AP MICRO REVIEW

AP Economics

Mr. Crawford

Semester Exam Review Guide

Structure:

60 Multiple Choice questions (1 point each) in 70 minutes

3 Essays (20 points) in 60 minutes

UNIT ONE
FUNDAMENTALS OF ECONOMICS

CHOICE
- EUSR=MSUW
OPPORTUNITY COST
- TINSTAAFL
SCARCITY
- LIMITED AND DESIRABLE
RATIONAL THINKING
COST-BENEFIT ANALYSIS
- FUTURE UTILITY
- INVESTMENT
MARGINAL THINKING
- IMPERFECT INFORMATION

ECONOMIC THEORY

POSITIVE/OBJECTIVE

FACTS
THEORY
- INDUCTION
- DEDUCTION

NORMATIVE/SUBJECTIVE

POLICY

FALLACIES

POST HOC
COMPOSITION
DEFINITION
BIAS

UNIT TWO
THE MARKET SYSTEM

THE FOUR FUNDAMENTAL QUESTIONS
TRADITIONAL SYSTEMS
- BARTER

ADAM SMITH

GREED
- PROFIT MOTIVE
PRIVATE PROPERTY
FREEDOM OF CHOICE
MARKETS
COMPETITION
NO GOVT
- "LAISSEZ FAIRE"
- "INVISIBLE HAND"

CAPITALISM
- SPECIALIZATION
- CAPITAL
- MONEY
CONSUMER SOVEREIGNTY
- DERIVED DEMAND

UNIT THREE
SUPPLY AND DEMAND

DEMAND

Law of Demand

CHANGE IN P= CHANGE IN Qd

INVERSE

CHANGE IN NPD= CHANGE IN D

TASTES
INCOME
MORE OR FEWER BUYERS
EXPECTATIONS
RELATED GOODS' PRICES
- SUB=SAME
- COMP=OPPOSITE

CHANGE IN D= PQ

SUPPLY

Law of Supply

CHANGE IN P = CHANGE IN Qs

DIRECT

DMR/IC
P X Q = TR

CHANGE IN NPD= CHANGE IN S

GOVERNMENT
- TAXES/SUBSIDIES
- PRICE CONTROLS
OTHER PROFIT OPPORTUNITIES
NUMBER
INVESTMENT IN TECHNOLOGY
COST OF RESOURCE
EXPECTATIONS

CHANGE IN S= PQ

UNIT FOUR
MARKET FAILURE

KARL MARX

WEALTH = UTILITY
LABOR THEORY OF VALUE
ALIENATION
EXPLOITATION
- SUBSISTENCE
- PROFIT IS SURPLUS LABOR
FLAWS OF CAPITALISM
- EXTERNALITIES
  - PUBLIC COSTS
- ASYMMETRIC INFORMATION
- PUBLIC GOODS
- IMPERFECT COMPETITION
  - MONOPOLY
- INEQUITY
- BUSINESS CYCLES
SOLUTION
- UNIONS
- REVOLUTION
- GOVERNMENT
  - PUBLIC OWNERSHIP

SOCIALISM

UNIT FIVE
MACROECONOMIC INSTABILITY

BUSINESS CYCLES

SAYS' LAW: Y = C
MARX: INHERENT INSTABILITY BECAUSE
- Y = C + S

AGGREGATE DEMAND

Law of Aggregate Demand

CHANGE IN PL = CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

INVERSE

FOREIGN PURCHASES EFFECT
WEALTH EFFECT
INTEREST RATE EFFECT

CHANGE IN NPD= CHANGE IN AD

CONSUMER DEBT
REAL WEALTH
CONSUMER EXPECTATIONS

CHANGE IN AD= PLAQ

CHANGE IN AD= PLQLSHORT RUN AGGREGATE SUPPLY

Law of Aggregate Supply

CHANGE IN PL = CHANGE IN CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

DIRECT

CHANGE IN NPD= CHANGE IN AS

GOVERNMENT
- TAXES/SUBSIDIES
EXPECTATIONS
COST OF RESOURCE

CHANGE IN AS= PLAQ

LONG RUN AGGREGATE SUPPLY

LRAS = PPF

PERFECTLY INELASTIC; UNRELATED TO CHANGES IN PL, LIMITS OF POTENTIAL PRODUCTION AT FULL EMPLOYMENT

CHANGE IN NPD= CHANGE IN LRAS

TRADE
RESOURCES
TECHNOLOGY

CLASSICAL THEORY

JOSEPH SCHUMPETER
- Y = C + S
- S = I
- Y = C + I
CYCLES ARE TEMPORARY DISEQUILIBRIUMS IN
- PRODUCT MARKET
- RESOURCE MARKET
- MONEY MARKET
IF AD THEN S > I
- SURPLUS; RECESSION
- PRICES DROP
  - DEFLATION OR DISINFLATION
- WAGES DROP
- INTEREST RATES DROP
- AS AND S = I
IF AD THEN S < I
- SHORTAGE; INFLATION
- PRICES RISE
  - INFLATION
- WAGES RISE
- INTEREST RATES RISE
AS AND S = I

UNIT SIX
KEYNESIANISM

CRITIQUES OF CLASSICAL THEORY

SAVINGS DOES NOT EQUAL INVESTMENT
RATCHET EFFECT
- DOWNWARD INFLEXIBILITY OF PRICES AND WAGES
KEYNESIAN CONSUMPTION MULTIPLIER

KCM = 1/MPS

NATIONAL INCOME ACCOUNTING

C + Ig + G + Xn = GDP
NY + KCA + IBT = GNP

CONSUMER PRICE INDEX

NOMINAL = PxQ
REAL = NOMINAL/CPI x 100
MARKET BASKET = HOLD QUANTITY CONSTANT
CPI = MARKET BASKET OF THIS YEAR/MARKET BASKET OF BASE YEAR x 100

UNEMPLOYMENT

LABOR POOL + NOT COUNTED = POPULATION
UNEMPLOYMENT RATE = UNEMPLOYED/LABOR POOL
UNEMPLOYMENT:

ACTUAL
FRICTIONAL
CYCLICAL
STRUCTURAL

OKUN'S LAW

CYCLICAL UNEMPLOYMENT x 2.5 = GDP GAP

COST

Aggregate Demand and Equilibrium
A. Equilibrium (E) is where planned and actual AD and AS are equal.
          1. Equilibrium is where all goods produced for sale are sold.
        2. At points below equilibrium, AD < AS, inventories are building and business
              activity is contracting. This level of economic activity was depicted by the
              horizontal (Keynesian) range of AS explained in the previous model.
        3. At points above equilibrium AD > AS, inventories are decreasing and
              business activity is expanding
              as depicted by the intermediate range and eventually the classical range of AS.
          4. Economic activity (Real GDP) will be wherever AD intersects AS.
              Equilibrium seldom exists as
              economic activity is usually in one stage or another of the business cycle.
     B. If economic activity is not in balance, a dynamic situation exists and will continue
             until equilibrium is reached.
     C. Keynes believed that E could settle at a level of economic activity with large amounts of unemployment.
         1. If potential Real GDP is greater than what actual AD yields, a recessionary gap exists and may persist indefinitely. The solution to this unacceptable
             equilibrium is to increase AD.
         2. If potential Real GDP is less than what actual AD yields, an inflationary gap exists and the inflation may persist indefinitely. The solution to this unacceptable level of economic activity is to decrease AD.

MONETARY POLICY

MONETARY POLICY/SUPPLY SIDE

PERMANENT INCOME THEORY
EXPANSIONARY BIAS
CROWDING OUT
STRUCTURAL DEBT
EXPORT SHOCK

EQUATION OF EXCHANGE

MV = PQ

FEDERAL RESERVE MONETARY TOOLS

OPEN MARKET
- BOND PRICES
DISCOUNT RATE
- DISCOUNT WINDOW
RESERVE RATION
- HAMMER
- CHANGES BOTH M AND V

LONG RUN
- IF EP > 0
  - FIRMS ENTER
  - ATC
  - P
  - EP = 0
- IF EP < 0
  - FIRMS LEAVE
  - ATC
  - P
  - EP = 0

LONG RUN PRODUCTIVE EFFICIENCY
X-EFFICIENCY
- OVERCAPITALIZATION FOR POTENTIAL EXPANSION
NOT ALLOCATIVE EFFICIENT