Download APME Unit I Review Guide

AP Macroeconomics
Stuff to Know!
Unit I: Introduction to Economics
Economics: The Study of Choice
1) Economics: A social science that examines how people choose among the alternatives available to them.
2) Opportunity cost: The value of the best alternative forgone in making any choice.
3) Scarcity: The condition of having to choose among alternatives.
4) free good: A good for which the choice of one use does not require that another be given up.
5) scarce good: A good for which the choice of one alternative requires that another be given up.
6) Macroeconomics: The branch of economics that focuses on the impact of choices on the total, or
aggregate, level of economic activity.
7) Microeconomics: The branch of economics that focuses on the choices made by consumers and firms and
the impacts those choices have on individual markets.
8) choice at the margin: A decision to do a little more or a little less of something.
9) Ceteris paribus: A Latin phrase that means, "all other things unchanged."
10) constant: Something whose value does not change.
11) dependent variable: A variable that responds to change.
12) fallacy of composition: Assuming that Event A caused Event B – merely because A happened before
Event B.
13) fallacy of false cause: The incorrect assumption that one event causes another because the two events tend
to occur together.
14) ignoring secondary effects: Failing to account for unintended consequences of economic actions that
develop slowly over time as people react to events.
15) independent variable: A variable that induces a change.
16) law: A theory that has been subjected to even more testing and that has won virtually universal acceptance.
17) model: A set of simplifying assumptions about some aspect of the real world.
18) normative statement: A statement that makes a value judgment.
19) positive statement: A statement of fact or a hypothesis which can be proven.
20) theory: A hypothesis that has not been rejected after widespread testing and that wins general acceptance.
21) variable: Something whose value can change.
Confronting Scarcity: Choices in Production
22) economic system: The set of rules that define how an economy's resources are to be owned and how
decisions about their use are to be made.
23) production possibilities function: A model that shows the goods and services that an economy is capable
of producing - its opportunities - given the factors of production and the technology it has available. The
production possibilities curve is the curve that shows the potential for production in the economy.
24) Capital: A factor of production that has been produced for use in the production of other goods and
services. Physical capital is the equipment, whereas human capital is the know-how.
25) Financial capital: Includes money and other "paper" assets (such as stocks and bonds) that represent
claims on future payments.
26) Labor: The human effort that can be applied to the production of goods and services.
27) Natural resources: The resources of nature that can be used for the production of goods and services.
28) entrepreneur: A person who, operating within the context of a market economy, seeks to earn profits by
finding new ways to organize factors of production.
29) factors of production: The resources available to the economy for the production of goods and services.
30) human capital: The skills a worker has as a result of education, training, or experience that can be used in
production.
31) technology: The knowledge that can be applied to the production of goods and services.
32) utility: The value, or satisfaction, that people derive from the goods and services they consume and the
activities they pursue.
33) Specialization: Situation in which an economy is producing the goods and services in which it has a
comparative advantage.
34) comparative advantage: In producing a good or service, the situation that occurs if the opportunity cost of
producing that good or service is lower for that economy than for any other.
35) efficient production: When an economy is operating on its production possibilities curve.
36) full employment: Situation in which all the factors of production that are available for use under current
market conditions are being utilized.
37) inefficient production: Situation in which the economy is using the same quantities of factors of
production but is operating inside its production possibilities curve.
38) law of increasing opportunity cost: As an economy moves along its production possibilities curve in the
direction of producing more of a particular good, the opportunity cost of additional units of that good will
increase.
39) production possibilities curve: A graphical representation of the alternative combinations of goods and
services an economy can produce.
40) command socialist economy: Economy in which government is the primary owner of capital and natural
resources and has broad power to allocate the use of factors of production.
41) economic growth: The process through which an economy achieves an outward shift in its production
possibilities curve.
42) market capitalist economy: Economy in which resources are generally owned by private individuals who
have the power to make decisions about their use.
43) mixed economies: Economy that combine elements of market capitalist and of command socialist
economic systems.
Demand and Supply
44) Markets: The institutions that bring together buyers and sellers.
45) change in demand: A shift in a demand curve.
46) change in quantity demanded: A movement along a demand curve that results from a change in price.
47) complements: Two goods for which an increase in price of one reduces the demand for the other.
48) demand curve: A graphical representation of a demand schedule.
49) demand schedule: A table that shows the quantities of a good or service demanded at different prices
during a particular period, all other things unchanged.
50) demand shifter: A variable that can change the quantity of a good or service demanded at each price.
51) inferior good: A good for which demand decreases when income increases.
52) law of demand: For virtually all goods and services, a higher price leads to a reduction in quantity
demanded and a lower price leads to an increase in quantity demanded.
53) normal good: A good for which demand increases when income increases.
54) quantity demanded: The quantity buyers are willing and able to buy of a good or service at a particular
price during a particular period, all other things unchanged.
55) substitutes: Two goods for which an increase in price of one increases the demand for the other.
56) change in quantity supplied: Movement along the supply curve caused by a change in price.
57) change in supply: A shift in the supply curve.
58) quantity supplied: The quantity sellers are willing to sell of a good or service at a particular price during a
particular period, all other things unchanged.
59) supply curve: A graphical representation of a supply schedule.
60) supply schedule: A table that shows quantities supplied at different prices during a particular period, all
other things unchanged.
61) supply shifter: A variable that can change the quantity of a good or service supplied at each price.
62) circular flow model: Model that provides a look at how markets work and how they are related to each
other.
63) equilibrium price: The price at which quantity demanded equals quantity supplied.
64) equilibrium quantity: The quantity demanded and supplied at the equilibrium price.
65) resource markets: Markets in which households supply factors of production--labor, capital, and natural
resources--demanded by firms.
66) model of demand and supply: Model that uses demand and supply curves to explain the determination of
price and quantity in a market.
67) product markets: Markets in which firms supply goods and services demanded by households.
68) shortage: The amount by which the quantity demanded exceeds the quantity supplied at the current price.
69) surplus: The amount by which the quantity supplied exceeds the quantity demanded at the current price.
Graphs in Economics
70) graph: A pictorial representation of the relationship between two or more variables.
71) intercept: The point at which a curve intersects an axis.
72) linear curve: A curve with constant slope.
73) linear relationship: Relationship that exists between two variables when the curve between them has a
constant slope.
74) movement along a curve: Change from one point on the curve to another that occurs when the dependent
variable changes in response to a change in the independent variable.
75) negative relationship: Relationship that exists between two variables when the variables move in opposite
directions.
76) origin: The point at which the axes of a graph intersect.
77) positive relationship: Relationship that exists between two variables when both variables move in the
same direction.
78) shift in a curve: Change in the graph of a relationship between two variables that implies new values of
one variable at each value of the other variable.
79) slope: The ratio of the change in the value of the variable on the vertical axis to the change in the value of
the variable on the horizontal axis measured between two points on the curve.
Equations:
Slope = vertical change / horizontal change (rise/run)
Graphs:
Budget Constraint Curve Graph
(For consumption)
Slope = trade off/opportunity cost of economic decision
Unattainable
Total
Revenue
spent on
Good A
Budget constraint (Any point along the curve uses ALL of your money!)
Total Revenue Spent on Good B
Production Possibilities Curve Graph
(For production)
Movements along curve (Increased production of one at the expense of another)
Shifts of entire curve (Increased or decreased production of both goods)
Unattainable
Capital
Goods
Efficient
Slope = trade off/opportunity cost of economic decision
*Bowed out shape due to law of increasing opportunity cost
Inefficient
Consumer Goods
Supply and Demand Graph
Supply
Supply is directly related (positive slope)
Market Equilibrium
Demand is inversely related (negative slope)
Price
Demand
Quantity
Movements along curve = change in “Quantity Demanded” or “Quantity Supplied”
Shifts of entire curve = change in “Demand” or “Supply”
Know how to graph the impacts of:
 Price determinants on supply and demand (Movement along curve)
 Non-price determinants (shifters) on supply and demand (Shifts of curves)
 Complements (If price of one increases, demand for the other decreases)
 Substitutes (If price of one increases, demand for the other increases)
 Normal goods vs. Inferior goods (If income increases…more normal and less inferior)
Price Floor:
Price Ceiling:
Supply
Supply
Price Floor
Market Equilibrium
Price
Market Equilibrium
Price
Price Ceiling
Demand
Quantity
Price floor (ABOVE market equilibrium)
= surplus
Demand
Quantity
Price Ceiling (BELOW market equilibrium)
= shortage
Changes in Equilibrium Price and Equilibrium Quantity:
S
S
S1
e
Price
e
e1
e
Price
D
D
Quantity
Increase in demand =
Increase in equilibrium price
Increase in equilibrium quantity
S1
e
S
Price
D1
Quantity
Increase in supply =
Decrease in equilibrium price
Increase in equilibrium quantity
e1
e
e1
e
Price
e
S
e1
e
D
D1
D
Quantity
Decrease in supply =
Increase in equilibrium price
Decrease in equilibrium quantity
For Simultaneous Shifts:
Quantity
Decrease in demand =
Decrease in equilibrium price
Decrease in equilibrium quantity