Nicholson- AP MACRO REVIEW
Basic Economic Concepts
A. Scarcity, choice, and opportunity costs
B. Production possibilities curve
C. Comparative advantage, absolute advantage,
specialization, and exchange
D. Demand, supply, and market equilibrium
E. Macroeconomic issues: business cycle, unemployment,
1. Economic growth – produce more and better goods and services
2. Full employment – suitable jobs for all citizens who are willing and able to work
3. Economic efficiency – achieve the maximum production using available resources
4. Price-level stability – avoid large fluctuations in the price level (inflation +
5. Economic freedom – businesses, workers, consumers have a high degree of
freedom in economic activities
6. Equitable distribution of income – try to minimize gap between rich and poor
7. Economic security – provide for those who are not able to earn sufficient income
8. Balance of trade – try to seek a trade balance with the rest of the world
Factors of Production
Land – all natural resources usable in the production process
Capital – all manufactured aids to production (tools, machinery, equipment, and
factory, storage, transportation, and distribution facilities used in producing goods
Labor – physical and mental talents of individuals available and usable in producing
goods and services
Entrepreneurial ability – the entrepreneur 1) takes the initiative in combining the
other resources to produce a good or service, 2) makes basic business-policy decisions,
3) is an innovator, and 4) is a risk bearer.
Production Possibilities Curve
The production possibilities curve represents the combinations of maximum output
that can be reached in the economy. It is a frontier because it shows the limit of
output. Anything under the curve is attainable, but involves inefficient use of
resources. Anything outside the curve is unattainable with current resources.
Usually, the curve is some type of consumer goods versus some type of capital goods.
Each point on the curve represents a maximum output of the two goods. Different
points on the curve mean different production combinations of the two goods.
The curve bows outwards because of the Law of Increasing Opportunity Cost, which
states that the amount of a good which has to be sacrificed for each additional unit of
another good is more than was sacrificed for the previous unit. The rationale for this
law is that some economic resources are not completely adaptable to alternative uses,
so the resources will yield less of one product.
Shifts in this curve can be caused by increases in resource supplies or advances in
technology. Also, if an economy favors “future goods” (technology, etc), the curve will
shift faster because of more economic growth.
Determinants of Production
One must compare marginal benefits and marginal costs to determine the best or
optimal output mix on the Production Possibilities Curve.
SUPPLY AND DEMAND
H - has preferences
e- expectation in future price
A - allowance income
P - price of related goods
e- expectation of future price
S- change in the number of suppliers
P - Productivity
A - advancement in technology
i - input costs
D - demand for related goods