AP Economics – BerrierUnit 1 Study GuideBasic Economic TheoryBasic Economic Assumptions:

1. 2. 3. 4.

Opportunity Cost PPC A.1

What type of opportunity cost is shown by PPC A.1? ______________Calculate the Opportunity Cost for the following shifts:AB ________ BC________ ED________CA_________

Production Possibilities PPC B.1

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Draw and label a PPC with consumer goods on the x-axis and capital goods on the y-axis. The PPC should be bowed out from the origin. Address each of the following using PPC B.1: 1. Demonstrate an example of economic growth in both industries on the graph. 2. What situations could cause economic growth? Name at least 3.

3. What are some reasons why the entire curve would shift inward (toward the origin)? Name at least 3.

4. How would unemployment be demonstrated on the graph – what is the economic rationale for this depiction? Plot this point UE.

5. What can be said about a point located outside of the curve? Inside?

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AP Economics – BerrierUnit 1 Study Guide PPC B.2Address 1-3 using PPC C.1. Use curve BB as your starting point.

1. Suppose massive new sources of oil and coal are found within the economy and there are major technological innovations in both sectors of the economy. Which curve in the diagram would represent the new PPC? __________ 2. Suppose that a new government comes into power that forbids the use of automated machinery and modern production techniques in all industries. Which curve in the diagram would represent the PPC? __________

3. Suppose there is a major technological breakthrough in ONLY the consumer goods industry, and the new technology is widely adopted. Which curve in the diagram would represent the new PPC? _________

Types of Economies Command Economy Mixed Economy Market Economy

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Circular Flow Model

Label the different roles within the Circular Flow Model. Be sure to include the relationship developed between each of the groups. Don’t forget to add a particular entity into the middle of your flow model!

Comparative AdvantageTable C.1

AP Economics – BerrierUnit 1 Study GuideINPUT Problem

Catching a Unit of Fish Growing a Unit of WheatFarmer A 10 minutes 20 minutesFarmer B 20 minutes 80 minutes

1. Who has absolute advantage in fishing?2. Who has the absolute advantage in growing wheat?3. What is Farmer A’s opportunity cost for producing one unit of wheat?4. Who has the comparative advantage in fishing? 5. Who has the comparative advantage in growing wheat?

Table C.2OUTPUT Problem

Cars Produced in 1 Day Tractors Produced in 1 DayCountry A 30 10Country B 20 40

1. Who has absolute advantage in car production?2. Who has the absolute advantage in tractor production?3. What is Country A’s opportunity cost for producing 1 car?4. Who has the comparative advantage in car production? 5. Who has the comparative advantage in tractor production?

Table C.3Sugar (in tons) Cars

Cuba 40 10Mexico 50 100

1. Which country has an absolute advantage in sugar?2. Which country has an absolute advantage in cars?3. What is Cuba’s opportunity cost for producing one car?4. Which country has a comparative advantage in cars?5. Which country has a comparative advantage in sugar?6. For both countries to benefit from trade, how much sugar can be traded for each car? 1 car for ____ sugar

Supply & Demand

________________ is the only thing that changes QUANTITY SUPPLIED/DEMANDED.

Supply Shifters Demand ShiftersT NO IN CE ER SS T

Price Ceiling:

AP Economics – BerrierUnit 1 Study Guide

Price Floor:

Graphs D.1 – D.6For each of the following scenarios, use a supply and demand diagram to illustrate the effect of the given shock on the equilibrium price and quantity in the specified competitive market. Explain whether there is a shift in the demand curve, the supply curve, or neither.

D.1 An unexpected temporary heat wave hits the East Coast. Show the effect in the ice cream market in New England.

Increase Demand – Tastes & ExpectationsIncrease P, Increase Q

D.2 The government introduces a tax on ice cream which is paid by producers. What is the effect in the ice cream market? Decrease Supply – Taxes & SubsidiesIncrease P, Decrease Q

D.3 China and Mexico are major producers of textiles. Workers in Mexico decide to go on strike. Show the effect on the market for Mexican textiles. Decrease Supply – ResourceIncrease P, Decrease Q

D.4 Show the effect of the situation described in above on the market for Chinese textiles. Increase Demand – SubstituteDecrease Price, Increase Q

AP Economics – BerrierUnit 1 Study Guide

D.5 Suppose the government imposes a price cap on bottled water. Show the effect in the bottled water market. No change in market Equilibrium

If this is a binding/effective price cap, this will result in a shortage ( Qd > Qs)

D.6The popularity of a new fad diet causes consumers’ tastes to shift away from bread. Show the effect on the market for butter, which is used mainly when people eat toast. Decrease Demand – Tastes and Preferences/complementDecrease P, Decrease Q

Multiple Choice Practice:

1. What statement best completes a short definition of economics? “Economics studiesa. how businesses produce goods and services.”b. the equitable distribution of society’s wealth and income.”c. the printing and circulation of money throughout the economy.”d. how individuals, institutions, and society make optimal choices under conditions of scarcity.

2. The opportunity cost of a new public stadium is the a. money cost of hiring guards and staff for the new stadium b. cost of constructing the new stadium in a future year. c. change in the real estate tax rate to pay off the new stadium.d. other goods and services that must be sacrificed to construct the new stadium.

3. Which situation would be most likely to shift the production possibilities curve for a nation in an outward direction?a. deterioration in product qualityb. reductions in the supply of resourcesc. increases in technological advancesd. rising levels of unemployment

4. The private ownership of property resources and the use of markets and prices to direct and coordinate economic activity are characteristic ofa. socialismb. communismc. a market economyd. a command economy

5. The reason for the law of demand can best be explained in terms of a. supplyb. complementary goodsc. the rationing function of pricesd. diminishing marginal utility

AP Economics – BerrierUnit 1 Study Guide6. Which change will decrease the demand for a

product?a. a favorable change in consumer tastesb. an increase in the price of a substitute goodc. a decrease in the price of a complementary goodd. a decrease in the number of buyers

7. The income of a consumer decreases, and the consumer’s demand for a particular good increases. It can be concluded that the good is a. normalb. inferiorc. a substituted. a complement

8. The law of supply states that, other things being constant, as price increases,a. supply increasesb. supply decreasesc. quantity supplied increasesd. quantity supplied decreases

9. A decrease in the supply of a product will most likely be caused bya. an increase in business taxesb. a increase in consumer incomesc. a decrease in resource costs for production d. a decrease in the price of a complementary good

10. Which of the following is "not" illustrated by a production possibility boundary?A. scarcityB. opportunity costC. necessity for choiceD. allocative efficiencyE. all of the above are illustrated

11. Consider the above production possibilities table. The table shows the maximum combinations of bread and guns that can be produced when all resources are fully employed. We can conclude that:

A. the opportunity cost of producing 200 guns instead of 100 guns is 750 units of bread.

B. the opportunity cost of producing 500 guns instead of 300 guns is zero since we don't have to give up any bread.

C. the opportunity cost of producing 400 guns instead of 100 guns is 600 units of bread.

D. the opportunity cost of producing 300 units of bread instead of 750 units of bread is 400 guns.

E. none of the above.

12. Which of the following would tend to increase U.S. production possibilities in the future?

A. the U.S. enters World War II.B. a new hybrid for wheat is discovered.C. a government program is instituted that

encourages college education.D. the present wage differential between

Mexico and the U.S. slowly erodes over time.

E. none of the above will increase U.S. production possibilities in the future.

13. All of the following are examples of opportunity cost except:

A. the leisure time sacrificed to study for an exam.

B. the tuition fees paid to a university.C. the income which could have been

earned by a college student had he or she worked full time instead of attending college.

D. the building which could have been built with the construction materials and labor used to build a new university library.

E. all of the above are examples of opportunity costs.

"Guns" 0 100 200 300 400 500 "Bread" 1000 900 750 550 300 0

AP Economics – BerrierUnit 1 Study Guide14. Most of economic theory:

A. views charitable human actions as especially moral.

B. assumes that groups of people often behave irrationally.

C. is based on the notion that politicians, entrepreneurs, and criminals are especially selfish and greedy.

D. views individuals as home economists.E. assumes that individuals act

purposefully and rationally to maximize their own self-interest.

15. An increase in consumer income will increase demand for a _______ but decrease demand for a _________

A. substitute good, inferior goodB. normal good, inferior goodC. inferior good, normal goodD. normal good, complementary good

16. If a price increase of good A increases the quantity demanded of good B, then good B is aA. substitute goodB. complementary goodC. bargainD. inferior good

17. The equilibrium price clears the market; it is the price at which ________ _________

A. Everything is soldB. Buyers spend all their moneyC. Quantity demanded equals quantity

suppliedD. Excess demand is zeroE. c and d

18. According to the theory of comparative advantage, which of the following is not a reason why countries trade?

A. Comparative advantage.B. Costs are higher in one country than in

another.C. Prices are lower in one country than in

another.D. The productivity of labor differs across

countries and industries.E. Exports give a country a political

advantage over other countries that exportless.