Chapters 1, 2, & 3 Study Guide AP Microeconomics Key Concepts scarcity economics macroeconomics microeconomics efficiency equity opportunity cost

business cycle depression recession expansions market economy (capitalism) command economy (communism) externality market power productivity output inflation Phillips curve positive statements normative statements

production possibilities frontier(curve) efficient circular flow diagram specialization comparative advantage absolute advantage imports exports marginal benefit marginal cost cost-benefit analysis Questions 1. You have $12 and can buy a pizza, a movie on DVD, or a package of CD-Rs. You decide to buy the pizza and think that if you hadnt been so hungry, you would have purchased the DVD. What is the opportunity cost of your pizza?

2. What is the opportunity cost of you attending college? What was your opportunity cost of coming to class today?

3. How are inflation and unemployment related in the short run?

4. Why is productivity important? 5. a. Draw and explain the production possibilities frontier for an economy that produces milk and cookies. Label points that are efficient, inefficient, unattainable, and attainable. b. Draw a new production possibilities frontier. Label points that have full employment and the points that have unemployment. Show and label economic growth on the production possibilities frontier.

6. What is inflation, and what causes it?

7. You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?

8. What are the two subfields into which economics is divided? Explain what each subfield studies.

9. What is the difference between a positive and a normative statement? Give an example of each.

10. Classify each of the following statements as positive or normative. Explain. a. Society faces a short-run tradeoff between inflation and unemployment b. A reduction in the rate of growth of money will reduce the rate of inflation. c. The Federal Reserve should reduce the rate of growth of money d. Society ought to require welfare recipients to look for jobs. e. Lower tax rates encourage more work and more saving. 11. Classify the following topics as relating to microeconomics or macroeconomics. a. a familys decision about how much income to save _ _ ___________________ b. the effect of government regulations on auto emissions _________________________________________ c. the impact of higher national saving on economic growth ________________________________________

d. a firms decision about how many workers to hire ______________________________________________ e. the relationship between the inflation rate and changes in the quantity of money ___________________ 12. Draw a circular-flow diagram. Identify the markets and the decision-makers.

13. Why is the production possibilities frontier bowed outward? 14. Is absolute advantage or comparative advantage more important for trade? Explain.

15. Will a nation tend to export or import goods for which it has a comparative advantage? Explain.

16. Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying. a. Draw Marias production possibilities frontier for reading economics and sociology.

b. What is Marias opportunity cost of reading 100 pages of sociology? 17. American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. a. Graph the production possibilities frontier of the American and Japanese economies.

b. For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? c. Which country has an absolute advantage in producing cars? In producing grain? d. Which country has a comparative advantage in producing cars? In producing grain? e. Without, trade, half of each countrys workers produce cars and half produce grain. What quantities of cars and grain does each country produce? 18. List the three basic economic questions.

19. Draw and explain the Phillips Curve.

20. Explain the phrase, There is no such thing as a free lunch.

21. List and explain the factors of production.

22. Figure below shows Mark and Sues PPF.

a. What is Sues opportunity cost of producing a shirt? What is Marks opportunity cost of producing a shirt? b. Who has the comparative advantage in producing shirts? c. What is Sues opportunity cost of producing a blouse? What is Marks opportunity cost of producing a blouse? d. Who has the comparative advantage in producing blouses? e. Who should specialize in producing blouses and who should specialize in producing shirts?