AP Macro Unit 1: Foundations of Economic Analysis

Economics

The social science that studies how individuals, governments, firms, and nations allocate scarce resources to satisfy unlimited wants.

Scarcity

The fundamental economic problem arising from limited resources to satisfy unlimited human wants.

Microeconomics

The branch of economics focusing on individual decision-making units like households and firms.

Macroeconomics

The branch of economics that analyzes the economy as a whole, focusing on aggregate indicators.

Factors of Production

Categorized resources necessary for producing goods and services, summarized by the acronym CELL.

Capital (Physical Capital)

Human-made resources utilized to produce other goods, such as machinery and tools.

Entrepreneurship

The human resource that combines other factors of production and takes risks to earn profits.

Land

Natural resources found in nature, such as water, minerals, and arable land.

Labor

Physical and mental human effort used in the production process.

Trade-off

All alternatives given up when choosing one course of action over others.

Opportunity Cost

The value of the next best alternative foregone when making a choice.

Production Possibilities Curve (PPC)

A graphical model showing the maximum combinations of two goods producible with full resource employment.

Productively Efficient Use

Using resources in a way that maximizes output, represented by points on the PPC.

Inefficiency

When resources are wasted or lying idle, represented by points inside the PPC.

Unattainable Production

Points outside the PPC where current resources and technology cannot achieve production.

Increasing Opportunity Cost

When the PPC is concave, indicating that resources are not perfectly adaptable.

Constant Opportunity Cost

When the PPC is a straight line, indicating that resources are perfectly substitutable between two goods.

Economic Growth

An outward shift of the PPC resulting from increased resource quantity, quality, or technology.

Absolute Advantage

The ability to produce more of a good with the same resources or the same amount with fewer resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Output Problems (OOO)

Problems showing how much product is created with fixed resources, using the rule: Output? Other goes Over.

Input Problems (IOU)

Problems showing how many resources are needed to create one product, using the rule: Input? Other goes Under.

Terms of Trade

The exchange rate that benefits trade, falling between the opportunity costs of buyers and sellers.

Law of Demand

The principle that describes the inverse relationship between price and quantity demanded.

Change in Quantity Demanded

A movement along the demand curve caused only by a change in the product's price.

Change in Demand

A shift of the entire demand curve caused by factors other than price.

Demand Shifters (TRIBE)

Factors that shift demand, including Tastes, Related goods prices, Income, Buyers, and Expectations.

Law of Supply

The principle that describes the direct relationship between price and quantity supplied.

Supply Shifters (ROTTEN)

Factors that shift supply, including Resource costs, Other goods' prices, Taxes, Technology, Expectations, and Number of Sellers.

Equilibrium Price and Quantity

The price and quantity where the demand curve intersects the supply curve, indicating no tendency for price to change.

Shortage (Excess Demand)

Occurs when price is below equilibrium, with quantity demanded exceeding quantity supplied.

Surplus (Excess Supply)

Occurs when price is above equilibrium, with quantity supplied exceeding quantity demanded.

Single Shifts

Changes in demand or supply that result in clear changes in price and quantity.

Double Shifts

Simultaneous shifts of both supply and demand curves, leading to one variable being indeterminate.

Productive Efficiency

Producing at the lowest possible cost, represented by any point on the supply curve or PPC.

Allocative Efficiency

Producing the amount society desires most compared to costs, occurring at market equilibrium.

Money is NOT Capital

A key distinction that in economics, capital refers to tools and machinery, not financial resources.

Change in Demand vs. Quantity Demanded Mistake

A common error in incorrectly attributing changes in price to shifts in demand instead of quantity demanded.

Price is NOT a Shifter

Price changes do not shift the demand or supply curves; they cause movements along the curves.

Comparative Advantage Math Errors

The importance of correctly applying output/input rules in comparative advantage calculations.

Double Shift Certainty Rule

When both supply and demand curves shift, one variable will be indeterminate and cannot be concluded without specifics.