Ap Econ Review

AP Econ

Quarter ReviewKennedy

Scarcity• Resources-Factors of Production• Labor/Land or Natural Resources/Physical

Capital/Entrepreneurial ability• Scarcity• All resources are scarce• Trade-offs• Everybody needs to make decisions• Stockbroker vs. McDonalds• Opportunity Costs• Choice between studying vs. Nintendo• Marginal Analysis= MC vs. MB• The next one…Marginal Cost vs Marginal Benefit• The additional cost to consume an additional item.

Production Possibilities• Production Possibilities table-• Shows the opportunity cost of production• Production Possibilities Curve• Graphically shows choice production of two products• Production Possibilities Frontier• Curve or the outer limit of production• Production sustainability• We are what we are..Better at sales than manufacturing• Law of Increasing Costs-• The Bow-The more a product is produced the more it

costs to produce it.• Comparative Advantage and Specialization

Production Possibilities 2• Comparative Advantage-• China can produce LCDs less than in US.• Absolute Advantage-• Saudi Arabia can produce oil more than any other country. It has an

Absolute advantage in oil production.• Perfect Advantage-• When there are exchanges with complete efficiency.• Imperfect Advantage- • There are problems or inconsistencies with exchanges and somebody

makes a profit.• Productive Efficiency-• Maximum output of a product at a level of resources and technology• Allocative Efficiency-• Production of the optimal level of products that provides the greatest net

benefit to society.

Growth

• Increase in quantity of resources-• Bakery hires another pastry baker and can

produce more.• Increase in quality of existing resources.• Pastry bakers get Belgian pastry inservice.• Technological Advancement.• New ovens increase production and taste.

Market vs. Command System

• Market System involves Private Property.• Market System involves Risk, Self-Interest

and Incentives.• Pareto Efficiency- Certain percentage within

market economies accrue capital.• Command System-Marxist or subsistence

economies.• Command System involves central planning

and government ownership of property.

Part Two

• Demand, Supply, Market Equilibrium and Welfare Analysis

Law of Demand• The Law of Demand- Holding all things equal when

a price rises consumers decrease their quantity demanded for that good.

• Income and substitution effects• Real vs. Nominal prices• Substitution effect-prices of ipods drive us to zunes.• Income effect-ipod has doubled its price and you

make the same so you have lost purchasing power.• The Demand Curve-A graphic demand schedule

that follows the law of demand.(negative slope)

Determinants of Demand• Consumer income• The price of a substitute good such as iced

tea vs. pop.• The price of a complimentary good like a

popsicle• Consumer tastes and preferences for

lemonade.• Consumer expectations about future prices

of lemonade.• Number of buyers in the market for

lemonade.

Supply• The Law of Supply-• Holding all things equal, when the price of a good rises

suppliers increase their quantity supplied for a good.• Increasing Marginal Costs-• The more you do something the harder it becomes to

do another thing.(one more rep)• The Supply Curve-• Graphic supply schedule with a positive slope. More of

incentive to sell more when its at a higher price.• When the price of a good changes and all other factors

are held constant the supply curve is held constant. External factors move the supply curve left or right.

Determinants of Supply• The cost of an input to the production of

lemonade.(sugar(intermediate goods))• Technology and productivity used to produce

lemonade• Taxes or subsidies on Lemonade• Producer expectations about future prices• The price of other goods that could be produced• The number of lemonade stands in the industry.

Market Equilibrium• Equilibrium=• Sweet spot where Qd=Qs• Shortage-• Excess Demand• Surplus-• Excess Supply• Changes in Demand-• Run on products- Go Scrooge on weak dollar• Increase in Demand- Wii limit at Fred Meyer because

of release of Brawl.• Decrease in Demand- P3 prices decrease because of

increase in demand for wii and 360.• Changes in Supply- Increases in diesel

prices(transport)

Market Equilibrium p2

• Changes in Supply• Increase in Supply• New Technology increases Grove’s Law• Decrease in Supply• Problems with transportation costs• Simultaneous Changes in Demand and

Supply.• Double Whammy - Cold winter + high fuel

prices= 4.00 gal diesel.

Welfare Analysis

• Total Welfare-• Sum of consumer and producer surplus.• Consumer Surplus• Difference between what you are willing to

pay and what you would actually pay.• Producer Surplus• The amount made by a producer above the

marginal cost.

Macroeconomic Measures of Performance

The Circular Flow Model

Accounting for Output and Income

• Valuing production- the value of goods produced over the number of goods produced.

• Developed Nations- high quality goods.• Developing Nations-Low quality goods

and resources.• Undeveloped Nations-Poor quality

goods and non-renewable resources.

Gross Domestic Product

• Aggregate- Sum of everything domestic and foreign.• What’s out- Intermediate goods• Double counting-• Second Hand Sales• Non-Market transactions• Underground Economy-Stuff off of the grid.• Consumer Spending= C• Investment Spending= I• Government Spending=G• Net Exports=(x-m)

National Income Concepts

• Aggregate Income= Income approach• GDP=C+I+G+(X+M)= Aggregate Spending=

Aggregate Income=Y• Nominal vs. Real GDP=• Nominal = value at current prices.• Real= Value adjusted for certain date.• Deflating Nominal GDP=• Real GDP=100*(Nominal GDP)/(Price Index)

Real and Nominal GDP

• Real GDP=100*(Nominal GDP)/(Price Index)

GDP DEFLATOR

• GDP price defaltor

Business Cycles

• Expansion• Peak• Contraction• Trough

Inflation, Consumer Price Index

• Consumer Price Index= BLS selects base year and a market basket(400g/s in 40 urban) of goods to chart changes in prices.

• This is done monthly.• Price Index Current year=100*(Scurrent year)

(Sbase year)• Consumer inflation=100(CPIn-CPIo)/CPI old• Nominal vs. Real income=• Real income=(nominal Income)/CPI(in100ths)

Unemployment and Full Employment Model

• The Unemployment Rate- • Labor Force= E+ U• Unemployment rate = UR=U/LF• Frictional Unemployment-switching(new)• Seasonal Unemployment(Alaska)• Structural Unemployment(Man to Service)• Cyclical Unemployment(follows business

cycle)

Consumption, Savings and the Multiplier

Consumption

• DI=Gross Income-Net Taxes• Consumption cycle• Marginal Propensity to Consume(MPC)

Saving

• Saving Cycle• Marginal Propensity to Save.

Multiplier

Aggregate Demand and Aggregate Supply