AP Microeconomics Notes

Chapter 3: Economic Systems

  1. The Fundamental Economic Questions
    1. The Questions
      1. What is the best way to use the resources at disposal?
      2. What should be produced given our resources?
      3. Once it is decided to produce a certain set of goods and services, how much of each item should be produced?
      4. Who will get how much of each good and service?
  2. ​​Strategies for Dealing with the Fundamental Economic Questions
    1. The Command Economy
      1. The central government dictates what will be produced, how much of each item is produced, and who will get how many of the final products
      2. Communism and socialism
      3. Prices can be set by the government
      4. Wages can be set so there is no lower class
      5. Goods and services usually distributed fairly/equally
    2. ​Capitalism
      1. An economic system where supply and demand determine prices
      2. Prices, which are determined in free markets, coordinate the economy
        1. resolve what and how much will be produced
      3. Supply and demand
        1. determines a person’s income
        2. and therefore how much of the production the person can obtain for his own use
      4. Allocative efficiency
        1. resources being deployed to produce just the right amount of each product to satisfy society’s wants
      5. Unequal distribution is the norm
    3. The Mixed Economy
      1. A blend of government controls and capitalism
      2. Currently every country in the world
  3. ​​Price Determination in Capitalism
    1. Law of Demand
      1. When the price of a product increases the quantity demanded decreases, ceteris paribus
        1. ceteris paribus- all other things remaining unchanged
      2. Demand curve slopes downward from left to right
        1. price on vertical axis
        2. quantity demanded on horizontal axis
      3. Note: The price of any given product is determined by the demand for it relative to the supply
    2. Law of Supply
      1. When the price of a product increases, the quantity supplied increases, ceteris paribus
      2. ​​Supply curve
        1. slopes upward from left to right
        2. same axes as that of the demand curve
    3. ​​Equilibrium
      1. ​A state of balance between the opposing forces of shortages and surpluses
      2. Prices stabilize at equilibrium value, which unfortunately always changes
        1. ​the supply and demand curves shift left and right
      3. ​​​Equilibrium point
        1. ​the intersection of the supply and demand curves
      4. ​​​Equilibrium quantity
        1. ​the amount of the product that will be bought and sold in a free market
      5. Equilibrium price
        1. the price that will prevail in a free market
    4. ​​Determinants of Demand
      1. Price of the product
        1. ​primary determinant
        2. doesn’t cause the demand curve to shift, but a change in the quantity demanded
        3. ​​all other determinants can cause the demand curve to shift,  a “decrease/increase in demand”
      2. Income
      3. Consumer tastes
      4. Prices of substitute products
      5. Prices of complementary products
      6. Expected future price of the product
    5. Determinants of Supply
      1. Price of the product
        1. a change in price is a “change in the quantity supplied”
        2. a change in anything else, “change in supply,” shifts the supply curve
      2. Prices of inputs required to make the product
      3. Technology and productivity
      4. Expected future price of the product
    6. Note
      1. Supply and demand affect each other indirectly, not directly
  4. ​​The Circular Flow Diagram
    1. Definition
      1. Diagram that shows how households and firms are related by the exchange of resources and products
    2. How it Works
      1. Individuals and households sell their resources to firms
      2. ​​The firms use the resources to produce goods and services
      3. Individuals and households use the proceeds from the sale of their resources to purchase the output of the firms
    3. Market for Goods and Services
      1. The exchange of income for products
    4. Market for Resources
      1. The exchange of resources for money

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How to cite this note (MLA)

Aboukhadijeh, Feross. "Chapter 3: Economic Systems" StudyNotes.org. Study Notes, LLC., 12 Oct. 2013. Web. 23 Jan. 2019. <https://www.apstudynotes.org/microeconomics/outlines/chapter-3-economic-systems/>.
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