Download AP MACROECONOMICS - Ch. 1-4: Basic Economic Concepts

AP MACROECONOMICS - Ch. 1-4: Basic Economic Concepts
Essential Topics (AP-specific topics, i.e. what the majority of my test will be covering):
1. Define the science of economics.
2. Distinguish between opportunity cost, scarcity, and tradeoffs.
3. Distinguish between macroeconomics and microeconomics.
4. List the three basic economic questions.
5. Use a production possibilities curve to demonstrate opportunity cost and growth.
6. List the determinants of demand and supply.
7. Recognize which factors will cause demand curves or supply curves to shift.
8. Distinguish between changes in quantity demanded and a change in demand.
9. Distinguish between changes in quantity supplied and a change in supply.
10. Determine effects on price and quantity when equilibrium changes.
Important AP Graphs:
1. Production Possibilities Curve: shows what can be produced in a closed society given a fixed
amount of resources (inputs or L,L,C,E) and technology.
A. Trade-offs and Opportunity costs: If this society is producing at point A they are capable of
making 10,000 robots and 0 pizzas. If they decide to increase pizza production to 100,000, they
will have to decrease production of robots by 1,000. In other words they will move from point A to
point B. This illustrates the concepts of trade-offs and opportunity costs. To produce more of one
thing you must give up more of another thing. That is the trade-off. The value of the thing you
gave up, the 1000 robots, is the opportunity cost. In other words, every decision involving limited
resources involves a cost. It is up to society to determine the mix of goods/services it will provide
by comparing the costs/benefits of each possible combination (or allocative efficiency).
B. Attainable vs Unattainable combinations (points): Any point on or inside the PPC (points
A,B,C,D,E and any within the yellow) is attainable. Any point outside the curve (point W) is
unattainable given the conditions.
C. Efficient vs Inefficient combinations: The PPC curve itself represents all the production
combinations that can be achieved with a fixed set of conditions. Because the curve represents a
maximum, every point on the curve represents productive efficiency. If a combination lies inside
the curve, it would be a result of productive inefficiencies such as not allowing certain people to
work or preventing the use of machines in production.
*Note the shape of the curve. It is concave to the origin or “bowed out.” This represents the concept of
increasing opportunity costs. That is, as you make more pizzas you have to give up more and more
robots. When you move from point A to point B you gain 1 pizza and lose 1 robot. When you move from
point D to point E you gain 1 pizza but lose 4 robots. This is due to the fact that the resources used to
make robots are not perfectly suitable to make pizzas. As you shift production from robots to pizzas
some of the workers that make robots must now make pizzas. As you make more and more pizzas the
workers may not be very good at making pizzas and it may take more and more of them to do the job.
The point is that is becomes more and more expensive in terms of resources to make pizzas because the
workers were initially trained to make robots.
D. Growth: Present Goods (consumer, pizzas, etc.) vs. Future Goods (capital, robots, etc.)
societies make decisions on how to use their resources by choosing a combination of present/future
goods that fits their needs/wants based on the marginal benefits/costs of each decision. Societies desire
economic growth as growth lessens the burden of scarcity, the basic problem in economics. Basically, if
society wants to consume more goods now (like pizzas), as in the example of Presentville on the left, they
will produce at point P, closer to the “goods for the present” or X-axis. This decision will, in turn, cost
them the ability to use their limited resources for the production of future goods. In order to make more
present goods they have to give up future goods. Future goods allow for growth so this society is
choosing to forgo future growth potential in favor of consumption now. In other words, there is no free
lunch. The opposite is true for societies who choose point F, as in Futureville on the right. They will give
up production of pizzas (or goods for the present) in favor of capital (or machines or goods for the future).
This allows for a greater potential for economic growth as shown by the greater shift in the PPC outward.
Less growth potential
More growth potential
2. Markets: Supply and Demand
A. Drawing a basic market graph – A.C.E.S. (Draw/label Axes, Curves, Equilibrium points, and Shifts with
arrows)
B. Shifting curves: Demand and Supply curves shift when factors outside of prices change. These factors
are called determinants and are listed below.
DEMAND
(Buyers)
I - income
N – number of buyers
E - expectations
R – prices of related goods
T – tastes/preferences
SUPPLY
(Sellers)
T – taxes/subsudies
I – input prices
N – number of sellers
E - expectations
R – prices of other related goods
T – technological change
3. The Circular Flow of Economic Activity – represents the interrelated nature of economic activity in a
market. Households, Businesses (or firms), and the Government are the main players in an economy.
All three are both buyers and sellers. Households sell resources and use the income to purchase goods.
Businesses buy resources from households and sell products to both households and the government.
The government buys and sells both resources and products while taking in income from households and
businesses through taxes and returning it through subsidies (taxes-subsidies (anti-taxes)=net taxes).
Complete Topic Outline (Full list of possible topics from the textbook)
Ch. 1
1.
Define economics.
2.
Describe the “economic way of thinking,” including definitions of purposeful behavior, utility,
marginal costs, marginal benefits and how these concepts may be used in decision-making.
3.
Explain how economists use the scientific method to formulate economic principles.
4.
Explain the importance of ceteris paribus in formulating economic principles.
5.
Differentiate between micro- and macroeconomics.
6.
Differentiate between positive and normative economics.
7.
Explain the economizing problem from the individual’s perspective
8.
Construct and explain a budget line (individual’s PPC).
9.
Describe the economizing problem facing society.
10.
Identify types of economic resources and types of income associated with various factors.
11.
Construct a production possibilities curve when given appropriate data.
12.
Illustrate economic growth, unemployment and underemployment of resources, and increasing
costs using a production possibilities curve.
13.
Summarize the general relationship between investment and economic growth.
Ch. 2/4 (not a huge focus on the AP exam directly but important for knowledge base)
1.
Highlight the main features of a market economy and a command economy.
2.
List and explain the important characteristics of the American market system.
3.
State the Three (four in the book) Fundamental Questions faced by any economic system.
4.
Describe how the market system answers each of these 3(four) fundamental questions.
5.
Explain how the consumer influences the “What goods and services will be produced?” question.
6.
Explain how a market system achieves economic efficiency.
7.
Explain how markets answer the “Who will get the output?” question.
8.
Describe how prices drive the movement of resources in a market system.
9.
Describe how the market system promotes technological improvements and capital accumulation.
10.
Explain the role of self-interest and “invisible hand” in promoting economic efficiency.
11.
Explain why the command system of the Soviet Union failed.
12.
Identify the decision makers and the markets in a market system using the circular flow diagram.
13.
Identify the two roles each that households and businesses play using the circular flow diagram.
14.
Differentiate between product and resource markets.
Ch. 3
1. Explain who and what demand and supply represent.
2. Differentiate between demand and quantity demanded; and supply and quantity supplied.
3. Graph demand and supply curves when given demand and supply schedules.
4. State the Law of Demand and the Law of Supply, and explain why price and quantity demanded
are inversely related, and why price and quantity supplied are directly related.
5.
List the major determinants of demand, and explain how a change in each will affect the demand
curve.
6. List the major determinants of supply, and explain how a change in each will affect the supply
curve.
7. Explain the concept of equilibrium price and quantity.
8. Illustrate graphically equilibrium price and quantity.
9. Explain the rationing function of prices.
10. Define productive and allocative efficiency, and explain how competitive markets achieve them.
11.
Explain and graph the effects of changes in demand and supply on equilibrium price and quantity,
including simultaneous changes in demand and supply.
12.
Define price ceilings and price floors, and provide examples.