastes and trends.

Shifts in Demand

• Situations leading to right and left shifts in demand curve discussed, influenced by market factors.

Activities Involving Demand

• Group activities to create demand curves based on various scenarios and their impacts on market behavior.

1.6 Supply

Supply Fundamentals

• Supply: Quantity of goods/services producers are willing to sell at specific prices focused on competitive market dynamics.

Law of Supply

• Law of Supply: Direct relationship between price and quantity supplied, assuming all else is constant.

Supply Schedule & Curve

• Creates graphical representations of quantity supplied corresponding to varied prices, typically rising slopes.

Determinants of Supply

• Identifiable factors influencing supply include:

  • Technology: Affecting production costs.

  • Related Prices: Impact of complementary/substitute goods.

  • Inputs: Cost of raw materials and labor.

  • Competition, Expectations, and Government Regulations: Influencing market outcomes.

Overall Market Dynamics

• Government interventions can create disequilibrium conditions disrupting natural supply-demand balance.