Krugman AP Section 1 Notes

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Economics
1
•KRUGMAN'S
•MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How scarcity and choice are central to
the study of economics
• The importance of opportunity cost in
individual choice and decision making
• The difference between positive
economics and normative economics
• When economists agree and why
sometimes disagree
• What makes macroeconomics different
from microeconomics
Individual Choice: The Core of
Economics
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Economics
Individual choice
Economy
Market economy
Property rights
Marginal analysis
I.
Individual Choice
A. Economics is the study of scarcity and choice
B. Market and Command Economies
1. Market Economies- production and consumption
are the result of decentralized decisions by many
firms and individuals
2. Command Economies- Industry is publicly owned
and there is a central authority making
production and consumption decisions
3. Why have most Command Economies Failed and
Market Economies succeed?
a. Incentives- Price is a powerful incentive
b. Property Rights- Who owns the land matters
c. When markets fail- government is there to
intervene
II. Resources are Scarce
A. Resources are:
1.
2.
3.
4.
Land- resources that come from nature
Labor- effort of workers
Capital- machinery, buildings, tools
Entrepreneurship- risk takers
B. Needs vs. Wants
C. Scarcity requires that choices be made
D. Choices require that things are given up
III. Opportunity Costs
A. The real cost of something is what you must
give up to get it.
B. Marginal Analysis
1. Many of our decisions are based on an
incremental basis (example: one hour of time)
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Utility and Diminishing Marginal Utility
2. Additional benefits are called marginal benefits
3. Additional costs are called marginal costs
4. If MB>MC, do it. If MB<MC, don’t do it.
IV. Micro vs. Macro
A. Microeconomics focuses on the individual
and how they make decisions and how those
decisions interact.
B. Macroeconomics is concerned with the
overall ups and downs in the economy.
1. Aggregates- measures that summarize data
2. Examples- Unemployment, inflation rate, GDP
V. Positive vs. Normative
A. Positive economics is analysis of how the
economy actually works (facts)
B. Normative economics is how the economy
should work (what if)
C. The overall economy is so complex that
economists often disagree on what to measure
and how to use those measurements.
1. Politicians often use whatever economist’s data fits
their beliefs
2. Ex. Taxes
VI. When and Why Economists
Disagree
• Economists may disagree because
they have different values or opinions
• Economists may disagree because
they use different models or methods
to conduct their analysis
• Over time, disputes in economics are
resolved by the accumulation of
evidence (but this can sometimes
take a long time!)
Module 2
Introduction to
Macroeconomics
•KRUGMAN'S
•MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
•
What a business cycle is and why policy makers
seek to diminish the severity of business cycles
•
How employment and unemployment are
measured and how they change over the
business cycle
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The definition of aggregate output and how it
changes over the business cycle
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The meaning of inflation and deflation and why
price stability is preferred
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How economic growth determines a country's
standard of living
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Why models - simplified representations of
reality- play a crucial role in economics
The Business Cycle
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Business Cycle
Depression
Recession
Expansion
Employment, Unemployment, and the
Business Cycles
•Employment
•Unemployment
•Labor force
•Unemployment rate
Aggregate Output and the Business Cycle
•Output
•Aggregate Output
Inflation, Deflation, and Price Stability
•Nominal income v. Real income
•Inflation
•Deflation
•Price Stability
Economic Growth
• Standards of living
• Economic growth
The Use of Models in Economics
•Models
•Other things equal
assumption
•Ceteris Paribus
Module 3
The
Production
Possibilities Curve Model
•KRUGMAN'S
•MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The importance of trade-offs in
economic analysis
• What the production possibilities
curve model tells us about
efficiency opportunity cost, and
economic growth
• The two sources of economic
growth - increases in the availability
of resources and improvements in
technology
I. The Production Possibilities
Curve
II. Opportunity Cost - Constant
III. Opportunity Cost - Increasing
IV. Efficient Allocation
• Productive Efficiency- the production of any
particular good in the least costly way.
– Society produces at the lowest achievable per unit
cost
– It is expending the least-valued combination of
resources to produce that product
– Lowest ATC
• Allocative Efficiency- Producing the particular
mix of goods and services most valued by
soceity.
– MB=MC, no DWL
V. Economic Growth
• Economic growth
• Expansion of the economy’s
production possibilities
• Availability of resources (land, labor,
capital, entrepreneurship)
• Technology
Economic Growth
Module
4
Comparative
Advantage and Trade
•KRUGMAN'S
•MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How trade leads to gains for an
individual or an economy
• The difference between absolute
advantage and comparative advantage
• How comparative advantage leads to
gains from trade in the global
marketplace
Gains from Trade
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Trade
Gains from trade
Specialization
The importance of
markets
Module 4
Absolute and Comparative
Advantage
I. Absolute Advantage
A. When a worker in a country can
produce more than a worker in another
country, the worker in the first country
has an Absolute Advantage in producing
that good.
Globalization
• Globalization is the manner in which
human activities, such as
communication, international trade, and
cultural awareness, are increasingly
integrated on a multinational basis.
• Students at DPHS are competing with
human resources globally for thoughtful
ideas and productivity
Should we do it all?
• As the US, we have absolute advantages
in many industries. Does that mean we
should produce everything ourselves?
–Not if we are looking at it from global
perspective.
–Think about Student A and B as
countries. What should they do?
II. Comparative Advantage
A. When companies specialize in the
production of a good or service for
which they have a lower opportunity
cost.
B. For students A and B, who should
specialize in what for the best overall
score?
Production Possibilities for Two
Countries
Will these two countries gain from trade if 100 units
of malaria medicine are traded for 200 cotton shirts
To find out:
1. Calculate the opportunity costs of production for
each country
2. Determine the comparative advantage for each
country
3. Determine if the terms of trade are mutually
beneficial
Production Possibilities for Two
Countries
Bangladesh
United States
Cotton Shirts (C)
750C = 250M
1C = 1/3M
1000C =1000M
1C = 1M
Malaria Medicine
(M)
250M = 750C
1M = 3C
1000M =1000C
1M = 1C
Production Possibilities for Two
Countries
Bangladesh
United States
Cotton Shirts (C)
750C = 250M
1C = 1/3M
1000C =1000M
1C = 1M
Malaria Medicine
(M)
250M = 750C
1M = 3C
1000M =1000C
1M = 1C
The United States has a comparative advantage in
Malaria Medicine (M) because they only give up 1
cotton shirt while Bangladesh must give up 3
cotton shirts to gain 1 unit of medicine.
Bangladesh has a comparative
advantage in Cotton Shirts (C)
because they only give up 1/3
unit of medicine while The
United States must give up 1
unit of medicine to gain 1
cotton shirt.
Production Possibilities for Two
Countries
The terms of trade are mutually
beneficial as long as they are
between the two countries’
opportunity costs.
Bangladesh
United States
Cotton Shirts (C)
750C = 250M
1C = 1/3M
1000C =1000M
1C = 1M
Malaria Medicine
(M)
250M = 750C
1M = 3C
1000M =1000C
1M = 1C
For example, any amount of
medicine greater than 1/3 and
less than 1 traded for 1 cotton
shirt would represent mutually
beneficial terms of trade.
Likewise, any number of cotton
shirts greater than 1 and less
than 3 traded for 1 unit of
medicine would represent
mutually beneficial terms of
trade.

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