AP Macroeconomics 1-8-13

1. AP Macroeconomics1-8-13

2. Scarcity vs. Shortage • Economics—the study of how people seek to satisfy needs and wants by making choices. • We need to make choices in life because every physical thing in this world is scarce. • There are limited quantities of EVERYTHING. • There are limited quantities of what can be produced, therefore we must choose.

3. Scarcity v. Shortage • Scarcity—the idea that there are limited quantities of all physical matter on Earth • When you make a decision to do something you have to give up something else. • What you give up is Opportunity Cost. This is the heart of Economics. (more on this later). • Shortageoccurs when merchants can’t or won’t offer enough of a product at a certain price. • Wartime, natural disasters, holiday season. You could say life is economics and economics is life because everything is scarce.

4. Branches of Economics • Macroeconomics—Looks at either the whole economy or one of its components • Component—small units lumped together to form one collection • The components are household, government, and business sectors (C, G, Ig, Xn)***** • We look at those components to see how they affect the entire economy • Unemployment, imports and exports

5. C+Ig+G+Xn • C+Ig+G+Xn equals gross domestic product • Add up C, Ig, G, and Xn and you have GDP which is the value of all final goods and services produced in a country in a year

6. Branches of Economics (cont) Microeconomics—study of small economic units: a particular industry, or firm, or group of households are studied

7. The Factors of Production • Factors of Production—the resources that are used to make goods and services. • Land—natural resources • Labor—a person’s effort • Capital—any human made resource that is used to produce other goods/services • Physical Capital—eg. Tools, computers, machines, factories, etc. • Human Capital—eg. Training, experience, schooling. • Entrepreneurs—a person who assembles the factors of production to create goods & services

8. It is not from the benevolence (kindness) of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. --Adam Smith

9. Key Assumptions in Economics • People are rationally self-interested • They seek to maximize their utility (happy points) • People generally make decisions at the margin • They weigh the marginal benefit against the marginal cost of a decision • Ceteris Paribus • Economists hold factors constant, except for what’s being considered

10. Basic Economic Vocabulary • Goods • Physical objects that can be purchased • Services • Actions or activities performed for a fee • Consumers • People who purchase goods and services • Producers • People who supply goods and services

11. TINSTAAFL There is no such thing as a free lunch. Put another way, “Everything has a cost.”

12. TINSTAAFL Illustrated: The PPC • The PPC = The Production Possibilities Curve • The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.

13. TINSTAAFL Illustrated: The PPC