AP MACROECONOMICS Introduction to Economics Modules 1 4

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AP MACROECONOMICS Introduction to Economics Modules 1 -4 Krugman Pages 2 -30 Basic Economic

AP MACROECONOMICS Introduction to Economics Modules 1 -4 Krugman Pages 2 -30 Basic Economic Concepts

Module 1

Module 1

What is Economics in General? • Economics is the science of scarcity and choices.

What is Economics in General? • Economics is the science of scarcity and choices. • Scarcity results because our wants are greater than our limited resources. • Since we are unable to have everything we desire, we must make choices on how we will use our resources. • In economics we will study the choices of individuals, firms, and governments. Economics is the study of _____. choices

Examples: You must choose between buying jeans or buying shoes. Businesses must choose how

Examples: You must choose between buying jeans or buying shoes. Businesses must choose how many people to hire Governments must choose how much to spend on welfare. Economics Defined Economics- The study of scarcity and choice. Macroeconomics- A focus on the overall ups and downs in the economy Microeconomics- focus is on choices made by individuals or firms.

Scarcity: What would parents choose? What would kids choose?

Scarcity: What would parents choose? What would kids choose?

6 The Four Factors of Production • Producing goods and services requires the use

6 The Four Factors of Production • Producing goods and services requires the use of resources. • ALL resources can be classified as one of the following four factors of production: Land Labor Capital Entrepreneurship

7 Land = All natural resources that are used to produce goods and services.

7 Land = All natural resources that are used to produce goods and services. Anything that comes from “mother nature. ” (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc. ) Labor = Any effort a person devotes to a task for which that person is paid. (manual laborers, lawyers, doctors, teachers, waiters, etc. )

Two Types of Capital: 8 1. Physical Capital- Any human-made resource that is used

Two Types of Capital: 8 1. Physical Capital- Any human-made resource that is used to create other goods and services (tools, tractors, machinery, buildings, factories, etc. ) 2. Human Capital- Any skills or knowledge gained by a worker through education and experience (college degrees, vocational training, etc. )

 Entrepreneurship= 9 ambitious leaders that combine the other factors of production to create

Entrepreneurship= 9 ambitious leaders that combine the other factors of production to create goods and services. Examples-Henry Ford, Bill Gates, Steven Jobs, Inventors, Store Owners, etc. Entrepreneurs: 1. Take The Initiative 2. Innovate 3. Take the Risk of Failure PROFIT So they can obtain _____. Profit= Revenue - Costs

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Classify the Factors of Production in the following scenario: You decide to order a

Classify the Factors of Production in the following scenario: You decide to order a pizza to satisfy the munchies. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Classify the different Factors of Production in the following scenario: You decide to order

Classify the different Factors of Production in the following scenario: You decide to order a pizza to satisfy the munchies. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Trade-offs and Opportunity Cost ALL decisions involve trade-offs. Trade-offs are all the alternatives that

Trade-offs and Opportunity Cost ALL decisions involve trade-offs. Trade-offs are all the alternatives that we give up whenever we choose one course of action over others. (Examples: going to the movies or going to a game) The most desirable alternative given up as a result of a decision is known as opportunity cost. What are trade-offs of deciding to go to college? What is the opportunity cost of going to college? GEICO commercial assumes you understand opportunity cost. Why?

Thinking Economically Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts

Thinking Economically Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest” Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice Real-life situations can be explained analyzed through simplified models and graphs.

Given the following assumptions, make a rational choice in your own self-interest (hold everything

Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant)… 1. You want to visit your b/f or g/f for a week 2. You work every weekday earning $100 per day 3. You have three flights to choose from: Thursday Night Flight = $275 Friday Early Morning Flight = $300 Friday Night Flight = $325 Which flight should you choose? Why?

How is Economics used? • Economists use scientific method to make generalizations and abstractions

How is Economics used? • Economists use scientific method to make generalizations and abstractions to develop theories. Problem is that many economists have different theories and there is no one absolute theory that always works. Positive vs. Normative Positive Economics Statements- Based on facts. Avoids value judgments (what is or what will be). Normative Economics Statements- Includes value judgments (what should or ought to be).

When and Why Economists Disagree Economists may disagree because they have different values or

When and Why Economists Disagree Economists may disagree because they have different values or opinions Economists may disagree because they use different models or methods to conduct their analysis Over time, disputes in economics are resolved by the accumulation of evidence (but this can sometimes take a long time!)

5 Key Economic Assumptions 1. Society’s wants are unlimited, but ALL resources are limited

5 Key Economic Assumptions 1. Society’s wants are unlimited, but ALL resources are limited (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off). 3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “selfinterest” and “politics” are always a “real-life” factor. 4. Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice 5. Real-life situations can be explained analyzed through simplified models and graphs.

Module 2: Macroeconomics Employment and the Labor Force

Module 2: Macroeconomics Employment and the Labor Force

The Various Business Cycles • • • Depression Recession Expansion or growth (which leads

The Various Business Cycles • • • Depression Recession Expansion or growth (which leads to inflation) Graph demonstrates changes happening over time as cycles change

Key Terms used in Macroeconomics • Nominal income v. Real income (adjusted for inflation)

Key Terms used in Macroeconomics • Nominal income v. Real income (adjusted for inflation) • Inflation • Deflation • Price Stability • Labor Force = employed+unemployed

Models are used in Economics to help explain what is happening • Models (aka

Models are used in Economics to help explain what is happening • Models (aka graphs) • Other things equal assumption • Ceteris Paribus (Latin for “other things equal”)

The U. S. Unemployment Rate and the Timing of Business Cycles, 1989– 2009. Shaded

The U. S. Unemployment Rate and the Timing of Business Cycles, 1989– 2009. Shaded areas Indicate periods of a recession

3: The Production Possibility PPCModule helps explain efficiency; opportunity costs; and economic growth Curve

3: The Production Possibility PPCModule helps explain efficiency; opportunity costs; and economic growth Curve

Keys to this Module The importance of trade-offs in economic analysis What the production

Keys to this Module The importance of trade-offs in economic analysis What the production possibilities curve model tells us about efficiency opportunity cost, and economic growth The two sources of economic growth - increases in the availability of resources and improvements in technology

When using a PPC always remember that if a point is inside or on

When using a PPC always remember that if a point is inside or on the curve it is feasible but if it lies outside the curve then it is not feasible. Being on the curve is most efficient (aka no missed opportunites)

Another PPC example

Another PPC example

This graph represents a constant opportunity cost for a business that makes both calzones

This graph represents a constant opportunity cost for a business that makes both calzones and pizzas.

This graph represent opportunity cost increasing. By producing more pizzas the store owner has

This graph represent opportunity cost increasing. By producing more pizzas the store owner has to make less calzones in order to be at maximum efficiency.

As more of a good is produced its opportunity cost typically rises because all

As more of a good is produced its opportunity cost typically rises because all inputs are used up and then less adaptable inputs must be used.

During economic growth the PPC shifts outward but during A shrinking of economic growth

During economic growth the PPC shifts outward but during A shrinking of economic growth it shifts inward

Another example of economic growth

Another example of economic growth

Marginal Analysis In economics the term marginal = additional “Thinking on the margin”, or

Marginal Analysis In economics the term marginal = additional “Thinking on the margin”, or MARGINAL ANALYSIS involves making decisions based on the difference of additional benefit vs. the additional cost. For Example: You have been shopping at the mall for a half hour, the additional benefit of shopping for another half-hour might outweigh the additional cost (the opportunity cost). After three hours, the additional benefit from staying an additional half-hour would likely be less than the additional cost.

Marginal Analysis Notice that the decision making process wasn’t “should I go to the

Marginal Analysis Notice that the decision making process wasn’t “should I go to the mall for 3 hours or should I stay home” In reality the decision making process started with “should I go to the mall at all. ” Once you are there you thought “should I stay for an additional half hour or should I go. ” The MARGINAL ANALYSIS approach to decision making is more commonly used than the “all or nothing” approach.

Marginal Analysis Notice that the decision making process wasn’t “should I go to the

Marginal Analysis Notice that the decision making process wasn’t “should I go to the mall for 3 hours or should I stay home” Everyone will continue to do something until In reality the decision making process was themall marginal “should I go to the at all. ”cost outweighs the marginal Once you arebenefit. there you thought I stay for Then they“should will an additional half hour should stop or doing it. I go. ” The MARGINAL ANALYSIS approach to decision making is more comely used than the “all or nothing” approach.

Module 4: Trade & Comparative Economies always produce more and obtain a higher Advantage

Module 4: Trade & Comparative Economies always produce more and obtain a higher Advantage standard of living when each economy specializes in a specific task and then trades with another. The process of globalization.

Gains from Trade The key to a much better standard of living for everyone

Gains from Trade The key to a much better standard of living for everyone is trade. The reason we have an economy is that there are gains from trade. Gains from trade arise from specialization. 38 of 16

Production Possibilities for Two Castaways: Tom and Hank (a) Tom’s Production Possibilities by himself

Production Possibilities for Two Castaways: Tom and Hank (a) Tom’s Production Possibilities by himself Figure 4. 1 Quantity of coconuts 30 Tom’s consumption without trade 9 Tom’s PPF 0 28 40 Quantity of fish 39 of 16

(b) Hank’s Production Possibilities by himself Figure 4. 1 Quantity of coconuts 20 Hank’s

(b) Hank’s Production Possibilities by himself Figure 4. 1 Quantity of coconuts 20 Hank’s consumption without trade 8 Hank’s PPF 0 6 10 Quantity of fish 40 of 16

Tom and Hank’s Individual Opportunity Costs Tom’s Hank’s Opportunity Cost One fish One coconut

Tom and Hank’s Individual Opportunity Costs Tom’s Hank’s Opportunity Cost One fish One coconut ¾ coconut 2 coconuts 4/3 fish ½ fish 41 of 16

 Both castaways are better off when they each specialize in what they are

Both castaways are better off when they each specialize in what they are good at and trade. Tom should specialize in catching fish. Hank should specialize in gathering coconuts. 42 of 16

(a) Tom’s Production and Consumption Quantity of coconuts 30 (b) Hank’s Production and Consumption

(a) Tom’s Production and Consumption Quantity of coconuts 30 (b) Hank’s Production and Consumption Quantity of coconuts Tom’s consumption without trade Tom’s consumption with trade Tom’s production with trade 10 9 Hank’s production with trade 20 Hank’s consumption with trade Hank’s consumption without trade Hank's PPF 10 8 Tom's PPF 0 2830 40 Quantity of fish 0 6 10 Quantity of fish 43 of 16

 An economy has a comparative advantage in producing a good or service if

An economy has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that country than for other countries. An economy has an absolute advantage in an activity if it can do it better than other nations. Having an absolute advantage is not the same thing as having a comparative advantage. 44 of 16

 Comparative advantage is the basis for trade. Trade can be beneficial to both

Comparative advantage is the basis for trade. Trade can be beneficial to both even if one has an absolute advantage in the production of both goods. By agreeing to specialize and trade, both traders can be better off. Everyone has a comparative advantage in something. 45 of 16

Rich Nation, Poor Nation Most clothing is made overseas in countries that are much

Rich Nation, Poor Nation Most clothing is made overseas in countries that are much poorer than the U. S. The immediate reason for their poverty is that their economies are much less productive. Even though these economies are much less productive, these countries hold a comparative advantage in clothing production. 46 of 16

 International advantage. trade results from comparative If the U. S. concentrates on producing

International advantage. trade results from comparative If the U. S. concentrates on producing pork and ships some of its output to Canada, while Canada concentrates on aircraft and ships some of its output to the U. S. , both countries can consume more than if they insisted on being self-sufficient. 47 of 16

(a) The U. S. Production Possibilities Frontier (b) Canadian Production Possibilities Frontier Quantity of

(a) The U. S. Production Possibilities Frontier (b) Canadian Production Possibilities Frontier Quantity of aircraft U. S. consumption without trade 1, 500 U. S. consumption with trade U. S. production with trade 1, 000 3, 000 Canadian production with trade Canadian consumption without trade 2, 000 1, 500 Canadian consumption with trade U. S. PPF 0 1 2 3 Quantity of pork (millions of tons) 0 0. 5 1 Canadian PPF 1. 5 Quantity of pork (millions of tons) 48 of 16

1. A higher standard of living comes from specialization and trade and thus globalization

1. A higher standard of living comes from specialization and trade and thus globalization is ultimately a benefit for all nations economically. 2. Comparative advantage explains the source of gains from trade between individuals and countries. 3. Everyone has a comparative advantage in something. 4. Absolute advantage is the ability to produce a particular good or service better than anyone else. 49 of 16

Trade Restrictions Tariffs a tax on imports meant to protect a nations industries. Quotas

Trade Restrictions Tariffs a tax on imports meant to protect a nations industries. Quotas or Quantity Controls to limit the amount of a good that could be sold. Meant to protect a nations Industry “Limiting mutually beneficial trade leads to inefficiency and illegal activity. ” 50 of 16