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AP Macro sec 01 02 basics
- 2. • Module 1Study of Economics • Module 2 Macroeconomics • Module 3 Production Possibility Curve • Module 4 Comparative Advantage Section 1: Basic Economic Concepts • Module 5 Demand • Module 6 Supply • Module 7 Equilibrium Section 2: Supply and Demand
- 3. Every Economic Systemsmust answer 3 Questions 1. What goods should be produced? 2. How should goods be produced? 3. Who gets to consume the goods? • In command economies, production & consumption are decided by government. • In market economies, private ownership is the norm and resources are allocated to their most productive use. • Mixed economies that lie between these two extremes.
- 4. Microeconomics / Macroeconomics •Micro, studies problems related to the individual firm, person or households. MACRO focuses on the ups and downs of the entire economy. Interest rates GDP Inflation Unemployment Aggregate prices Government policy International trade
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- 8. Section 01/02 Vocabulary 1. Factors ofProduction 2. Invisible Hand 3. Ceteris paribus 4. Correlation 5. Causation 6. Scarcity 7. Opportunity Cost 8. Liquidity 9. Public Good 10.Private Good
- 9. Factors of Production 1. Land 2.Labor 3. Capital 4. Entrepreneurial Ability
- 10. Invisible Hand • Metaphorfor how trade, produces benefits for the individual and for society. • “Man intends only his own gain, and is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interests, he promotes that of society more effectually than when he intends.” “The Wealth of Nations,” Adam Smith
- 11. Ceteris paribus Example: "If the priceof cell phones increases, ceteris paribus, quantity demanded will decrease.” "all other things being equal“
- 12. Correlation Causation • Correlationof data indicates only association not causation. Just because events occur together does not mean one caused the other. • Exists when one action causes another. • Smoking and lung cancer rather than smoking and alcoholism.
- 13. Scarcity • Scarcity occurswhen the price of a good is ZERO and QD > QS. • Scarcity implies unlimited wants verses limited resources. • A good is scarce if it is both desirable and limited. • Human’s wants and needs are infinite. Resources needed to meet those wants are scarce. • Because resources are scarce choices must be made in how to allocate them. This is done in a free market through the price mechanism • Economics is the study of how to deal with this problem.
- 14. Opportunity Cost • Theproblem of scarcity lead to the concept of opportunity cost. • When a choice is made to use one resource another must be given up. • That is a TRADE-OFF • What’s given up is the opportunity cost of that choice.
- 15. Opportunity Cost andLeBron James
- 16. Liquidity • The easewith which an asset can be spent. • Cash is the most liquid asset • Real estate, is relatively illiquid.
- 17. Public Goods • Nonrivalrous: –One person’s consumption does not decrease amount available to others. • Nonexcludable: – Its difficult to keep others from consuming good. Private Goods • Rivalrous: – One person’s consumption of the good decreases amount available to others. • Excludable: – It is possible to prevent people from consuming the good. https://www.youtube.com/watch?v=E1v5eRs0_fw (Good video but 8 minutes long)
- 18. Section 01/02 Vocabulary 1. Factors ofProduction 2. Invisible Hand 3. Ceteris paribus 4. Correlation 5. Causation 6. Scarcity 7. Opportunity Cost 8. Liquidity 9. Public Good 10.Private Good
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- 20. Demand • The DemandCurve is extrapolated from multiple data points. • It shows the relationship between Price and Quantity from the consumer’s perspective.
- 21. Demand and QuantityDemanded (QD)
- 22. Law of Demand • Quantity Demandedis the quantity of good a consumer is willing and able to buy at a certain Price. • As price increases, QD decreases. • As Price decreases, QD increases.
- 23. Shifts and Movements • Itsimportant to know what causes a shift & what causes a movement. PRICE causes movement.
- 24. Determinants of Demand (DemandShifters) 1. Δ Taste of consumers. 2. Δ Number of consumers 3. Δ Income of consumers 4. Δ Price of related good • A change in any of these determinants of will shift the Demand curve Notice PRICE is not a demand shifter
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- 28. ∆ Price ofa Complementary Good
- 30. Demand Shift Quiz(4 Questions) • Explain whether each of the following events represents: • Shift of Demand curve • Movement along Demand curve
- 31. Customers are willingto pay more for umbrellas on rainy days. • Shift of Demand curve • Movement along Demand curve
- 32. Customers are willingto pay more for umbrellas on rainy days. • Because of the rain the QD of umbrellas is higher at any given Price. This causes a rightward shift of the Demand curve.
- 33. When XYZ Telecomoffered reduced rates on weekends, the volume of weekend calling increased sharply. • Shift of Demand curve • Movement along Demand curve
- 34. When XYZ Telecomoffered reduced rates on weekends, the volume of weekend calling increased sharply. • The QD of weekend calls rises in response to the Price reduction. This causes a movement along the Demand curve to the right.
- 35. People buy moreroses on Valentine's Day, even though prices are higher than at other times. • Shift of Demand curve • Movement along Demand curve
- 36. People buy moreroses on Valentine's Day, even though prices are higher than at other times. • The Demand for roses increases on Valentine's Day. This causes a rightward shift of the Demand curve.
- 37. The rise inthe price of gas leads commuters to join carpools. • Shift of Demand curve • Movement along Demand curve
- 38. The rise inthe Price of gas leads many commuters to join carpools. • The QD of gas falls in response to a rise in Price. This causes a movement along the Demand curve to the left.
- 39. Supply A Supply Curveshows the relationship between Price and Quantity from the producer’s perspective. Its important to understand that producers always produce as much as they possibly can with the resource available to them. If the cost of resources changes the amount of goods produced changes inversely.
- 40. Law of Supply • Producerare always profit maximisers • Supply Curve comes from market pressure of producers selling for the highest price. • As price increase • QS increase
- 41. Quantity Supplied • Quantity ofgood a producer is willing and able to sell at a certain Price. As Price increases, QS increases.
- 42. Equilibrium QD = QS •Equilibrium is established by the forces of competition • The market clearing price
- 43. Determinants of Supply (SupplyShifters) 1. ∆ Resource Prices 2. ∆ Technology 3. ∆ Taxes and subsidies 4. ∆ number of sellers
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- 45. Supply Shift Quiz(4 Questions) • Explain whether each of the following events represents: • Shift of Supply curve • Movement along Supply curve
- 46. Strawberry farmers openroadside stands during harvest season, even though Prices are usually low at that time. a. Shift of Supply curve b. Movement along Supply curve.
- 47. Strawberry farmers openroadside stands during harvest season, even though Prices are usually low at that time. • QS of strawberries is higher at any given Price. This is a rightward shift of the Supply curve.
- 48. After the schoolyear begins, fast-food chains raise wages to attract workers because: a. Shift of the Supply curve b. Movement along the Supply curve.
- 49. After the schoolyear begins, fast-food chains must raise wages to attract workers. • In order to attract workers, chains have to offer higher wages. • The QS of labor is lower at any given wage. This causes a leftward shift of the Supply curve compared to the summer Supply curve.
- 50. Technology has madeit possible to build larger, cheaper per person cruise ships allowing Caribbean Cruise Line to offer more cabins. a. Shift of the Supply curve b. Movement along the Supply curve.
- 51. After technology madeit possible to build larger cruise ships, Caribbean Cruise Line has offered more cabins. • The QS of cabins is higher at any given Price. This is a rightward shift of the Supply curve.
- 52. Quiz: Shifts &Movements of Supply or Demand • The following market situations begin in equilibrium. Then an event occurs. • Use your knowledge to answer each question and draw a correct graph. A.What effect will the event have on Demand and Supply? B.What will happen to the Price?
- 53. 1. In 1997California wine growers produced a bumper crop of grapes. A. What will happen to Demand & Supply? B. What will happen to equilibrium Price? grapes
- 54. 1. In 1997California wine growers produced a bumper crop of grapes. • Supply curve shifts right. • Price falls.
- 55. 2. After ahurricane, many people cancel their vacations. A. What will happen to Demand & Supply? B. What will happen to equilibrium Price? Hotel rooms
- 56. 2. After ahurricane, many people cancel their vacations. • Demand shifts left. • Price falls.
- 57. 3. After aheavy snowfall, many people want to buy snowblowers at the local tool shop. A. What will happen to Demand & Supply? B. What will happen to equilibrium Price? Snowblowers
- 58. 3. After aheavy snowfall, many people want to buy snowblowers at the local tool shop. • Demand curve shifts right. • Price rises.
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- 60. • The PPCmeasures the production of 2 goods. • Each point shows how much can be produced. • The curve measures trade-off. • To produce more oranges Narnia must produce fewer apples. Narnia
- 61. PPC • Points onthe curve represent efficiency. • Points inside the curve illustrate unemployment and recession. • The curve tells decision-makers how much of each good they must give up to produce another unit of the other good. Narnia
- 62. Shape of theCurve Not every resource is suited to every good. • A Straight curve means Constant Opportunity Cost • Apples & Pears • A Bowed PPC illustrates Increasing Opportunity Cost. • Wheat & Computers
- 63. Shift of thePPC • Increases in Resources • Advances in Technology • Growth in population
- 64. How to Createa PPC
- 65. Production Possibility Table ProductionPossibilities for Pizzas and Robots Production Alternatives Type of Products A B C D E Pizzas 0 1000 2000 3000 4000 Robots 10 9 7 4 0 Notice, this is not constant opportunity cost
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- 68. Opportunity Cost andPPC • At Point A The economy is producing 60 guns / 3 butters. • At point B the economy is producing 30 guns / 7 butters. • The 4 additional units of butter come at a cost of ___ guns
- 69. ACDC: Production PossibilitiesCurve Opportunity Cost Scarcity Trade-offs Constant Opportunity Cost Increasing Opportunity Cost 5:35
- 70. Calculating opportunity cost AB C D E Videos 0 1 2 3 4 Hats 30 29 25 15 0 • A to D - • B to C - • E to D - • C to A -
- 71. Calculating opportunity cost AB C D E Videos 0 1 2 3 4 Hats 30 29 25 15 0 •A to D – 15 hats •B to C – 4 hats •E to D – 1 video •C to A – 2 videos
- 72. Five Concepts Concerning International Trade 1. Absolute Advantage:A nation has an AA if it can produce more goods, more efficiently. 2. Comparative Advantage: A nation has a CA if it has a lower opportunity cost of production. 3. Opportunity cost: Cost of production in term of another good 4. Per Unit Opportunity cost: Production cost of one unit of a good in relation to another good. 5. Terms of Trade: Trade deal that will benefit both nations
- 73. Comparative Advantage • In1 hour • England makes 10 apples or 5 pears: 10/5 = 2 • Australia makes 6 apples or 4 pears: 6/4 = 1.5 • Every hour England produces 5p they could grow 10a. • 10 ÷ 5 = 2 • England’s opportunity cost for 1p = 2a • Every hour Australia produces 4 p they could grow 6a. • 6 ÷ 4 = 1.5 • Australia’s opportunity cost of 1p = 1.5a Since 1.5 < 2 Australia has a:
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- 76. Comparative Advantage andPer Unit Opportunity Cost • In this type of question, you are given two nations, producing the same two goods at different opportunity costs. • You need to: 1. Create a table. 2. Find the per unit opportunity cost using a bit of algebra. 3. Find comparative advantage for one good and one nation. 4. Figure out the best terms of trade. Let’s look at an example on the next slide.
- 77. China can build4 computers or 200 tons of rice • 4c not built costs 200r • Which is the same as: 4c = 200r • 200r not grown costs 4c • Which is the same as 200r = 4c • We need to know the cost of one computer and one ton of rice. • Divide both sides to get 1c or 1r. 4c/4 = 200r/4 200r/200 = 4c/200 1c = 50r 1r = 0.02c
- 78. Comparative Advantage Problems Let’s dosome word problems. I will do the first one. You do the rest.
- 79. Canada produces 20planes or 2 ships France produces 12 planes or 2 ships 1. What is the per unit opportunity cost for producing planes and ships? • How must does 1 plane costs, not 20. 2. Who has the comparative advantage? 3. Find a term of trade that benefits both nations. FIRST: CREATE A TABLE.
- 80. Canada can produce20 planes or 2 ships France can produce 12 planes or 2 ships Planes Ships Canada 20 2 France 12 2 • Now find PER UNIT OC by dividing. Canada France Planes 20 12 Ships 2 2
- 81. Per Unit OpportunityCost • In Canada, 20p cost 2s 20p = 2s 20p/20 = 2s/20 1p = 0.1s • In Canada, 2s cost 20p 2s = 20p 2s/2 = 20p/2 1s = 10p • In France 12p cost 2s 12p = 2s 12p/12 = 2s/12 1p = 0.17 • In France 2s cost 12p 2s = 12p 2s/2 = 12p/2 1s = 6p Planes Ships Canada 20 2 France 12 2 Notice the reciprocals.
- 82. Per Unit OpportunityCost • Canada can make 1 plane for 0.1 ships, which is better than France’s 0.17 ship for 1 plane. • Since 0.1 < 0.17, Canada has a comparative advantage in planes. • France can make 1 ship for 6 planes, which is better than Canada’s 1 ship for 10 planes. • Since 6 < 10, France has a comparative advantage in ships. Planes Ships Canada 20 2 France 12 2
- 83. A term oftrade that benefits both nations? • The exchange must benefit both nations. No nation will buy what they can produce more cheaply at home. • Inside Canada 1s costs 10p • Inside France 1s cost 6p • What will the international cost of 1 ship be? • Canada wants deal that is < 10 planes. • France wants a deal that is > 6 plane • Either 7, 8 or 9 planes per ship would make both nations better off. Planes Ships Canada 20 2 France 12 2
- 84. Do the nextthree yourself.
- 85. 1. Per unitO.C. apples 2. Who has the Comparative advantage in apples 3. What are the best terms of trade for apples USA Korea Apples 39 24 Pumpkins 13 12 https://www.youtube.com/watch?v=hnGCj wRWtcw&t=243s
- 86. Focus on Apples •Perunit O.C. of 1 American apple is 0.33p •Per unit O.C. of 1 Korean apple is 0.5p •US has a CA in apples because 0.33p < 0.5p •The terms of trade for 1 American apple would be anywhere between 0.33 & 0.5 Korean Pumpkins. USA Korea Apples 39a (39a/39 = 13p/39) 1a = 0.33p 24a (24a/24 = 12p/24) 1a = 0.5p Pumpkin 13p (13p/13 = 39a/13) 1p = 3a 12p (12p.12 = 24a/12) 1p = 2a
- 87. Korea can produce3 cars or 9 boats. Germany can produce 4 cars or 8 boats. 1. Per Unit O.C. for cars: 2. Per Unit O.C. for boats: 3. Who has the Comparative advantage in cars? 4. What are the best terms of trade, cars for boats. • 1 Korean car costs __ bikes. • 1 German car costs __ bikes. • _____ has a comparative advantage in cars because __ • Terms of trade: ____. Answer on next slide
- 88. Korea can produce3 cars or 9 bikes. Germany can produce 4 cars or 8 boats. 1. Per Unit O.C. for cars: 2. Per Unit O.C. for boats: 3. Who has the Comparative advantage in cars? 4. What are the best terms of trade, cars for boats. Cars Cycles Korea 3 9 Germany 4 8 • 1 Korean car costs 3 boats. • 1 German car costs 2 boats. • Comparative advantage goes to German cars because 2b < 3b • Terms of trade: 1 German car should cost 2 ½ Korean boats.
- 89. Japan can produce4 laptops or 12 phones. Brazil can produce 1 laptop or 5 phones. 1. Per Unit O.C for laptops? 2. Per Unit O.C. for phones 3. Comparative advantage in laptops? 4. What are the best terms of trade for apples for laptops. • 1 made in Japan, laptop costs __ phones. • 1 made in Brazil, laptop costs __ phones. • __ has a comparative advantage in laptops because__ • Terms of trade: Answer on next slide
- 90. Japan can produce4 laptops or 12 phones. Brazil can produce 1 laptop or 5 phones. 1. Per Unit O.C for laptops? 2. Per Unit O.C. for phones 3. Comparative advantage in laptops? 4. Terms of trade Laptops Phones Japan 4 (1L costs 3P) 12 (1P costs 1/3L Brazil 1 (L costs 5 p) 5(1p costs 1/5L) • 1 Made in Japan laptop costs 3 Japanese phones. • 1 Made in Brazil laptop costs 5 Brazilian phones. • Japan has a comparative advantage in laptops because 3 < 5. • Terms of trade: 1 Japanese laptop should cost 4 Brazilian phones.
- 91. Two Price Controls •PriceCeiling •Price Floor
- 92. Price Ceiling Legal limiton how HIGH a Price can be.
- 93. Table: Price Ceiling,Apartments (millions) Monthly Rent Quantity Demanded Quantity Supplied $1,400 1.6 2.4 1,300 1.7 2.3 1,200 1.8 2.2 1,100 1.9 2.1 1,000 2.0 2.0 900 2.1 1.9 800 2.2 1.8 700 2.3 1.7 600 2.4 1.6
- 94. Graphing a PriceCeiling for Apartments
- 95. Problems with PriceCeilings 1. Inefficient allocation of resources 2. Low quality 3. Black markets Let’s look at each problem
- 96. Inefficient Allocation ofResources
- 97. Low Quality • Ina rent control situation, landlords have little incentive to provide better conditions since they are easily able to find new tenants.
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- 99. Price Floor Legal limiton how LOW a Price can be.
- 100. Table: Price Floor:Butter Price of Butter (per pound) QD of Butter (Million of Pounds) QS of Butter (Million of Pounds) $1.40 8.0 14.0 $1.30 8.5 13.0 $1.20 9.0 12.0 $1.10 9.5 11.0 $1.00 10.0 10.0 $.90 10.5 9.0 $.80 11.0 8.0 $.70 11.5 7.0 $.60 12.0 6.0
- 101. Graphing a PriceFloor
- 102. Butter Mountain andButter Cookies
- 103. Price Controls Why isthis significant? The question is should price controls exist? Should the government enforce a price to make it “fair”.
- 104. Elasticity of Demand •We know when Price increase, QD decreases. • But how much? • Elasticity is the measure of consumer responsiveness to a change in price. • There are three kinds of demand elasticity. • Elastic demand • Inelastic demand • Unit elastic demand Let’s look at each kind
- 105. Elastic Demand Steak isrelatively price-sensitive and therefore elastic The small ∆P results in a larger ∆QD. An increase in price causes consumers to buy a lot less. Revenue decreases. The slope shows an elastic good.
- 106. Inelastic Demand • Insulinis less price- sensitive and therefore inelastic. • The slope is steeper indicating the good’s inelastic nature. • Notice QD does decrease, but not by much.
- 107. Unit Elastic Demand •A good is unit elastic when ∆P = ∆QD • A ∆ price has no effect on revenue.
- 109. Extreme Examples ofPED Perfectly Elastic Perfectly Inelastic %∆QD = zero (no matter the Price) %∆P = zero (no matter the QD)
- 110. Mnemonic Trick forElastic and Inelastic Demand