AP Econ - Unit One :)

Determinants of Supply (R.O.T.T.E.N.)

*R*esource prices/production costs; Ex: increase in resource prices = decrease in supply *O*ther goods prices *T*echnology; Ex: Increase in tech = increase in supply *T*axes, regulation, subsidies; Ex: increase tax, decrease supply *E*xpectations *N*umber of suppliers/natural disasters

Demand Determinants (T.R.I.B.E.)

*T*astes/preferences/trends *R*elated Goods Prices - substitutes or complements *I*come - normal goods or inferior goods (the generic version.) *B*uyers/population *E*xpectations

How do we know if we made a good decision?

*The benefits have to outway the costs*

Scarcity

*Wants exceed resources* - All resources are scarce so all goods are scarce - Scarcity is the reason we study economics

Constant Costs

- Straight line - As production changes resources are *perfectly interchangeable* - the *cost ratio is constant*

Types of Economic Systems

- Traditional - Centrally Planned - Free Market - Mixed - combination of all 3

Three Economic Questions

- What to produce? - How to produce it? - Who do we produce it for?

Increasing Costs

- curved line - as production changes resources are *not* perfectly interchangeable - *cost ratio increases*

Steps to Calculate Comparative Advantage

1. Calculate cost for each country - other over 2. Compare costs between countries 3. Smallest cost = comparative advantage 4. Country with lowest cost has comparative advantage and should specialize and trade

Terms of Trade

A trade that is mutually advantageous 1. Find comparative advantage 2. Each country trades their specialized good 3. Each country needs more than their cost in return

What describes law of Supply?

An increase in the price of a good will increase the quantity supplied.

Any point inside a production possibilities curve is what?

Any point inside a production possibilities curve is

Law of Supply

As price increases the quantity supplied also increases Ex: The more you are paid for a job, the longer you are willing to work - As price decreases, the quantity supplied decreases

Law of Demand

As price increases, the quantity demanded decreases - As price decreases, the quantity demanded increases

Change in Quantity Demand

Change in *price only*, move along line

If the production technology of a good improves and at the same time the number of consumers willing and able to buy the good in the market increases, which of the following will definitely occur?

Equilibrium quantity will increase.

Incentives

Factors that motivate individuals - Ex: money, grades, freetime

Macroeconomics

Study government decisions and economy as a whole

Economics

Study of how individuals make decisions to use their limited resources to satisfy unlimited wants

Microeconomics

Study of individual and business decisions

Labor

Workers and human capital (human capital is the knowledge/education of workers)

Ceteris Paribus

a Latin phrase that means "all other things held constant"

Disequilibrium

describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market

inferior goods

goods that consumers demand less of when their incomes rise - the generic brand

A production possibilities curve that is concave to the origin (bowed out) implies that as more of a good is produced, the opportunity cost does what?

increases

Entreprenuer

Person who puts all these together (land, labor, capital) - Idea holder

Capital

Physical capital - any man-made resource Ex: technology, equipment, factory space

Equilibrium

Price where quantity demanded = quantity supplied

Shortage

Quantity demanded is larger than quantity supplied

Surplus

Quantity supplied is larger than the quantity demanded

All societies face a trade-off for every decision for what reason?

Resources are scarce

Saying to help remember demand v. supply graphs

"Demand to the land, Supply to the sky"

Change in Demand

A determinant changes and out demand curve shifts; increase= right decrease = left (This is where the whole *line* moves)

Price Ceiling

A maximum price that can be set and must be *below* equilibrium - supply decreases, more buyers, creating a *shortage*

Price Floor

A minimum price that can be set - set *above* the equilibrium - creates less buyers, more supplier, creating a *surplus*

Assume an economy produces two goods, capital goods and consumer goods. If the production of capital goods increases in the current period, which of the following will occur for the current and future production possibilities curve (PPC) for consumer goods and capital goods?

A movement along the current PPC and a rightward shift of the future PPC

Economic System

A system developed by a group to address the issue of scarcity - Each group must decide how to use their resources to meet their goals

Trade Offs

All the alternatives given up - opportunity cost + everything else

As nations specialize in production and trade in international markets, they can expect what of the following domestic improvements?

Allocation of domestic resources and Standard of living

normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Production Possibility Graph (PPG)

Illustrates all the possible combinations that an economy can use its resources

Factors of Production

Land, labor, and capital (also entrepreneurship)

Opportunity Cost

Most desirable alternative given up - not a benefit - what you gave up Ex: money, time, another good

Nations A and B produce only chairs and bicycles. If each laborer in Nation A can produce twice as many chairs as each laborer in Nation B, then which of the following is necessarily true?

Nation A has an absolute advantage in chairs.

Land

Natural resources

Assume that Country A exports one bushel of wheat in exchange for 2.5 bushels of corn from Country B. If the terms of trade are beneficial to both countries, what must be true?

The cost of producing a bushel of wheat in Country A is less than 2.5 bushels of corn.

Comparative Advantage

When an individual or group can produce at a lower cost than others - When an economy has the comparative advantage, then they should specialize in producing that good and trade for others.

Change in Supply

When something other than price changes and the supply curve shifts left or right right = increase left = decrease

Change in Quantity Supply

When there is a change in *price only* and it moves along the supply curve

If the wage rate of workers producing a good decreases, then what would most likely occur?

The supply of the good will increase.

Human Capital

The training and education of workers

Two nations sign a trade agreement expecting to enjoy mutual gains from the trade of a certain good. How will this event likely affect the supply of the good in the two nations?

This event will likely cause an increase in the supply of the good in both nations.

Which of the following is the most fundamental issue that economics addresses?

Use of scarce resources

Absolute Advantage

When an individual or a group can outproduce others

Unlike a market economy, a command economy uses what?

more centralized planning in economic decision making

A country's infrastructure refers to its

public capital goods such as highways

The concept of opportunity cost would no longer be relevant if what?

the supply of all resources were unlimited