AP Macroeconomics
Some Basics Before We Get Started. |
Krugman (K) Mod. 1
Mankiw (M) Ch. 1 |
Circular Flow of Income |
Mankiw (M) Ch. 2
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This model was developed by Frank Knight at the beginning of the 20th century. He was educated at Milligan University, at University of Tennessee, Knoxville, and earned his Ph. D at Cornell University. He became a notable professor at the University of Chicago, School of Economics.
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Consider the Circular Flow of Money model.
What does the Circular Flow Chart demonstrate about the transfer and transformation of resources?
Terms to know: want, need, service, consumer good, capital good, public good, land, labor, capital, input, output. We will add the government's participation in the relationship between households and firms later in Unit 2. |
For context: The Business Cycle
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M Ch. 1
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For context, Macroeconomics will discuss what occurs in the market at different points in the business cycle. The business cycle is the longer view of the circular flow model.
The four phases of the business cycle are Expansion, Peak, Recession, and Trough. Referring back to the Circular Flow Model, the Expansion gets its label from the expanding business activity or supply of money in the Circular Flow. During the Recession, business activity and the supply of money is contracting or receding. The Expansion and the Recession will be in our focus most of the course. For reference, pay attention to unemployment, consumer income, consumer spending, and business productivity. (We will add to these economic indicators later.) Note that the rate of unemployment affects consumer income, which affects consumer spending, which affects business productivity, which affects the unemployment rate. During an Expansion, unemployment decreases, consumer income increases, consumer spending increases, and business productivity increases. This trend recycles through these indicators throughout the expansion. During a Recession, consumer spending decreases, business productivity decreases, unemployment increases, and consumer income decreases. This trend recycles through these indicators throughout the recession. We will constantly be referring back to the business cycle to understand what trends occur in the market, what legislative and monetary actions may occur to manage the economy. For the longer view, take a look at "Growth In GDP per capita 1871-2009" link at the right. |
The Production Possibilities Frontier (PPF) |
M Ch. 2
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Note in our imaginary country, it produces 2 products. If it efficiently commits all of it's resources (land, labor and capital) to the production of these 2 products, it can produce any combination of products A and B along the Production Possibilities Curve (PPC), E1, E2 and E3. Achieving the maximum output from available resources of any combination of the two products is called allocative efficiency. If the country inefficiently uses its resources or is wasteful, it will produce some combination of products A and B that is below its potential output on the PPC. Consequently, they may produce inside the PPC at points I and W. If the country attempts to produce beyond its PPC at point N, it is simply not sustainable or possible because they do not have the resources to produce at that level.
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PPF/PPC Practice |
On a PPC that is straight, the ratio of giving up the manufacture of one product to the gain of the alternative product is the same any where along the curve. It is said that opportunity costs are constant along the PPC.
In the example to the right, moving from point A to B, or B to C, or even A to D, The ratio of giving up product Beta to gain more of product Alpha is the same. If we gave up Alpha to gain Beta, the ratio would be the same between points along the PPC. Anytime you are given a scenario that refers to constant opportunity costs, you need to draw a straight line for the PPC. |
Interdependence and the Gains from Trade
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M Ch. 3
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Note the production possibilities frontiers of the two countries to the right and left. Each country happen to make the same two products with their scarce resources. Gearhead Republic produces more cars and computers than Geeklandia. Gearhead Republic has absolute advantage over Geeklandia in producing both products.
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Now, which country has comparative advantage in producing cars and computers. Stated another way, which country experiences the least opportunity cost producing a car or a computer.
When you calculate comparative advantage for production output, set it up like the example, and place the "other over" to calculate the opportunity costs. "Other over" refers to the other product that could be produced if you hadn't put all your resources into producing the the product you are making. For instance, here we have placed the number of computers over the number of cars to determine how many computers are given up to make one car. Or, we have placed the number of cars over the number of computers to determine how many cars are given up to make one computer. "Other over". Notice that Gearhead Republic only gives up 3 computers to produce a car compared to Geeklandia who gives up producing 5 computers to produce a car. Gearhead Republic has comparative advantage over Geeklandia in producing cars. Notice that Geeklandia only gives up producing a 1/5th of a car to produce a computer, where Gearhead Republic gives up 1/3rd of a car to produce a computer. Geeklandia has comparative advantage over Gearhead Republic in producing computers. |
Demand
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M Ch. 4
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Supply
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M Ch. 4
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Market Equilibrium |
M Ch. 4
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Price Controls in the Market |
M Ch. 6
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What are the effects of a price ceiling? Negative externalities.
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What are the effects of a price floor? Negative externalities.
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Other Changes in Market Equilibrium |
M Ch. 6
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