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STUDY GUIDE AP/IB Economics BASIC ECONOMIC CONCEPTS – CHS. 1-2, 4, 25 The Five Powers of Economic Thinking _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ Normative economic statements are statements about ______ _______ ________, while positive economic statements are statements about _______ _______. Economic Goals _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ The basic problem of economics is _______________. The Four Factors of Production are _______________, _______________, _______________ and _______________ Opportunity Cost is the cost of the next _______________ alternative that is forgone. Be able to give some examples of opportunity costs. Circular Flow Diagram Households send ____________________ to the businesses and businesses send ____________________ to the households in the input market. Households send ____________________ to the businesses and businesses send ____________________ to the households in the product market. Production Possibilities Curve – know which points show efficiency and which do not B* A* A _______________ B _______________ Know how to compute P.P. curve trade-offs Know what operating under the P.P. curve represents Reasons for shifting the P.P. Curve outward (How to Achieve Economic Growth) ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ Law of Increasing Costs Definition of Economic Growth Merit vs. Demerit Goods (be able to give examples) MICROECONOMICS – CHS. 3, 6, 16-17 Supply and Demand Laws of Supply and Demand Reasons for Shifts in the Demand Curve _____________________________ ________________________________ _____________________________ ________________________________ _____________________________ ________________________________ Reasons for Shifts in the Supply Curve _____________________________ ________________________________ _____________________________ ________________________________ _____________________________ Be able to sketch Supply and Demand Curve Shifts (increases in either curve shift the curves parallel and to the right, while decreases in either curve shift the curves parallel and to the left) Price Floors and Ceilings When the price of a good is set above the equilibrium price, the market will experience a _______________. Sketch the Graph of a Price Floor Effects of a Price Floor _____________________________ ________________________________ _____________________________ ________________________________ When the price of a good is set below the equilibrium price, the market will experience a _______________ Sketch the Graph of a Price Ceiling Effects of a Price Ceiling _____________________________ ________________________________ _____________________________ Elasticity of Demand Definition ______________________________________________________ Formula % change in quantity demanded % change in price We E is __________ than one, the portion of the demand curve is inelastic. We E is __________ than one, the portion of the demand curve is elastic. We E is __________ than one, the portion of the demand curve is unit elastic. When in the inelastic portion of the demand curve, _______________ price increases total revenue. When in the elastic portion of the demand curve, _______________ price increases total revenue. When in the unit elastic portion of the demand curve, changing price causes _____ __________ to total revenue. Determinants of Elasticity of Demand _________________________ _________________________ _________________________ _________________________ Elasticity of Supply Definition Formula* ______________________________________________________ % change in quantity supplied % change in price We E is __________ than one, the portion of the supply curve is inelastic. We E is __________ than one, the portion of the supply curve is elastic. We E is __________ than one, the portion of the supply curve is unit elastic. Determinants of Elasticity of Supply _________________________ _________________________ Cross Elasticity of Demand Formula* % change in quantity demanded of product A % change in price of product B If cross elasticity of demand is positive, then the two products are __________. If cross elasticity of demand is negative, then the two products are __________. If cross elasticity of demand is zero, then the two products are __________. Income Elasticity of Demand Formula* % change in quantity demanded % change in income If income elasticity of demand is positive, then the product is __________. If income elasticity of demand is negative, then the product is __________. Public Goods Characteristics _________________________ Externalities Negative Positive _________________________ ______________________________________________________ ______________________________________________________ Externality Graph Be able to sketch an externality graph with MSC and MPC (positive slope) and MSB and MPB (negative slope) When either MSC or MPC increases, the curve shifts to the left When either MSB or MPB increases, the curve shifts to the right Govt. Solutions to Reducing Negative Externalities ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ Govt. Solutions to Encouraging Positive Externalities ______________________________ ______________________________ ______________________________ Taxation Benefits Received Principle __________________________________________ __________________________________________________________________ Ability to Pay Principle __________________________________________ __________________________________________________________________ INTRODUCTION TO MACROECONOMICS – CHS. 24, 26 Gross National Product (GNP) __________________________________________ ________________________________________________________________________ Net National Product (NNP) ________________________________________________ ________________________________________________________________________ Nominal Gross Domestic Product (GDP) ____________________________________ ________________________________________________________________________ Formula C + I + G + Xn Real GDP Nominal GDP Price Index Per Capita GDP Real GDP Population Limitations to GDP __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ Unemployment Unemployment Rate* Number of People Unemployed Total Labor Force x 100 The four types of unemployment are __________, __________, __________ and the most serious form is __________. Costs of Unemployment ____________________________________________________ ____________________________________________________ ____________________________________________________ ____________________________________________________ ____________________________________________________ ____________________________________________________ Inflation Definition ______________________________________________________ List two types of Inflation ______________________________ ______________________________ List two groups that would be helped by inflation ______________________________ ______________________________ List four groups that would be hurt by inflation ______________________________ ______________________________ ______________________________ ______________________________ Consumer Price Index* Price of Selected Items in the Current Year Price of Selected Items in the Past Year Nominal Interest Rate Deflation Definition __________________ + x 100 __________________ ______________________________________________________ AGGREGATE EXPENDITURES AND AGGREGATE SUPPLY AND DEMAND – CHS. 27-29 Consumption Determinants of Consumption ________________________ ________________________ ________________________ ________________________ ________________________ Investment Determinants of Investment _______________________ ________________________ _______________________ ________________________ _______________________ ________________________ Investment Graph IR Investment Government Spending Net Exports Determinants of Net Exports ________________________ ________________________ ________________________ Multiplier Analysis Formula 1 / (1-MPC) or 1 / (MPS) Formula to Find the Change to Real GDP Change in Real GDP = Change in Spending x Multiplier Graph the Aggregate Supply/Aggregate Demand Diagram PL Real GDP Aggregate Supply and Demand Graph (be able to draw this) AD has a negative slope Reasons why the Aggregate Demand Curve Shifts _________________________ _________________________ _________________________ _________________________ AS has a positive slope Classical Keynesian Reasons why the Aggregate Supply Curve Shifts _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ Results of Shifts in AS & AD Increase in AD – inflation with economic growth Decrease in AD – deflation with recession Increase in AS – deflation with economic growth Decrease in AS – inflation with recession (stagflation) *formulas given on the final exam
