AP Macroeconomics

1. AP Macroeconomics Unit 1

2. I. Basic Economic Concepts • Scarcity: wants > resources • Economics – study of how people satisfy wants with scarce resources • Economics is the study of choices. • Microeconomics deals with specific economic units such as individuals, households, & businesses. • Macroeconomics: Deals either with the economy as a whole or basic subdivisions such as government, households, or business sectors.

3. I. Basic Economic Concepts • relation v. causation: Just because something happens when something else happens does not mean one caused the other. It may just be that they are correlated. • positive statement-the way things are • normative statement-the way things ought to be • CETERIS PARIBUS: If all other things stay the same. • The economy resembles a complex machine or a living organism. To better determine how it works (or what’s wrong with it), simple models are used that assume ceteris paribus. In this way, we seek to determine how one part of the machine affects another.

4. I. Basic Economic Concepts • Utility=satisfaction • Marginal utility is the satisfaction of getting one more. • The law of diminishing marginal utility: utility declines with each additional unit. • By dividing MU by P, one can see how much bang they’re getting for their buck. • By comparing MU/P for a variety of goods, one makes rational purchasing decisions.

5. I. Basic Economic Concepts • The Factors of Production • Categories of resources needed to produce goods/services • They are: • Land – all natural resources (landforms, oil, animal life, minerals, climate, etc.) • Capital – stuff we make to make other stuff (tools, machinery, human capital, etc.) • Labor – workers applying efforts, abilities, & skills • Entrepreneurship – when risk-takers combine the FOP into new products

6. II. Opportunity Cost • The O.C. of an item is what you give up to get that item. • The O.C. of an item is the best alternative foregone. • Consumer Goods vs. Capital Goods • Consumer Goods vs. Military Spending • “There is no such thing as a free lunch.”

7. II. Opportunity Cost • The Production Possibilities Curve is a chart that illustrates the limits of what can be produced by an economy. • Assumes: • Fixed resources & technology • 2 products • Efficiency and/or Full Employment

8. II. Opportunity Cost • 2 types of efficiency: • productive-full use of all resources • allocative-who gets what • The PPC represents productive efficiency. • Allocative efficiency depends on what you consider to be “fair”.

9. II. Opportunity Cost • Operating inside the PPC is inefficient. • Operating outside the PPC for a long period of time is impossible.

10. II. Opportunity Cost • Why is the PPC curved/concave? • The Law of Increasing Opportunity Costs: • Not all resources are easily converted to producing the other good/ service.

11. II. Opportunity Cost • What happens if: • -additional resources become available? • -technological advances increase productivity of labor and/or capital? • Which is better, A or B? • How can we reach D?

12. XI. Economic Systems • Traditional: • 3 Qs answered by custom. • Resources allocated by inheritance. • Subsistence farmers, cattle herders, hunter/gathers, etc. • African Mbuti, Aborigines, Inuits.

13. XI. Economic Systems • Disadvantages: • New ideas discouraged. • Low standard of living. • Persecution/land encroachment.

14. XI. Economic Systems • Command: • Central authority answers 3 Qs. • There are no “pure” command economies. • North Korea, Cuba, & Vietnam are usually considered command economies.

15. XI. Economic Systems • Market: • Producers & consumers answer 3 Qs. • Producers provide the goods/services consumers want to buy. • U.S., Canada, Japan, South Korea - are close

16. Freedom Security Equity Growth Efficiency Price Stability Employ-ment*** Command N Y ? N N Y Y Market Y N ? Y Y N N XI. Economic Systems ***Employment is sometimes included under the goal of Security

17. XII. Competition & Free Enterprise • Capitalism: citizens own FOP • Free enterprise: limited gov’t interference; competition encouraged • Voluntary exchange: buyers & sellers benefit (GDP)

18. XII. Competition & Free Enterprise • Private property rightsmotivate people to work, save & invest • Profit motive encourages entrepreneurship & drives growth • Competition helps lower prices

19. II. Opportunity Cost • What is Crusoe’s O.C. of four fish? • What is Crusoe’s O.C. of each fish? • What is Crusoe’s O.C. of eight coconuts? • What is Crusoe’s O.C. of one coconut? • Per-unit opportunity cost can be determined bymaking the ends of the PPC into a ratio &setting 1 side equal to one.

20. II. Opportunity Cost • What is the opportunity cost of 90 guns? • What is the opportunity cost of 50 butter?

21. XI. Economic Systems • Traditional: • 3 Qs answered by custom, ritual, and habit. • Resources allocated by inheritance. • Subsistence farmers, cattle herders, hunter/gathers, etc. • African Mbuti, Aborigines, Inuits.

22. XI. Economic Systems • Advantages: • Life is stable, predictable, and continuous. • Low income inequality. • Disadvantages: • New ideas discouraged. • Low standard of living. • Persecution/land encroachment.

23. XI. Economic Systems • Command: • Central authority answers 3 Qs. • There are no “pure” command economies. • North Korea, Cuba, & Vietnam are usually considered command economies.

24. Command • Advantages: • If circumstances require a quick change in resource allocation it can meet this need rapidly. • Disadvantages: • Little incentive to work hard. • Large bureaucracies • slow day 2 day decisions • high cost

25. XI. Economic Systems • Market: • Producers & consumers answer 3 Qs. • Producers provide the goods/services consumers want to buy. • U.S., Canada, Japan, South Korea - are close

26. Market • Advantages: • markets can adjust over time • when producers answer 3 q’s, it is more efficient • individual decisions direct the use of scarce resources • larger variety of goods

27. Market • Disadvantages: • the way FOR WHOM is answered • without government regulations, without enforced rules of the game, adequate competition may not occur or may fade away • only rewards production, so those who don’t produce suffer (young, old, sick)

28. Freedom Security Equity Growth Efficiency Price Stability Employ-ment*** Command N Y ? N N Y Y Market Y N ? Y Y N N XI. Economic Systems ***Employment is sometimes included under the goal of Security

29. I. Capitalism • FOP privately owned • individuals must have control of property (Corp. clip) • intellectual, artistic, etc. property ownership. • Freedom of enterprise and choice • owners must be able to use property any way they see fit • workers must have access to any occupation they see fit • consumers must have access to all goods and services

30. I. Capitalism • Prices set by market (goes hand-in-hand with market system) • market: mechanism or arrangement bringing buyers and sellers together • through price, the market decides what is to be produced, for whom, and how. • Role of self-interest: all parties must be free to try to get the most out of the system. • Buyer tries to get a low P. seller tries to get a high P

31. I. Capitalism • Competition: Large # buyers/sellers, each free to enter/exit the market • Large # of buyers/sellers ensures that no individual buyer or seller can influence the price. • Under such competition, what would happen if one seller decided to increase the price of their goods? • Limited government interaction. The market must be self-regulating.

32. I. Capitalism • Advantages: efficiency, freedom, individual satisfaction • consumer sovereignty: to make profits, producers must make things consumers will buy, so the consumer indirectly answers the WHAT question • Disadvantages: underproduction of public goods, only produces for those with $$, unstable

33. II. Socialism • Gov’t owns/runs some basic resources, distributes some output for social goals • Elected officials make many economic decisions. • Pros: everyone gets certain benefits • Cons: lower efficiency, higher taxes, special interests get “entrenched” • Sweden, Norway, Venezuela, China

34. III. Communism • Needs of individual less important than needs of society. • Gov’t owns FOP • Gov’t officials answer 3 Q’s • No prices • Pros: stability, spirit of sharing, no unemployment • Cons: low freedom, low incentive to work hard, lack flexibility for day2day changes, inefficiency of centralized planning • Vietnam, Cuba, North Korea

35. Max they can produce of each Coco-nuts Fish Young Guy 10 10 Old Guy 4 8 III. Absolute Advantage • When 1 person/ business/country, etc. can produce a good or service more efficiently than another person/business/country, etc. • Young guy has absolute advantage in coconuts & fish.

36. Max they can produce of each good Coco-nuts Fish Young Guy (A) 10 10 Old Guy (B) 4 8 III. Absolute Advantage

37. III. Absolute Advantage • Some problems ask you to consider inputs rather than outputs to determine O.C. and/or absolute advantage. • Output problems state that you get a certain amount of product out of a given input. • Input problems state that it takes a certain amount of input to get a given product.

38. III. Absolute Advantage • Input = Hours to build 1: Car Tank • Company X: 2 2 • Company Z: 3 1 • Who has the absolute advantage in Cars? • Tanks?

39. IV. Comparative Advantage • Specialization: doing one thing. • Benefits of? • Costs of?

40. IV. Comparative Advantage • Lower opportunity cost = comparative advantage. • To get B’s O.C. Coconuts: • 4C8F • 4 4 • B’s O.C. Coconuts = • 2 Fish

41. IV. Comparative Advantage • B’s O.C. Fish: • 4C8F • 8 8 • B’s O.C. Fish = • 4/8 or 1/2 Coconuts • A’s O.C. Fish = • 1 Coconut • Who has lower O.C. of Fish?

42. IV. Comparative Advantage • EVEN IF a country has an absolute advantage in all goods, trade can still be beneficial. • All countries benefit by making what they have a comparative advantage in, & trading.

43. Amounts they consume before trade Coco-nuts Fish Young Guy 6 4 Old Guy 2 4 IV. Comparative Advantage TOTALS

44. Amounts they produce with trade Coco-nuts Fish Young Guy (A) 10 0 Old Guy (B) 0 8 IV. Comparative Advantage

45. Amounts they consume before trade Amounts they producewith trade Coco-nuts Coco-nuts Fish Fish Young Guy 6 4 Young Guy 10 0 Old Guy 2 4 Old Guy 0 8 IV. Comparative Advantage Totals: 8 8 10 8

46. Amounts they consume before trade Amounts they consume after trade Coco-nuts Coco-nuts Fish Fish Young Guy (A) Young Guy (A) 7 6 4 4 Old Guy (B) Old Guy (B) 2 3 4 4 IV. Comparative Advantage Totals: 8 8 10 8

47. Amounts they consume after trade Coco-nuts Fish Young Guy (A) 7 4 Old Guy (B) 3 4 IV. Comparative Advantage

48. Product per hour Corn Wheat Mike 8 6 John 2 4 Corn Wheat Mike’s O.C.: 6/8 8/6 John’s O.C.: 4/2 2/4 Who should make what? IV. Comparative Advantage

49. Input Method Apples needed to make one: PieJuice Jeff 5 3 Judy 6 3 Convert to outputs Units per apple: PieJuice Jeff 1/5 1/3 Judy 1/6 1/3 Jeff’s OC 5/3 3/5 Judy’s OC 6/3 3/6 Who should make what? IV. Comparative Advantage

50. IV. Comparative Advantage • Absolute/Comparative Advantage; Input/Output Worksheet