Unit I: Fundamental Principles



AP Macro Unit 1: Basic Economic Concepts

Problem Set #1

1. Complete each of the following tasks with short paragraphs:

A. Explain the relationship between scarcity, choices, and trade-offs (____/5)

B. Differentiate between the following terms: price, costs, and opportunity cost (____/4)

C. Fully explain the difference between the following (USE EXAMPLES):

i. Consumer Goods and Capital Goods (____/3)

ii. Normative and Positive Economics (____/3)

iii. Allocative and Productive Efficiency (_____/3)

iv. Free-Market and Centrally Planned Economies (_____/3)

v. Resource Markets and Product Markets (____/3)

2. Draw Production Possibilities Graph for the Ford Motor Co. using the following information: (____/5

| |A |B |C |D |E |F |G |

| Cars |0 |10 |18 |25 |30 |33 |35 |

|Trucks |45 |42 |39 |33 |25 |15 |0 |

A. What are the consequences of Ford producing at combination A? Combination G? In reality, are either combinations desirable? Why? Why not? (____/5)

B. Plot the combination with 20 cars and 40 trucks and label it “X.” Plot the combination with 25 cars and 20 trucks and label it “Y.” Explain what is happening at these points? (____/5)

C. Explain, with examples, how your graph shows 5 concepts: opportunity costs, efficiency, unemployment, the law of increasing opportunity costs, and economic growth. (____/11)

3. Use the PPF-A and PPF-B on the back of this paper to answer the following:

A. On PPF-A, what is the opportunity cost from point a to b in terms of guns? What about moving from b to c? What generalizations can you make? (____/5)

B. On PPF-B, what is the opportunity cost from point a to b in terms of guns? What is the PER UNIT OPPORTUNITY COST from moving from c to e? (____/5)

C. Which PPF shows increasing opportunity costs? Use numerical examples to explain why? (____/5)

D. Fully explain three specific situations that would shift PPF-B outward. Draw and label these changes on three separate graphs. (____/5)

4. EXPLAIN an experience or example that shows the “real world” application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept.

A. The Law of Demand and the Law of Supply ( ____/5)

B. The Law of Diminishing Marginal Utility ( ____/5)

C. Normal Goods and Inferior Goods ( ____/5)

D. Consumer’s Surplus and Producer’s Surplus ( ____/5)

5. Supply and Demand Worksheets

a. Complete the study guide entitled “Demand and Supply Study Guide” ( ____/5) You do not have to do the highlighted sections

b. Complete the worksheet entitled “Demand and Supply Practice” ( ____/5)

Demand and Supply Study Guide

|Demand |Supply |

|Definition of Demand: |Definition of Supply: |

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|The Law of Demand: |The Law of Supply: |

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|Why is demand downward sloping? |Why is supply upward sloping? |

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|Demand Curve |Supply Curve |

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|What changes quantity demanded? |What changes quantity supplied? |

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|What changes in demand? (5 Shifters of Demand) |What changes supply? (6 Shifters of Supply) |

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|Explain the difference between a “change in demand” and change in “quantity demand” |

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|Supply and Demand Together |

|[pic] | |

| |Equilibrium- Qd____Qs |

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| |Shortage- Qd____Qs |

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| |Shortage- Qd____Qs |

| |CS and PS |

|Definition of Consumer Surplus (CS) |[pic] |

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|Definition of Producer Surplus (PS) | |

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|Definition of Dead Weight Loss (DWL) | |

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|Economic Analysis-What happens to P and Q? |Double Shifts in Demand and Supply |

|Cereal Market |Rule: |

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|Change: Price of milk increases significantly | |

|Elasticity of Demand |Inelastic Demand |Elastic Demand |

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|Elasticity of Supply | | |

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|Elasticity of Demand Coefficients |Total Revenue Test |

|Perfectly Inelastic |Inelastic Demand |

|Relatively Inelastic |When price increases, TR ____ |

|Unit Elastic |When price decreases, TR ____ |

|Relatively Elastic |Elastic Demand |

|Perfectly Elastic |When price increases, TR ____ |

| |When price decreases, TR ____ |

Demand and Supply Practice

Use Economic Analysis to determine what happens to the price and quantity of computer games in each scenario.

|# |Change |Graph |Economic Analysis |

| 1 |It becomes known that an electronics |[pic] |1. Draw and Label Equilibrium: |

| |store is going to have a sale on their | |2. The Change: |

| |computer games 3 months from now. | |Supply or Demand |

| | | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

| 2 |The workers who produce the computer |[pic] |1. Draw and Label Equilibrium: |

| |games go on strike for over two months | |2. The Change: |

| | | |Supply or Demand |

| | | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|3 |When the average price of movie tickets|[pic] |1. Draw and Label Equilibrium: |

| |rises, it has an effect on the purchase| |2. The Change: |

| |of computer games. (Analyze computer | |Supply or Demand |

| |games.) | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|4. |The workers who produce the computer |[pic] |1. Draw and Label Equilibrium: |

| |games negotiate a $20 per hour wage | |2. The Change: |

| |increase. | |Supply or Demand |

| | | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|6. |A reputable private research institute |[pic] |1. Draw and Label Equilibrium: |

| |announces that children who play | |2. The Change: |

| |computer games also improve their | |Supply or Demand |

| |grades in school. | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|7. |Because of the use of mass production |[pic] |1. Draw and Label Equilibrium: |

| |techniques, workers in the computer | |2. The Change: |

| |game industry become more productive | |Supply or Demand |

| | | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|8. | |[pic] |1. Draw and Label Equilibrium: |

| |The price of home computers decreases | |2. The Change: |

| |significantly. (Analyze computer | |Supply or Demand |

| |games.) | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|9. |The Federal government imposes a $5 per|[pic] |1. Draw and Label Equilibrium: |

| |game tax on the manufacturers of the | |2. The Change: |

| |games. | |Supply or Demand |

| | | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|10 |The manufacturer of the computer games |[pic] |1. Draw and Label Equilibrium: |

| |raises the price on the games. | |2. The Change: |

| | | |Supply or Demand |

| | | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|11 |In order to promote American |[pic] |1. Draw and Label Equilibrium: |

| |production, Congress provides a subsidy| |2. The Change: |

| |to game producers. (Analyze only | |Supply or Demand |

| |American firms) | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|12 |A large firm enters the game business |[pic] |1. Draw and Label Equilibrium: |

| |with a new line of games. (Analyze the| |2. The Change: |

| |whole game industry) | |Supply or Demand |

| | | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|13 |In order make computer games available |[pic] |1. Draw and Label Equilibrium: |

| |to low-income families, Congress sets a| |2. The Change: |

| |price ceiling for the games. | |Supply or Demand |

| | | |Increase or Decrease |

| | | |Shifter |

| | | |3. After: Price _____ Quantity_____ |

|14 |The popularity of the computer games |[pic] |1. Draw and Label Equilibrium: |

| |increases in the world markets. At the| |2. The Change: |

| |same time new technology lower | |Demand- Up or Down Shifter- |

| |production costs. (Double Shift) | |Supply- Up or Down Shifter- |

| | | |3. After: Price _____ Quantity_____ |

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1. _____/24

2. _____/26

3. _____/20

4. _____/20

5. _____/10

Total: /100

1. Draw Equilibrium

2. Analyze Change

o Supply or Demand

o Shifter-

o Increase or Decrease

3. New Equilibrium

o What Happens to:

Price_____

Quantity______

If demand decreases AND supply increases, what happens to

P _____ Q_____

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