AP Macroeconomics

• Economics


  The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants. It is the systematic study of choice.
• Scarcity


  All factors of production are scarce; therefore, the production of goods and service are also scarce. The economic problem states however that our needs our unlimited and as mentioned earlier, the resources available are scarce.
• Macroeconomics


  Considers the big picture- the nation's economy as a whole. E.g., would changes to the money supply have an effect on country A's imports and export?
• Microeconomics


  Filters our scope to individuals in an economy while keeping the overall economy in mind.
• Factors of Production


  • Labor - Human effort and talent, physical and mental. This can be augmented by education and training (human capital).
  • Land or natural resources - Any resource created by nature. This may be arable land, mineral deposits, oil and gas reserves, or water.
  • Physical capital - Human-made equipment like machinery as well as buildings, roads, vehicles, and computers.
  • Entrepreneurial ability - The effort and know-how to put the other resources together in a productive venture.
• Organizations of Society


  • Tradition - Tied to the evolution of economics, and it is related to subsistence and tribal life.
  • Command - Consists of the central planning of the economy which differed in different regions of the world depending on the political regime.
  • Market - Essentially, it is the place in the economy where buyers and sellers perform transactions. The modern market was built from the foundation of the Laissez Faire ("free market") philosophy introduced in the 19th century, which emphasizes the importance of property rights and private property.
  • Mixed - Most countries today will display a mix of command and market structure. This is important because the government does play a role in organizing the economy, though to different degrees across the globe.
• Opportunity Cost


  The value of what was given up. Ex. → If you use a scarce resource to pursue activity X, the opportunity cost of activity X is activity Y, the next best use of that resource.
• Trade-Offs


  Since we have scarce resources, individuals, firms, and governments are faced with trade-offs.
• Production Possibilities Curve (PPC)


  To examine production and opportunity cost, economists find it useful to create a simplified model of an individual, or a nation, that can choose to allocate its scarce resources between the production of two goods or services.
• Constant Opportunity Cost


  The production possibilities curve can illustrate two types of opportunity costs: Increasing opportunity costs and Decreasing opportunity costs.
• Productive Efficiency


  When the economy is producing the maximum output for a given level of technology and resources. All points on the production frontier are productively efficient.
• Allocative Efficiency


  The economy is producing the optimal mix of goods and services. Optimal - The combination of goods and services that provides the most net benefit to society.
• Economic Growth


  The ability to produce a larger total output over time. Can occur if one or all of these happen: An increase in the number of resources, An increase in the quality of existing resources, Technological advancements in production.
• Economic Contraction


  It is when a country's economy shrinks due to factors such as reduced spending by consumers, businesses, or the government. Economic contractions are a normal part of the business cycle and can lead to long-term growth if managed correctly.
• Absolute Advantage


  The absolute advantage is producing goods/services more efficiently, using fewer inputs.
• Comparative Advantage


  In macroeconomics, this principle is the basis for showing how nations can gain from free trade. Countries export what they have a comparative advantage in and import what they don't have a comparative advantage in.
• Law of Demand


  Holding all else equal, when the price of good rises, consumers decrease the quantity demanded of that good.
• Determinants of Demand


  The INSECT Acronym: Income, Number of Buyers/Consumers, Substitutes, Expectations of Future Price, Complements, Tastes and Preferences.
• Law of Supply


  Rising prices give greater opportunities for suppliers to earn a profit. When the price level increases, the quantity of a good, supplied increases. When the price level decreases, the quantity of a good, supplied decreases.
• Determinants of Supply


  The ROTTEN Acronym: Resources, Other good prices, Taxes, Technology, Expectations of the supplier, Number of competitors.
• Market Equilibrium


  The market equilibrium price is that price that the market sets, where buyers buy the exact amount which the sellers are willing to produce. It's also known as market-clearing price.
• Market Disequilibrium


  This occurs when there is a shortage or surplus in the market.
• Circular Flow Model


  A model that shows how households and firms circulate resources, goods, and incomes through the economy. This basic model is expanded to include the government and the foreign sector.
• Gross Domestic Product (GDP)


  The market value of the final goods and services produced within a nation in a given period. GDP = C + I + G + (X - M).
• Firms


  Sell goods and services
• Goods and services exchange

  Between firms and households for money
• Goods and services exchange plays a crucial role in the economy
• Product market


  Interaction between demand and supply determines prices of goods and services and the number of goods and services that are exchanged
• Factor market


  Market where factors of production such as labor, capital, and land are bought and sold
• Factors of production


  Used by firms to produce goods and services, which are then sold to households in the goods market
• Gross Domestic Product (GDP)


  The market value of the final goods and services produced within a nation in a given period
• Aggregate spending (GDP)


  The sum of all spending from four sectors of the economy: C + I + G + (X - M)
• Consumer spending (C)


  Spending done by customers
• Investment spending (I)


  Current spending to increase output or productivity later, including new capital machinery, new construction, and change in unsold inventories
• Government spending (G)


  Purchases made by the government for final goods and services and investments in infrastructure
• Net exports (X - M)


  Exports (X) minus Imports (M)
• GDP = C + I + G + (X - M) = Aggregate Spending = Aggregate Income (Y) = Sum of all value added
• Aggregate income (AI)


  The sum of all income—Wages + Rent + Interest + Profit—earned by suppliers of resources in the economy
• Value-added approach


  A third approach to calculating GDP that considers all stages of production of a final good and the value that was added to the final good along the way
• What is not included in GDP


  • Illegal Activities
  • Unpaid work
  • Transfer payments
  • Intermediate goods
  • Depreciation