Download Problem Areas in AP Economics Real Interest rate

Basic Economic Concepts
Scarcity, Opportunity Cost & PPC
Capitalism Characteristics
Supply and Demand
SCARCITY
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Economics is the study of limited resources
and unlimited needs and wants
Scarcity leads to making choices
Opportunity Cost is what is sacrificed when
one choice is made over the “next best
alternative”
Every decision has an opportunity cost
Opportunity Cost to every decision!
SCARCITY
Marginal decision making = the result of an
additional change
 Marginal benefits vs. marginal costs is the
basis for making the decision
 Examples:
1 more hour of sleep vs. eating breakfast
Part time job vs. goofing off
College vs. full time job
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Production Possibilities Curve
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Illustrates scarcity, choices & opportunities
costs
Points on the curve show production amounts
possible for 2 goods
Capital
goods
Point A
Consumer
Goods
Capital
Goods
Point A
Y = Point
Not Possible
X = Point
possible,
but inefficient
Consumer
Goods
CAPITALISM – MARKET ECONOMY
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Ownership of all resources is in the hands of
individuals
Decision making is by individuals in the
market
Voluntary exchange of goods and services
Self interest influences all decisions – to the
benefit of society
Competition is the regulating mechanism
CAPITALISM – MARKET ECONOMY
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Markets and Prices coordinate the millions of
decisions
System is facilitated by:
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Specialization
Use of money
Technology
Active, but limited government involvement
CAPITALISM – MARKET ECONOMY
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Basic Questions every society must ask:
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What goods & services to produce?
How to produce?
How much to produce?
For whom to produce?
How will changes be implemented?
Non Sequitur by Wiley Miller
CAPITALISM – MARKET ECONOMY
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Lesson on property rights – Power point
Supply and Demand
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Go to Power Point on S & D
Problem Areas in AP Economics
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Investment – term defined as business
spending for capital equipment, machinery,
factories, inventories, etc.
Personal investment is NOT used in Macro
Investment decisions are MB vs MC
MB = rate of return business will receive
(profit motive = revenue – cost = profit)
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MC = interest rate that must be paid to
borrow funds for Ig (gross private investment)
Problem Areas in AP Economics
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Real Interest rate – cost of borrowing the money
to buy the capital goods (machinery)
If rate of return is greater than the cost of the
interest, the investment will be profitable
Ex: 10% rate of return is greater than 7% interest =
profitable decision
Even if capital is financed by savings, it gives up
interest earned on $$$savings
REAL interest is used – inflation adjusted $$
(nominal rate – inflation rate = real interest rate)
Problem Areas in AP Economics
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Investment Demand Curve shows amount
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of Ig at each real interest rate amount
Ig Demand Curve shifts (left or right) when
other factors change:
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Costs of production
Business taxes
Technology changes
Excessive inventories (no need for new production)
Expectations for future business conditions
Problem Areas in AP Economics
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Key Graphs to know and teach:
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Circular Flow
PPC
Supply and Demand
Foreign Exchange Rates (S & D)
Investment Demand
Business Cycles
AD/AS (Short Run and Long Run)
Problem Areas in AP Economics
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Key Graphs to know and teach:
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Loanable Funds (S & D) + AD/AS (Fiscal Policy)
Money Market + Ig Demand + AD/AS (Monetary
Policy)
Phillips Curve (Long Run and Short Run)
Laffer Curve
Cost Curves (Micro)