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AP Macro ReviewSection 1: Basic Economic ConceptsKEY TERMSEconomicsEconomy Market Economy Command Economy IncentivesResources Land, Labour, Capital, Entrepreneurship CapitalScarce/Scarcity Opportunity Cost Law of Increasing Opportunity CostMicroeconomicsMacroeconomics Economic Aggregates Positive EconomicsNormative EconomicsBusiness CycleDepression, Recession, Expansion, Peak, TroughEmploymentUnemploymentLabour ForceEconomic GrowthProduction Possibilities CurveEfficientProductive Efficiency Allocative EfficiencyTechnology TradeGains from tradeComparative AdvantageAbsolute AdvantageTerms of Trade KEY FORMULASOpportunity Cost (Output) > Other Goes Over (OGO) Opportunity Cost (Input, i.e. # of labour hours required) > Opposite of OGOKEY EXAMPLE – TERMS OF TRADE StateApplesTimberOC of 1 AppleOC of 1 TimberOregon10404 timber (40/10)0.25 apples (10/40)Washington40100.25 timber4 applesAbsolute Advantage (produce the most)Oregon > TimberWashington > ApplesComparative Advantage (lower opportunity cost)Oregon > TimberWashington > ApplesTerms of TradeOregon specializes in Timber > 1 timber for (between 0.25 and 4 apples)Washington specializes in Apples > 1 apple for (between 0.25 and 4 timber) Key Graphs:KEY GRAPHS Business Cycle Production Possibilities Curve AP EXAM TIPSM1: The Study of Economics Terms in economics often have different meaning than they do in everyday life.Scarcity is about more than just a limited amount of a good. In economics, scarcity involves trying to satisfy unlimited consumer wants with limited resources. There difference is the relationship to unlimited consumer wants."Capital" is generally used to refer to the category of factors of production made up of manufactured goods used to make other good and services. Don't confuse this type of capital with "financial capital" such as money, stocks and bonds.Positive economic statements are about what is. ?FR #2Normative economic statements are about what should be. ?FR#2M2: Introduction to MacroeconomicsBe prepared to identify different phases of the business cycle so you can relate each phase to changes in employment, output and growth.?Economic growth is an increase in the economy's potential output. Changes in real GDP (output) do not necessarily indicate economic growth. Temporary fluctuations in economic conditions often alter real GDP when there has been no change in the economy's potential output. ?FR #1M3: The Production Possibilities CurveBe prepared to draw a correctly labelled production possibilities curve and use it to identify opportunity cost, efficient points, inefficient points, and unattainable points. Unemployment results in production at a point below the production possibilities curve. Most production possibilities curves are concave to the origin (bowed out) due to specialization of resources. FR #2Opportunity cost = opportunity lost (the financial or non-financial cost of a choice not taken, the NEXT best option).?M4: Comparative Advantage and Trade?The producer with the absolute advantage can produce the largest quantity of the good. However, it is the producer with the comparative advantage, and not necessarily the one with the absolute advantage, who should specialize in the production of that good to achieve mutual gains from trade. ?FR #2 ................
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