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Unit 1: Economic Fundamentals Portfolio Michael Duthie AP Macro 7th period Economics Definition The social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them. Example The allocation of budget and time, goods and services that businesses produce and governments provide, and how goods and services will be proved and where production will be located. Scarcity Definition The condition that arises because wants exceed the ability of resources to satisfy them. Example Someone wants to buy a boat, and they also want to buy a television. The have enough money to buy either the boat or the television but not both. This person is facing scarcity. Opportunity Cost Definition The opportunity cost of something is the best thing you must give up to get it Example You have the choice of going to the mall, playing a video game, or doing your homework. If you choose to play a video game, then you cannot go to the mall or do your homework. The opportunity cost of playing a video game is the best alternative you forgo. If the best alternative is doing your homework, then the opportunity cost of playing a video game is doing your homework. Marginal Analysis Definition An examination of the additional benefits of an activity compared to the additional costs of that activity. Example If you exercise five times a week and are thinking of adding a sixth day, you would use marginal analysis to determine whether the benefits of the sixth day would be worth the cost of the sixth day. Micro vs Macroeconomics Definition Microeconomics is the study of the choices of individuals and businesses make and the way these choices interact and are influenced by governments. Macroeconomics is the study of the total effects on the national economy and the global economy of the choices that individuals, businesses, and governments make. Example Micro-the study of demand and supply, price ceilings, minimum wage, and opportunity cost. Macro- the study of the U.S. unemployment rate, international trade, and inflation. Normative vs. Positive Definition Normative statements are disagreements that can’t be settled with facts. They are based on values. Positive statements are disagreements that can be settled with facts. They are statements about what is. Example Normative- “We should decrease our use of coal.” That can’t be settled with facts. Positive- “Our planet is warming because of the quantity of coal we’re burning.” This can be tested with facts. Goods and Services Definition The objects (goods) and the actions (services) that people value and produce to satisfy human wants. Example Goods- popcorn, cars, clothes Services- a movie showing, a plane flight, etc. Factors of Production Definition The productive resources that are used to produce goods and services—land, labor, capital, and entrepreneurship. Example To make soda, Coca-Cola uses labor and capital. Costs of Production Definition A cost incurred by a business when manufacturing a good or producing a service. Example If costs are too high, these can be decreased or possibly eliminated. Production costs can be used to compare the expenses of different activities within a company. Comparative Advantages Definition The ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else. Example An American worker can make 2 game machines or 1 laptop. A German worker can produce 1 game machine and 2 laptops in the same amount of time. The American worker has a comparative advantage in making game machines and the German worker has a comparative advantage in making laptops. Absolute Advantage Definition When one person (or nation) is more productive than another—needs fewer inputs or takes less time to produce a good or perform a production task. Example Japan make 10 computers and 5 cars in an hour while American makes 8 computers and 3 cars in an hour. Japan has the absolute advantage. Substitute Definition A good that can be consumed in place of another good. Example If the price of cookies rises, Julie will switch to brownies. For Julie, cookies and brownies are substitutes. Complement Definition A good that is consumed with another good. Example Beth likes to eat potato chips with soda(can you blame her?). For beth, potato chips and soda are complements. Normal Good Definition A good for which the demand increases when income increases and demand decreases when income decreases. Example When Calahan was a student, was a student, he had one watch. But now that he has graduated and earns $40,000 a year, he has 5 watches. When his income increased, he bought more watches. Watches are a normal good for him. Inferior Good Definition A good for which demand decreases when income increases and demand increases when income decreases. Example Aiden ate hamburger meat for dinner everyday when he was a student. But when he graduated and started making more money, he started eating steak more than hamburgers. As Aiden’s income increased, his demand for hamburger meat decreased. Hamburger meat is an inferior good. Surplus Definition The amount by which the quantity supplied exceeds the quantity demanded. Example More chocolate is made than is demanded by consumers. Suppliers must cut the price of chocolate to sell the excess amount of chocolate. Shortage Definition The amount by which the quantity demanded exceeds the quantity supplied. Example Not enough chocolate is made for the demand of consumers. Suppliers raise the price in order to make less people buy it so they don’t run out. Price Floor Definition A government regulation that places a lower limit on the price at which a particular good, service, or factor of production may be traded. Example Suppose the government requires that milk producers receive a minimum of $4.00 a gallon for milk. Such a regulation is a price floor. Price Ceiling Definition A government regulation that places an upperlimit on the price at which a particular good, service, or factor of production may be traded Example Suppose the government passes legislation governing the maximum price that natural gas distributors can charge households. Such a regulation is a price ceiling. Marginal Benefit=Marginal Cost Explanation When the marginal benefit from something equals the marginal cost, the choice is rational and it is not possible to make a better choice. Scarce resources are being used in the best possible way. Example The marginal benefit and cost of playing video games rather than studying is the same, therefore you can play video games without it being a detriment to your grades. Law of Increasing Opportunity Cost Explanation As you increase production of one good, the opportunity cost to produced the additional good will increase. Example Each hat you make and sell brings in $30 in profit, and each belt brings in $20. To make more money, you shift more workers from belt production to hats. Some workers can make a hat just as quickly as a belt, so the opportunity cost it low: You give up $20 to make $30. But others are belt specialists. It might take them as much time to make one hat as it does to make four belts. With them, the opportunity cost is high: To make $30, you're giving up $80. Meanwhile, your stepped-up hat production has glutted the hat market, forcing you to cut prices and reduce profit to $25 a hat. The opportunity cost rises further because of the price decrease. Law of Demand Explanation Other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases; and if the price of a good falls, the quantity demanded of that good increases. Example If the price of a computer falls, other things remaining the same, the quantity of computers demanded increases. If the price of dental services rises, other things remaining the same, the quantity of dental services demanded decreases. Nonprice Determinates of Demand Explanation Income, tastes and preferences, the price of related goods, changes in expectations od future relative prices, and market size/population. These factors shift the demand curve. Example A decrease in the market size/population of a good would cause a decrease in demand. The demand curve shifts to the left. Law of Supply Explanation Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases; and if the price of a good falls, the quantity supplied of that good decreases. Example If the price of a movie ticket rises, other things remaining the same, the quantity of movie tickets supplied increases. If the price of banking services falls, other things remaining the same, the quantity of banking services supplied decreases. Nonprice Determinates of Supply Explanation Input costs, technology, taxes and subsidies, expectations of future relative prices, and the number of firms in the industry. These shift the supply curve Example New technology is made to make production faster. This increases supply and shifts the supply curve to the right. Market Equilibrium(formula) Explanation When the quantity demanded equals the quantity supplied—buyers' and sellers' plans are in balance. Example When people plan to buy 1,000 haircuts a week at a price of $60 each and the stylists plan to sell 1,000 haircuts a week at a price of $60 each, then buying and selling plans are balanced and the market for haircuts is in equilibrium. Production Possibilities Frontier Circulatory Flow Market Equilibrium(model) Unit 2: Macroeconomic Indicators Portfolio Michael Duthie AP Macro 7th period GDP Definition The market value of all the final goods and services produced within a country in a given time period. Example In the United States in 2013, the market value of all the final goods and services produced was $16,800 billion. U.S. GDP in 2010 was $16,800 billion. Unemployment Definition Being unemployed means that you are at or above the working age(16 years old), not institutionalized, and actively looking for a job. Example A new college graduate searching for a new job is a good example of unemployment. Frictional Unemployment Definition The unemployment that arises from normal labor turnover—from people entering and leaving the labor force and from the ongoing creation and destruction of jobs. Example A new college graduate looking for work, someone shifting jobs based on the seasons, someone quitting a job and looking for a new one. Structural Unemployment Definition The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs. Example An assembly line worker being replaced by a machine. Cyclical Unemployment Definition The fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion. Example A factory worker loses his job during a recession. Once the economy starts moving towards an expansion, he will likely be rehired. His period of unemployment is cyclical unemployment. Full Employment Definition When there is no cyclical unemployment or, equivalently, when all the unemployment is frictional, structural or seasonal. Example A good example would be when we are in an expansionary and there is a peak when there’s no cyclical unemployment. Inflation v. Deflation Definition Inflation is a situation in which the price level is rising and the inflation rate is positive. Deflation is a situation in which the price level is falling and the inflation rate is negative. Example A combination of recession and inflation occurred in the United States and the global economy in the mid-1970s and early 1980s. GDP= C + I + G + NX Explanation C stands for Consumption expenditure, I stands for Investment, G stands for Government expenditure on goods and services, and NX stands for Net eXports(the difference of imports and exports) of goods and services. Added together, they make total expenditure, or GDP Example All consumer expenditure, investment expenditure, government expenditure, and net exports added together. Real GDP Explanation Real GDP is nominal GDP divided by the price index. Real GDP is just nominal GDP adjusted for inflation. Example 11.24(nominal)/107(price index)=10.50(real) Economic Growth Rate Explanation (Real GDP in current year-Real GDP in previous year)/(Real GDP in previous year) X 100 Example (8.4 trill-8.0 trill)/(8.0 trill)X100=5 percent growth rate Unemployment Rate Explanation The percentage of the people in the labor force who are unemployed (Number of people unemployed/labor force)X100 Example (11.8 million/155.7 million)x100= 7.6 percent Output Gap Explanation real GDP minus potential GDP expressed as a percentage of potential GDP. Example Consumer Price Index Explanation (CPI is the cost of CPI basket at current period prices/cost of CPI basket at base prices) x100 Example (70/50)X100=140 Real Inflation Explanation The percentage change in the price level from one year to the next (CPI in current year-CPI in previous year)/(CPI in previous year)x100 Example (140-120)/(120)X100=16.7 percent Business Cycle
