AP Macroeconomics Michael Kaylael Melissael

Open vs. Closed Economy – US ECONOMY IS; – Highly privatized Private ownership of FOPs – Highly marketized Percent of GDP that flows through the government is relatively small – Produce most of what we consume, consume most of what we produce Openness – How much is exported and imported, as a percent of GDP – US Relatively Closed Examples: Open: Japan, Netherlands Closed: United States

Production Possibilities Frontier - A diagram that illustrates the possible combination of goods a company produces when all of their resources are fully utilized A B C Opportunity costs are constant, Fully utilizing all resources, being as efficient as possible -illustrates tradeoff btwn goods A B C Opportunity costs are not constant -varying opp. costs reflects principal of increasing cost

Shifts in the Demand Curve Increase in demand = shift right – At all prices we buy more Decrease in demand = shift left – At all prices we buy less Changes in demand caused by: – Consumer preferences, consumer income D0D0 Q price

Complimentary and Substitute Goods Complimentary – Goods you typically buy together ex: peanut butter and jelly, pasta and sauce, tables and chairs – As the price of one goes up, demand for complimentary products go down as well Substitute – Products that can be used in place of one another ex: butter and margarine, cow milk and soy milk, fresh and frozen produce – As the price of butter goes up, QD goes down, so demand for margarine goes up

Supply and Demand Supply – Determinants: # of sellers, technology, cost of inputs, prices of related products, future price expectations – Market Equilibrium Intersection of supply and demand curves, where QS=QD Surplus – QS > QD because price is too high To fix: price must be lower, P QS QD Shortage – QD > QS because price is too low To fix: P QD QS