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AP® Macroeconomics

All six College Board units, the four skill categories, and the graphs: built for the 60 MC and the 3 FRQs.

Start Unit 1 free. Unit 1: Basic Economic Concepts is open to everyone, no account needed. Other topics are locked.

Unit 1: Basic Economic Concepts

THE BIG PICTURE. Unit 1 (5–10%) is the smallest unit by exam weight, but it builds the foundational micro toolkit that every later unit borrows. Three ideas dominate: scarcity (why economics exists at all), opportunity cost (the true measure of any choice), and the supply and demand model (the workhorse that explains every market, every price, every quantity in the entire course). Master these and the rest of macro becomes a sequence of applications.

SCARCITY AND THE PRODUCTION POSSIBILITIES CURVE (PPC)

Resources are limited; wants are unlimited. Therefore choices must be made, and every choice has a cost.

The Production Possibilities Curve (PPC) is a graph showing the maximum output of two goods an economy can produce using all available resources efficiently. Axes are the two goods.

Reading the PPC:

  • Points on the curve: efficient (using all resources at full capacity).
  • Points inside the curve: inefficient (unused or misallocated resources, e.g. unemployment).
  • Points outside the curve: unattainable with current resources (but possible with growth).
  • Bowed-out (concave) shape: increasing opportunity cost (resources are not equally productive at both goods). The cost of producing more of one good rises as you produce more of it.
  • Straight-line PPC: constant opportunity cost (resources are equally well-suited).

Shifts of the PPC:

  • Outward shift: economic growth (more resources, better technology, more workers, more capital).
  • Inward shift: loss of resources (natural disaster, war, population decline).
  • Asymmetric shift: improvement in technology for ONE good shifts only that axis outward.

The PPC: efficiency, opportunity cost, and growth Points on the curve are efficient, points inside waste resources, and points outside are unattainable until the curve shifts out. Moving from A to B gains consumption goods at the cost of capital goods; the bowed shape means that cost keeps rising.

WORKED EXAMPLE: READING OPPORTUNITY COST FROM A PPC TABLE

An economy can produce these combinations of capital goods (machines) and consumption goods (food), using all resources efficiently.

PointCapital goodsConsumption goodsOpportunity cost of the last 10 consumption goods
A200–
B18102 capital goods
C14204 capital goods
D8306 capital goods
E0408 capital goods

Step 1. Moving from A to B gives up 2 capital goods for 10 consumption goods, so each consumption good costs 0.2 capital goods. From D to E, each costs 0.8.

Step 2. The cost per unit rises (0.2, 0.4, 0.6, 0.8), so the PPC is bowed out (concave): resources suited to building machines are poorly suited to growing food, and the economy moves them over last.

Step 3. Classify two more points. (10 capital, 20 consumption) is inside the curve (C already gives 14 capital with 20 consumption), so resources are unemployed or misallocated. (18 capital, 30 consumption) is outside the curve: unattainable until the PPC shifts out.

Step 4. Why choose more capital now? Capital goods are a source of growth. An economy that produces at A or B today shifts its PPC out faster than one that produces at E, which is the link between the PPC and long-run growth in Unit 5.

CASE STUDY: DETROIT GOES TO WAR (1942)

After the United States entered World War II, the War Production Board ordered civilian car production to end after February 2, 1942. The last civilian cars rolled off the lines in early to mid February (Ford's last civilian car was built on February 10), and the auto plants were converted to build tanks, aircraft parts, and other military goods for the rest of the war.

  • Concept: opportunity cost. The economy moved along its PPC from consumer goods toward military goods; Americans gave up new cars to get war materiel.
  • Graph: a PPC with "Military goods" and "Consumer goods" on the axes; a point that slides toward the military axis.
  • Lesson: a fully employed economy cannot produce more of one good without giving up some of another. (The war also pulled idle resources back into use, which is a move from inside the curve toward it.)

OPPORTUNITY COST

The value of the next-best alternative given up when a choice is made. NOT the same as monetary price; it includes time, foregone benefits, and any other loss.

On the PPC: opportunity cost of producing more of Good X = the units of Good Y given up (slope of PPC at that point).

Example: if a country can produce either 10 cars or 20 computers, the opportunity cost of 1 car = 2 computers; the opportunity cost of 1 computer = 0.5 cars.

COMPARATIVE ADVANTAGE AND GAINS FROM TRADE

Absolute advantage: producer that can make MORE of a good with the same resources (or the same amount with fewer resources). Comparative advantage: producer with the LOWER OPPORTUNITY COST of producing a good.

Trade is mutually beneficial when each party specializes in the good for which it has comparative advantage. Even a country with absolute advantage in BOTH goods gains by specializing in the one where its comparative advantage is greatest.

Terms of trade: the ratio at which goods are exchanged. Must fall between the two opportunity costs for both parties to gain.

Example: Country A: 1 car costs 2 computers. Country B: 1 car costs 4 computers. A has comparative advantage in cars (lower OC); B in computers. Terms of trade for cars: anywhere between 2 and 4 computers per car works.

WORKED EXAMPLE: COMPARATIVE ADVANTAGE FROM AN OUTPUT TABLE

One worker in each country can produce the following in a day.

CountryWheat (tons)Cloth (bolts)
Atlantis126
Borealis44

Step 1: absolute advantage. Atlantis produces more of both goods per worker, so it has the absolute advantage in both.

Step 2: opportunity costs. Divide what is given up by what is gained.

CountryCost of 1 ton of wheatCost of 1 bolt of cloth
Atlantis6/12 = 0.5 cloth12/6 = 2 wheat
Borealis4/4 = 1 cloth4/4 = 1 wheat

Step 3: comparative advantage. Atlantis has the lower cost of wheat (0.5 < 1), so it specializes in wheat. Borealis has the lower cost of cloth (1 < 2), so it specializes in cloth.

Step 4: terms of trade. A price of 1 bolt of cloth for between 1 and 2 tons of wheat benefits both. At 1.5 tons per bolt, Borealis gets 1.5 wheat for a bolt that cost it 1 wheat to make, and Atlantis gets a bolt of cloth for 1.5 wheat instead of the 2 it would give up making cloth itself.

DEMAND

Law of demand: as price rises, quantity demanded falls (all else equal). Demand curve slopes downward.

Two reasons:

  • Substitution effect: higher price → consumers buy substitutes instead.
  • Income effect: higher price → real income falls → fewer of all normal goods.

Movement along vs shift of demand:

  • Movement along (change in QUANTITY demanded): caused only by a change in the good's OWN price.
  • Shift (change in DEMAND): caused by anything OTHER than own price.

Shifters of demand (memorize: "TRIBE"):

  • Tastes/preferences (changes in popularity, advertising).
  • Related goods (substitutes: PP of substitute up → demand for this good up; complements: PP of complement up → demand for this good down).
  • Income (for normal goods, income up → demand up; for inferior goods, income up → demand down).
  • Buyers (number of consumers in the market).
  • Expectations (future PP expected to rise → demand now rises).

SUPPLY

Law of supply: as price rises, quantity supplied rises (firms profit more, produce more).

Shifters of supply (memorize: "ROTTEN"):

  • Resource costs (inputs more expensive → supply down).
  • Other goods' prices (firm could switch production).
  • Technology (improvements → supply up).
  • Taxes (taxes raise costs → supply down) and subsidies (lower costs → supply up).
  • Expectations (future PP expected to rise → supply now decreases as firms hold back).
  • Number of sellers (more firms → supply up).

MARKET EQUILIBRIUM

The intersection of supply and demand. At equilibrium:

  • Quantity demanded = quantity supplied = equilibrium quantity Q∗Q^*.
  • Price = equilibrium price P∗P^*.
  • No shortage or surplus; market clears.

Disequilibrium:

  • Price above equilibrium → surplus (Qs > Qd) → downward pressure on price.
  • Price below equilibrium → shortage (Qd > Qs) → upward pressure on price.

Comparative statics (how equilibrium changes when curves shift):

ShiftNew P∗P^*New Q∗Q^*
Demand upUpUp
Demand downDownDown
Supply upDownUp
Supply downUpDown

When both curves shift: one of P∗P^* or Q∗Q^* is determined; the other is indeterminate (depends on relative magnitudes of shifts).

Disequilibrium and a demand shift Left: a price above equilibrium makes quantity supplied exceed quantity demanded, a surplus that pushes the price down. Right: an increase in demand raises both the equilibrium price and quantity.

PRACTICE: WHICH CURVE SHIFTS?

Cover the right three columns and predict them for the market for eggs.

EventCurve and directionEquilibrium priceEquilibrium quantity
Disease kills millions of laying hensSupply shifts leftUpDown
The price of chicken feed fallsSupply shifts rightDownUp
A popular diet recommends eating more eggsDemand shifts rightUpUp
The price of bacon (a complement) risesDemand shifts leftDownDown
The price of eggs risesNeither: a movement along demand(the cause, not a result)Quantity demanded falls
Hens die AND a diet craze raises demandSupply left, demand rightUpIndeterminate

WORKED EXAMPLE: AN FRQ-STYLE SUPPLY SHOCK

Prompt: "Assume the market for eggs is perfectly competitive and in equilibrium. An outbreak of avian flu kills a large share of egg-laying hens. (a) Draw a correctly labeled graph of the egg market and show the effect on the equilibrium price and quantity. (b) Explain why the price changes."

Part (a). Label the vertical axis "Price" and the horizontal axis "Quantity." Draw a downward-sloping D and an upward-sloping S1S_1, and mark P1P_1 and Q1Q_1 with dashed lines to both axes. Draw S2S_2 to the left of S1S_1. Mark the new intersection with P2P_2 above P1P_1 and Q2Q_2 left of Q1Q_1. (The layout matches the right panel of the figure, except that supply, not demand, shifts.)

Part (b). Fewer hens means less is offered at every price, so supply decreases. At the old price P1P_1 quantity demanded now exceeds quantity supplied (a shortage). Buyers bid the price up until the shortage disappears at P2P_2.

CASE STUDY: EGG PRICES AND BIRD FLU (2022 TO 2025)

Highly pathogenic avian influenza swept through U.S. poultry flocks starting in 2022. The USDA's Economic Research Service reports that more than 43 million egg-laying hens died from the disease or were culled between February and December 2022. The BLS average retail price of a dozen Grade A large eggs reached about $4.82 in January 2023. A new wave of outbreaks pushed it to a record of about $6.23 in March 2025.

  • Concept: a decrease in supply (a change in a supply determinant, not in the price of eggs itself).
  • Graph: supply shifts left; price rises and quantity falls.
  • Lesson: egg demand is fairly inelastic (few close substitutes for breakfast and baking), so a supply shock shows up mostly as a large price increase rather than a large drop in quantity.

EXAM CONNECTIONS. Unit 1 problems appear as quick MC: identify the comparative-advantage country, read OC from a PPC, predict the effect of a shock on P∗P^* and Q∗Q^*. The graphing skill (Skill Category 4) shows up immediately: every FRQ in the course requires correctly drawn S/D graphs with axes labeled "Price" and "Quantity" and curves clearly identified.

Key Terms

Scarcity

The condition that resources are insufficient to satisfy all wants. The fundamental economic problem; reason economics exists.

Opportunity Cost

Value of the next-best alternative given up when a choice is made. Not just monetary; includes time, foregone benefits, etc.

Production Possibilities Curve (PPC)

Graph showing maximum combinations of two goods an economy can produce using all resources efficiently. Bowed-out → increasing OC; straight → constant OC.

Absolute Advantage

Ability to produce MORE of a good than another producer using the same resources. NOT relevant for trade decisions.

Comparative Advantage

Ability to produce a good at a LOWER OPPORTUNITY COST than another producer. The basis for mutually beneficial trade.

Terms of Trade

Ratio at which two goods are exchanged. For trade to benefit both parties, ToT must fall between the two trading partners' opportunity costs.

Law of Demand

Inverse relationship between price and quantity demanded, ceteris paribus. Demand curve slopes down.

Demand Shifters (TRIBE)

Tastes, Related goods (substitutes/complements), Income, Buyers (number), Expectations. A change in any of these shifts the demand curve.

Law of Supply

Positive relationship between price and quantity supplied, ceteris paribus. Supply curve slopes up.

Supply Shifters (ROTTEN)

Resource costs, Other goods' prices, Technology, Taxes/subsidies, Expectations, Number of sellers.

Market Equilibrium

Point where quantity supplied equals quantity demanded; no shortage or surplus. Yields equilibrium price P∗P^* and quantity Q∗Q^*.

Shortage

Quantity demanded exceeds quantity supplied (occurs when price is below equilibrium). Pressure for price to rise.

Surplus

Quantity supplied exceeds quantity demanded (occurs when price is above equilibrium). Pressure for price to fall.

Normal vs Inferior Goods

Normal: demand rises with income (most goods). Inferior: demand FALLS with income (e.g. ramen noodles, used cars; people buy fewer as they get richer).

Substitutes vs Complements

Substitutes: used instead of each other (Coke/Pepsi); PP of one rises → demand for other rises. Complements: used together (cars/gas); PP of one rises → demand for other falls.

Exam Tips

  • Always label your S/D graph axes "Price" and "Quantity" and identify curves clearly (S, D, S', D'). FRQ rubrics dock points for missing labels or unclear shifts.
  • Movement along vs shift of curve: a price change moves ALONG the curve; anything else SHIFTS the curve. Confusing these is the most common Unit 1 error.
  • Comparative advantage uses opportunity cost, not absolute output. To find CA: divide alternative output by own output for each good.
  • For PPC problems, inside curve = inefficient, on curve = efficient, outside = unattainable. PPC shifts out from growth, in from resource loss.
  • When both S and D shift, ONE of P/Q is determined and the OTHER is indeterminate. Memorize: same-direction shifts → Q determinate, P indeterminate; opposite-direction shifts → P determinate, Q indeterminate.
  • Memorize TRIBE for demand shifters and ROTTEN for supply shifters. These mnemonics save time on every shift-identification MC.

Now practice this topic

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