Transcript Advantages - Effingham County Schools

AP Macroeconomics
Unit 1
I. Basic Economic Concepts
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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.
I. Basic Economic Concepts
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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.
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.

I. Basic Economic Concepts
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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
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.”

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

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”.

II. Opportunity Cost
Operating inside
the PPC is
inefficient.
 Operating
outside the PPC
for a long period
of time is
impossible.

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.
II. Opportunity Cost
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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?
XI. Economic Systems
Traditional:
 3 Qs answered by
custom.
 Resources allocated by
inheritance.
 Subsistence farmers,
cattle herders,
hunter/gathers, etc.
 African Mbuti, Aborigines,
Inuits.

XI. Economic Systems
Disadvantages:
 New ideas discouraged.
 Low standard of living.
 Persecution/land encroachment.
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XI. Economic Systems
Command:
 Central authority
answers 3 Qs.
 There are no “pure”
command economies.
 North Korea, Cuba, &
Vietnam are usually
considered command
economies.

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

XI. Economic Systems
Freedom
Command
Market
Security Equity
Growth Efficiency Price
Stability
Employment***
N Y ? N N Y Y
Y N ? Y Y N N
***Employment is sometimes included under the goal of
Security
XII. Competition & Free
Enterprise
 Capitalism:
citizens own FOP
 Free enterprise: limited gov’t
interference; competition encouraged
 Voluntary exchange: buyers & sellers
benefit (GDP)
XII. Competition & Free
Enterprise
 Private
property rights motivate
people to work, save & invest
 Profit motive encourages
entrepreneurship & drives growth
 Competition helps lower prices
II. Opportunity Cost
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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 by
making the ends of the PPC
into a ratio & setting 1 side
equal to one.
II. Opportunity Cost
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
What is the
opportunity cost of
90 guns?
What is the
opportunity cost of
50 butter?
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.

XI. Economic Systems
Advantages:
 Life is stable, predictable, and continuous.
 Low income inequality.
 Disadvantages:
 New ideas discouraged.
 Low standard of living.
 Persecution/land encroachment.

XI. Economic Systems
Command:
 Central authority
answers 3 Qs.
 There are no “pure”
command economies.
 North Korea, Cuba, &
Vietnam are usually
considered command
economies.

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
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

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
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)

XI. Economic Systems
Freedom
Command
Market
Security Equity
Growth Efficiency Price
Stability
Employment***
N Y ? N N Y Y
Y N ? Y Y N N
***Employment is sometimes included
under the goal of Security
I. Capitalism

FOP privately owned
 individuals
must have control of property
(Corp. clip)
 intellectual, artistic, etc. property ownership.
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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
I. Capitalism
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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.
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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
I. Capitalism
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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?
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Limited government interaction. The
market must be self-regulating.
I. Capitalism
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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
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Disadvantages: underproduction of
public goods, only produces for those
with $$, unstable
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
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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
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III. Absolute Advantage
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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.
Max they
can
produce
of each
Coconuts
Young
Guy
10
10
Old
Guy
4
8
Fish
III. Absolute Advantage
Max they
can
produce
of each
good
Young
Guy
(A)
Old
Guy
(B)
Coconuts
Fish
10
10
4
8
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.
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III. Absolute Advantage
Input = Hours to build 1:
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Company X:
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Company Z:
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Car
2
3
Tank
2
1
Who has the absolute advantage in Cars?
 Tanks?
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IV. Comparative Advantage
Specialization: doing one thing.
 Benefits of?


Costs of?
IV. Comparative Advantage
Lower opportunity
cost = comparative
advantage.
 To get B’s O.C.
Coconuts:

4C
8F

4
4
 B’s O.C. Coconuts =
 2 Fish
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IV. Comparative Advantage
B’s O.C. Fish:
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4C
8F

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?

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.
IV. Comparative Advantage
Amounts
they
consume
before
trade
TOTALS
Coconuts
Fish
Young
Guy
6
4
Old
Guy
2
4
IV. Comparative Advantage
Amounts
they
produce
with
trade
Young
Guy
(A)
Old
Guy
(B)
Coconuts
Fish
10
0
0
8
IV. Comparative Advantage
Amounts
they
consume
before
trade
Young
Guy
Coconuts
6
Fish
Amounts
they
produce
with
trade
Coconuts
Fish
4
Young
Guy
10
0
Old
Guy
0
8
10
8
Old
Guy
2
4
Totals:
8
8
IV. Comparative Advantage
Amounts
they
consume
before
trade
Young
Guy
(A)
Old
Guy
(B)
Totals:
Coconuts
Fish
6
4
2
4
8
8
Amounts
they
consume
after trade
Young
Guy
(A)
Old
Guy
(B)
Coconuts
Fish
7
4
3
4
10
8
IV. Comparative Advantage
Amounts
they
consume
after trade
Young
Guy
(A)
Old
Guy
(B)
Coconuts
Fish
7
4
3
4
IV. Comparative Advantage
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Product per hour
Corn
Wheat
Mike
8
6
John
2
4
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Corn

Mike’s O.C.:
6/8
8/6
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John’s O.C.:
4/2
2/4

Who should make


Wheat
IV. Comparative Advantage
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Input Method
Apples needed to
make one:
Pie
Juice
Jeff
5
3
Judy
6
3
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Convert to outputs
Units per apple:
Pie Juice
Jeff
1/5
1/3
Judy
1/6
1/3

Jeff’s OC 5/3
Judy’s OC 6/3

Who should make what?

3/5
3/6
IV. Comparative Advantage

Absolute/Comparative Advantage;
Input/Output Worksheet
IV. Comparative Advantage
Terms of Trade: the rate by which one unit
of one good will be traded for another
good.
 Determine each country’s O.C. of each
good.

Nebraska
IV.
Comparative
Advantage
 Nebraska-Wheat; Florida-Pears


Now, Nebraska is willing to give up up to 4
wheat per pear, & Florida wants at least 3 wheat
per pear.
Terms of Trade: 1 Pear will be traded for
between 3 & 4 Wheat
Nebraska
IV. Comparative Advantage
Other benefits of specialization:
 More efficient use of resources.
 Increased production without increase in
resources.
 Effects of specialization on PPC?
 Practice Time (Problems in Class Notes)

I. Basic Economic Concepts
3 Basic Questions:
 What should we
produce?
 How should we produce
it?
 For whom should we
produce?

The “Spruce Goose”-Largest airplane ever built.
-319 ft wingspan
-Could carry 750 soldiers or one
Sherman Tank
-Made of wood
VI. Productivity
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


The amount of goods/services
produces by each unit of labor
input.
Drives economic growth.
Affected by interdependence.
Increase Productivity:
Specialization- doing what you
have an advantage in
Division of labor- splitting big
jobs up
Investing in human capital.
More education = more income.
VII. Demand
A market is an arrangement that allows
buyers and sellers to exchange things.
 Demand is the desire, ability, & willingness
to buy a product at a range of prices.
 Quantity demanded is the amount that
would be purchased at a certain price.

VII. Demand
Joe Schmoe’s demand schedule for
hamburgers per week:

Price
Quantity Demanded

$5
1

$3
4

$1
8
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VII. Demand
The demand curve shows how quantity
(Q) demanded varies depending on price
(P) of good/service; it is just a visual
representation of the demand schedule.
 P is on vertical axis, Q is on horizontal
 Demand curve slopes down.

VII. Demand
Price
VII. Demand
Price
Quantity
VII. Demand
Price
$5
$4
$3
$2
$1
Quantity
VII. Demand
Price
$5
$4
$3
$2
$1
Quantity
1
2
3
4
5
6
7
8
9 10
VII. Demand
Price
.
$5
$4
.
$3
$2
.
$1
Quantity
1
2
3
4
5
6
7
8
9 10
VII. Demand
Price
.
5
4
.
3
2
.
1
D
Quantity
1
2
3
4
5
6
7
8
9 10
VII. Demand
Price
Changes in QUANTITY DEMANDED
.
5
4
.
3
2
.
1
D
Quantity
1
2
3
4
5
6
7
8
9 10
VII. Demand
Price
P’
An increase in price causes a
decrease in quantity demanded.
.
5
4
P
.
3
2
.
1
D
Quantity
1
Q’
2
3
4
Q
5
6
7
8
9 10
VII. Demand
Price
A decrease in price causes an
increase in quantity demanded.
.
5
4
P
.
3
2
P’
.
1
D
Quantity
1
2
3
4
Q
5
6
7
8
Q’
9 10
Mr. Cook’s Demand For Video
Price
Quantity
Games
90
80
70
60
Price
$80
$55
$35
$20
$18
$15
$12
$11
$9
Demanded
1
2
3
4
5
6
7
8
9
50
40
Line 1
30
20
10
0
1 2 3 4 5 6 7 8 9
Quantity
VII. Demand
The Law of Demand:
 As P goes up, Q demanded falls, & vice
versa.
 The demand curve slopes downward
because of the:

 income
effect
 substitution effect
VII. Demand
A change in demand is
caused by a change in:
 Income (normal/inferior
goods)
 Consumer Tastes
 Price change in
substitute/complement
 Consumer expectations
about prices & income
 # of buyers

Complementary Goods
Potato Market

What effect does a fall in the price of
potatoes have on the market for sour
cream?
Complementary Goods
Potato Market
Sour
Cream
Market
A decrease in the price of potatoes
causes…
 an increase in the demand for sour cream.

Substitute Goods
Margarine

What effect does an increase in the price of
margarine have on the market for butter?
Substitute Goods
Margarine
Market

Butter
Market
An increase in the price of margarine causes
an increase in the demand for butter.
VII. Demand
Elasticity measures sensitivity to price changes.
 Elasticity coefficient =
Q/[(Q2+Q1)/2]
.
P/[(P2+P1)/2]
 Demand is:
 Elastic if small P causes big Q. [more
sensitive] Elasticity coef.>1
 Inelastic if big P causes small Q. [less
sensitive] Elasticity coef.<1
 Unit or unitary Elastic if % P = % Q; E=1

VII. Demand

Note: Elasticity does not necessarily equal
the slope of the demand curve.
VII. Demand
Determinants of Demand Elasticity
Can purchase be delayed?
 Are substitutes available?
 Does purchase use large portion of
income?
 If “yes’s” outnumber “no’s” then demand is
elastic.

The Total Expenditures Test
Price times quantity demanded equals
expenditures (P * Q = Ex).
 Demand curve is:
 -Elastic if P and Ex move in opposite
directions.
 -Inelastic if P & Ex move in the same
direction.
 -Unit elastic if there is no change in Ex.
 Understanding the relationship b/w
elasticity & profits can help producers
effectively price their products.

VIII.
Supply
 Supply = Q seller(s) are willing & able to
sell at various prices.
 The Law of Supply = Suppliers will offer
more at higher P & less at lower P.
 Supply curve is always upward sloping.
VIII. Supply
VIII. Supply
VIII. Supply
A decrease in price leads to a decrease in
Quantity Supplied.
 A increase in price leads to a increase in
Quantity Supplied.

VIII. Supply









A change in supply occurs when suppliers offer
different Q for sale at all prices.
Can cause a change in supply:
Input costs
Productivity
Technology
Taxes/Subsidies
Seller Expectations
Regulations
# Sellers
VIII. Supply
Supply is:
 elastic when a small P change causes a big
change in Q supplied.
 inelastic when P changes have little effect
on Q.
 Remember: Flatter is Elastic!

VIII. Supply
Determinants of supply elasticity:
 If adjustments to production can be made
quickly, supply is elastic.
 If not, supply is inelastic.

Elastic Supply
Inelastic Supply
IX. Equilibrium Price and
Quantity
Together, demand & supply make a
complete picture of the market.
 Price changes allow supply & demand to
be =
 Surpluses: when supply > demand
 Shortages: when demand > supply
 Equilibrium price where supply meets
demand

IX. Equilibrium Price and Quantity
IX. Equilibrium Price and Quantity
How
do prices adjust to
equilibrium?
Explaining & Predicting Prices
If Supply increases, P __ & Q __
 If Supply decreases, P __ & Q __
 If Demand increases, P __ & Q __
 If Demand decreases, P __ & Q __
 If Supply & Demand increase, P __ & Q __
 If Supply & Demand decrease, P __ & Q __
 Supply incrse/Demand decrse, P __ & Q __
 Supply decrse/Demand incrse, P __ & Q __
 The more elastic a curve is, the less P will
change if that curve shifts.

The Lemonade Market
The Oil Market
X. Distorting Market Outcomes
Can occur when pursuing equity &
security.
 Example: setting a “socially desirable” P

X. Distorting Market Outcomes

Price Ceilings create shortages (rent
control in Manhattan)
X. Distorting Market Outcomes

Price Floors create surpluses (minimum
wage)
XI. Economic Systems
Traditional:
 3 Qs answered by
custom.
 Resources allocated by
inheritance.
 Subsistence farmers,
cattle herders,
hunter/gathers, etc.
 African Mbuti, Aborigines,
Inuits.

XI. Economic Systems
Disadvantages:
 New ideas discouraged.
 Low standard of living.
 Persecution/land encroachment.

XI. Economic Systems
Command:
 Central authority
answers 3 Qs.
 There are no “pure”
command economies.
 North Korea, Cuba, &
Vietnam are usually
considered command
economies.

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

XI. Economic Systems
Freedom
Command
Market
Security Equity
Growth Efficiency Price
Stability
Employment***
N Y ? N N Y Y
Y N ? Y Y N N
***Employment is sometimes included under the goal of
Security
XII. Competition & Free
Enterprise
 Capitalism:
citizens own FOP
 Free enterprise: limited gov’t
interference; competition encouraged
 Voluntary exchange: buyers & sellers
benefit (GDP)
XII. Competition & Free
Enterprise
 Private
property rights motivate
people to work, save & invest
 Profit motive encourages
entrepreneurship & drives growth
 Competition helps lower prices
XIII. Role of Government
Protector: pass/enforce laws to protect
consumers/workers
 Both a provider & a consumer
 A regulator by working to preserve
competition (anti-trust, property rights)
 Promote national goals
 Gov’t intervention makes the U.S. a
*mixed economy* or *modified free
enterprise economy*.

XIV. Business & Market
Structures
Corporation-limited liability, double taxation
 Sole P. & Partnerships-unlimited liability
 Monopoly-1 seller
 Oligopoly-Few sellers, price leadership,
interdependence
 Perfect-Many, Identical, Independent, No
barriers
 Monopolistic-Like perfect but not identical
