AP Macroeconomics – UNIT 1 - Weebly

AP Macroeconomics ? UNIT 1

Basic Economic Concepts

What is economics?

? A social science that studies how resources are used (often concerned with how

they are used to their full potential).

Macroeconomics

? involves economic problems encountered by the nation as a whole.

Macroeconomic Concepts: ? Do we spend too many of our resources on national defense and not enough on

education?

? If households are required to pay fewer taxes, will national savings be affected? ? Will prices rise or fall because of a tax cut? ? Will increasing the money supply increase production levels in the economy?

Microeconomics

? concerned with economic problems faced by individual units within the overall economy. (particular families, individuals and firms)

Microeconomic Concepts:

? Does a particular family save enough to provide for its future needs? ? How will a tax break affect XYZ Corporation's output? ? If the Smith's win the lottery, how will their spending patterns change?

Resources

? Resources are anything that can be used to produce a good or a

service.

? LAND (natural) ? LABOR (human attributes) ? CAPITAL (productive equipment or machinery)

Scarcity ? Unlimited Wants > Limited Resources

Opportunity Costs

? What must be sacrificed to obtain something. ? The amount of one good that must be sacrificed to obtain an alternative good.

Opp. Cost of Good X = Change in Good Y production Change in Good X production

Production Possibilities Frontier

? PPFs; also known as PPCs ? The combination of two goods that can be produced if the economy uses all of

its resources fully & efficiently.

Economic Systems & Circular Flow

The Three Basic Economic Questions

1. What to Produce?

? Deals with opportunity costs; what will be sacrificed in order to make more of something else

2. How to Produce?

? By what means is production going to take place? Mechanized labor or human labor?

3. For Whom to Produce?

? Allocation. How are the products to be distributed?

Society's Economic Goals

? Economic Growth ? Full Employment ? Economic Efficiency ? Price-level Stability ? Economic Freedom ? Equitable Distribution of Income ? Economic Security ? Balance of Trade

Principal Types of Economic Systems

? Traditional Economies ? Command Economies - Centrally Directed Economies ? Market Economies ? Mixed Economies

Traditional Economies ? The basic questions of what, how and for whom to produce are resolved primarily

by custom or tradition.

? Things are done the way they have always been done. ? Prominent in non-industrial (less developed) countries. ? Examples include some areas of Africa.

Command Economies

? Government owns most or all of the resources. ? Central planning is responsible for decision making. ? Type of government is usually socialism or communism. ? North Korea and Cuba are the last remaining examples of largely centrally

planned economies.

Market Economies

? Economic system in which the basic questions of what, how, and for whom to produce are resolved primarily by buyers and sellers interacting in markets.

? In other words, supply and demand answer the three basic economic questions. ? Everyone acts in their own self interests. ? Individuals and business seek to maximize its satisfaction or profit through its

own decision regarding consumption or production. ? United States is an example.

Mixed Economies

? An economic system in which the basic questions of what, how, and for whom to produce are resolved by a mixture of market forces with governmental direction and/or custom and tradition.

? China tends to be more of a command economy, but has some private ownership. ? United States tends to be more of a market economy, but the government has

some restrictions.

Markets

? Any institution or mechanism that brings together buyers (demanders), and

sellers (suppliers) of a particular good or service.

Product & Factor Markets

? Product Market ? A market in which finished goods and services are exchanged. ? Buyers are individuals and households. ? Households consist of individuals or a family.

? Factor Market ? A market in which resources and semi-finished products are exchanged. ? The buyers are businesses.

Circular Flow Model

? The flow of resources from households to firms and of products from firms to

households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.

Supply & Demand

Markets

? A market is an institution or mechanism that brings together buyers

("demanders") and sellers ("suppliers") of particular goods, services, or resources.

Markets Exist in Many Forms ? Stores ? Internet ? Telephone ? Door to Door Salesmen ? Stock Exchanges ? Labor Markets

Any situation that links potential buyers with potential sellers.

Price

? Price can act as both an:

? ENCOURAGEMENT ? DISCOURAGEMENT

? Price can be an obstacle. ? The higher the obstacle, the less of the product that will be bought. ? "Sales" at stores is evidence of this.

Forces That Determine Price

? Demand

? The buyer's side of the market

? Supply

? The seller's side of the market

DEMAND

? The quantities of a particular good or service consumers are willing and able to

buy at different possible prices at a particular time.

? Generally, the higher the price the less consumers will buy of an item,

AND the lower the price, the more consumers will buy.

Demand Schedule

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