AP MACRO: BASIC ECONOMIC CONCEPTS
PPC curve
Shows the trade-off in how to allocate scarce resources between two competing activities, goods, or services Models scarcity, efficiency, and OC
comparative advantage
Specialization and trade should be based on what? not absolute advantage
increased
When an individual or a nation specializes in the production of a particular good or service and trades for all other goods or services, the total output and welfare of society is what?
fiscal policy
When determining this policy, a government must consider the marginal propensity to consume and the marginal propensity to save of its nation's households. This will help the government determine the relative effect of either a change in taxes or a change in government spending.
social science
a field of academic scholarship that examines the interactions, between humans, our institutions, our organizations, and the natural and social environment we inhabit
economic growth
an increase in the total output of a nation over time, which is possible if a nation experiences an increase in the quality or the quantity of productive resources
productivity
output generated per unit of input
scarcity
when something is both desired and limited
scarcity, efficiency, opportunity cost, economic growth, productivity
What are some concepts illustrated by the PPC model?
product market, firms, resource market, households
What are the 4 blocks of the circular flow model in order, clockwise?
What should be produced? How should it be produced? For whom should it be produced
What are the three basic economic questions?
property rights, incentives, prices
What are the three fundamental characteristics of market economics?
inefficiency or recession
What does a point inside the PPC curve indicate?
land, labor, capital (tools), entrepreneurship (thought, innovation)
List 4 resources
three objectives of government policy
1. full employment of the nation's labor force (low unemployment) 2. stability in the level of prices for goods and services in a nation (low inflation) 3. the continual increase in the output of goods and services in a nation (economic growth)
basic economic problems
1. humans wants and needs are infinite, but the resources needed to satisfy those wants and needs are limited and scarce 2. because of scarcity, people face choices and need to sacrifice something when they want more of something else 3. scarce resources are the factors of production needed to produce any good or service humans may want or need
marginal
An economic decision by an individual, a business firm, or a government is usually a what decision?
command or market system
An economic system is the system a nation uses to allocate its scarce resource between the competing needs and wants of the nation's government, business firms, and households What are the two primary systems used to allocate resources in the last century?
market economics
Based on the principles of private ownership of resources, property rights, and the pursuit of self-interest. Resources tend to flow toward the most profitable uses, and goods are allocated to those willing and able to pay the most for them. Adam Smith formed the basis for market / laissez-faire economic theory Resources are allocated and used relatively efficiently because it is in the self-interest of individuals to meet the needs of society, thereby earning for themselves an income that they can then use to meet their own wants an needs
marginal revenue they will earn from selling it
Businesses consider the marginal cost of additional units of output and compare it to the what?
product or resource market
Circular Flow: All exchanges in a market economy take place where?
product market
Circular Flow: Households earn their income in the resource market, and then demand the finished products provided by firms where?
resource market
Circular Flow: Households earn their income where?
households
Circular Flow: In a market economy, who are the owners of productive resources?
business firms demand resources households demand goods and services
Circular Flow: In a market economy, who demands resources and goods and services?
pay households for their resources in the resource market
Circular Flow: To acquire the inputs for production, what must firms do?
productive resources from households
Circular Flow: what are the inputs firms need in order to produce goods and services?
the price of the good
Consumers weight the marginal utility of additional units of a particular good v what?
no
Could a country ever have comparative advantage in the production of both goods?
Product Market (revenues to Firms) Firms (costs of production to Resource Market) Resource Market (wages, rent, interest to Households) Households (expenditures to Product Market)
Describe the clockwise direction of arrows in the circular flow model
Product Market (goods and services to Households) Households (land, labor, capital to Resource Market) Resource Market (factors of production to firms) Firms (output to Product Market)
Describe the counterclockwise direction of arrows in the circular flow model
no
Does the circular flow diagram account for the role of government or foreign consumers in a nation's economy?
market economic system
Fundamental to this system is the idea that the exchanges between individuals are voluntary and that anyone engaging in such exchanges benefits Bartering / trading, exchanges benefit both parties
Calculate opportunity cost of each country and compare
How do you calculate comparative advantage?
margin
In macroeconomics, the government thinks on the __________ when determining tax rates paid by households at different income levels
opportunity cost
Not necessarily monetary Rather, when you buy something, the OC is what you could have done with the money you spent
command economy
Often compared with communism, socialism An economic system in which the three basic economic questions are answered by 'the state 1. All resources are allocated based on the goals of the central government (equality = resources distributed evenly, military = resources produced for military) 2. No private ownership or property rights. The state owns all factors of production. 3. The lack of private ownership of resources often creates a problem of incentives 4. When the only goal of producers is to meet the quotas sent down by the state, resources are often wasted or used inefficiently 5. These economics have mostly transitioned to a market system because of the enormous inefficiency in the allocation and use of resources resulting from the lack of private ownership and incentives
law of increasing opportunity cost
PPC has a convex shape, bows out from the origin Says that as the output of a particular product increases, the opportunity cost of producing additional units rises This results from the fact that some labor, land, and capital resources are better suited to making some goods than to making others
PPC
This can be used to show how gains from trade allow countries to enjoy combinations of goods that they could not produce domestically
circular flow model
the flow of resources, money, and goods and services
economics
the social science that deals with the problem of how to allocate the world's scarce resources between the competing and unlimited wants and needs of people
microeconomics
the study of individual markets for goods, services, and resources buyers and sellers meet in markets to exchange money, goods, services, and resources. equilibrium price and quantity occur when the quantity demanded for a particular item is equal to the quantity supplied examines the relationship between prices and quantities of individual products
macroeconomics
the study of whole nations' economics examines aggregates or the total sum of items examined individually in microeconomics, such as aggregate demand and aggregate supply, referring to the total demand for a nation's output and the total supply of the nation's output examines the interactions of all a nation's households, firms, government, and foreigners in determining the overall level of output, employment, and the price level in a nation used to inform government policy