Course Goals and Objectives
Semester #1: Microeconomics
UNIT I: BASIC PRINCIPLES:
The focus of this unit is scarcity. We will examine some methodological questions in economics, and cover such concepts as scarce resources, unlimited wants, and tradeoffs in decision-making. We will analyze the different economic systems--market, command and traditional--that have been used to answer the questions of what to produce, how to produce and for whom to produce. Students will be introduced to the most basic forms of economic models as well as the 10 Principles of Economics, with an emphasis on the importance of trade-offs and trade. Finally, this unit will introduce the student to the economic way of thinking.
Lesson #1 “First Principles,” ten principles are explained: four principles of individual choice, covering concepts such as opportunity cost, marginal analysis and incentives; and five principles of interaction between individuals, covering concepts such as gains from trade, market efficiency, and market failure. Students learn that these ten principles form a cohesive conceptual foundation to all of economics.
Lesson 2, “Economic Models: Trade-offs and Trade,” shows students how to think like an economist by using three models—the production possibility frontier, comparative advantage and trade, and the circular-flow diagram—to analyze the world around them. It gives students an early introduction to gains from trade and to international comparisons.
This unit will make up 8-12% of the AP Exam.
1. Describe and analyze the "economic way of thinking"
2. Describe the methodology used in economics
3. Graph and interpret data
4. Graph and distinguish between inverse, direct and zero relationships
5. Graph and distinguish between constant and variable relationships
6. Identify the conditions that give rise to the economic problem of scarcity
7. Define Opportunity Cost
8. Identify the Opportunity Costs involved in various courses of action
9. Construct a Production Possibilities curve from sets of hypothetical data
10. Apply the concept of Opportunity Cost to a Production Possibilities Curve
11. Analyze the significance of different locations on, above or below a Production Possibilities Curve
12. Identify the three economic questions every economic system must answer
13. Compare and contrast the economic philosophies of Adam Smith and Karl Marx
14. Describe and analyze the economic goals of different economic systems
15. Analyze the advantages and disadvantages of different economic systems
UNIT II: SUPPLY AND DEMAND
The Laws of Supply and Demand are the absolute fundamentals of economics; as President John F. Kennedy once said: "Teach a parrot to say 'supply and demand' and you'll have an economist." Supply and Demand are tools for understanding a wide variety of specific issues as well as the operation of the entire economic system. In this unit, we will learn that Supply and Demand curves are models for human behavior, and we will learn to analyze the determinants of Supply and Demand and the ways in which changes in these determinants affect Supply and Demand curves. Emphasis will be placed on the process by which equilibrium price and quantity are determined and the impact of government policies such as price floors, taxes, tariffs and quotas. In particular it is important to be able to make the distinction between movements along the curves and shifts in the curves themselves.
Lesson #1 “Supply and Demand,” covers the standard material in a fresh and compelling way: supply and demand, market equilibrium, and surplus and shortage are all illustrated using an example of the market for scalped tickets to a sports event. Students learn how the demand and supply curves of scalped tickets shift in response to the announcement of a star player’s impending retirement.
Lesson #2, “The Market Strikes Back,” covers various types of market interventions and their consequences: price and quantity controls, inefficiency and deadweight loss, and excise taxes. Through tangible examples such as rent control regulations, minimum wage laws and New York City taxi licenses, the costs generated by attempts to control markets are made real to students.
Lesson #3, “Elasticity,” we introduce the various elasticity measures and show how elasticities are used to evaluate the incidence of an excise tax.
This unit will make up 20-30% of the AP Exam.
1. Describe the behavior of buyers and sellers in a competitive marketplace
2. List and explain the determinants of Demand
3. List and explain the determinants of Supply
4.Draw a graph of a Supply and Demand schedule from data
5. Define Equilibrium
6. Determine what Equilibrium price and quantity will be when given the Demand and Supply data for a good
7. Differentiate between a "change in demand" and a "change in quantity demanded"
8. Differentiate between a "change in supply" and a "change in quantity supplied"
9. Analyze factors and situations that cause Supply and Demand curves to shift
10. Predict the effects of changes in the prices and quantities of Substitute and Complementary goods on the equilibrium price and quantity of a good
11. Explain shifts in the Supply and Demand curves based on changes in Supply and Demand
12. Define Price Elasticity of Demand
13. Distinguish between Elastic and Inelastic Demand
14. Explain the factors that tend to make Demand Elastic or Inelastic
15. Determine the Elasticity of a good at different prices based on changes in Total Revenue
16. Explain the factors that make a good Elastic or Inelastic
17. Define and distinguish between a Normal and an Inferior good
18. Define Price Ceilings and Price Floors
19. Graph Price ceilings and Price Floors
20. Analyze the effects of Price Ceilings and Price Floors on a competitive market
21. Define and describe the concepts of Surplus and Shortage and how they relate to Price Ceilings and Price Floors
22. Explain how markets allocate resources
UNIT III: INDIVIDUALS & MARKETS
Through examples such as a market for used textbooks and eBay, students learn how markets create surpluses for the producer and the consumer under certain conditions. The concept of a derived market demand versus individual demand is emphasized. The concept of market failure to be efficient is then introduced with a focus of deadweight loss.
Lesson #1, “Making Decisions,” - Microeconomics is a decision-theoretic discipline—it is fundamentally a science of how to make decisions. In this lesson students are shown how individuals think "on the margin" and create rational choice-making levels of quantity, and create consumer or producer surpluses. We also show how market demand is derived through the individual choices of consumers.
Lesson #2 "Costs of Decisions" will introduce students to the inefficiencies of excise taxes on the market and show tax incidence and burden on producers and consumers. We reprise the concept of opportunity cost in terms of economic and accounting profits; present a thorough treatment of marginal analysis, and explain the concept of explicit, implicit and sunk cost. Full coverage of sunk cost at this point will help students later when they need to understand the irrelevance of fixed cost in the firm’s short-run output decision.
This unit will make up 8-12% of the AP Exam.
1. Understand the meaning of consumer surplus and its relationship to the demand curve.
2. Understand the meaning of producer surplus and its relationship to the supply curve.
3. Understand the meaning and importance of total surplus and how it can be used both to measure the gains from trade and to evaluate the efficiency of the market.
4. Understand how to use changes in total surplus to measure the deadweight loss of taxes.
5. Learn how economists model decision making by individuals and firms
6. Understand the importance of implicit as well as explicit costs in decision making.
7. Distinguish the difference between accounting profits and economic profits and why economic profit is the correct basis for decisions.
8. Understand the difference between “either or” and “how much” decisions.
9. Define the principle of marginal analysis.
10. Understand what sunk costs are and why they should be ignored.
11. Learn how to make decisions in cases in which time is a factor.
UNIT IV: THE CONSUMER
This unit focuses on the rational decision making of buyers in the market and introduces the students to the limitations of individuals wants and needs based on budget constraints. It shows the difference between preferences and attainability, bring back the importance of choice-making and trade-offs.
Lesson #1, “The Rational Consumer,” provides a complete treatment of consumer behavior. There is a simple, intuitive exposition of the budget line, the optimal consumption choice, diminishing marginal utility, and income and substitution effects and their relationship to market demand. Students learn, for example, that a budget line constructed using prices is much like a Weight-Watchers diet plan constructed using calories. If time allows, we will cover the concept of indifference curves.
This unit will make up 10-15% of the AP Exam.
1. Understand the economics of consumer behavior: how consumers choose to spend their income on goods and services.
2. Explain why consumers make choice by maximizing utility, a measure of satisfaction from consumption.
3. Explain why the principle of diminishing marginal utility applies to the consumption of most goods and services.
4. Understand how to use marginal analysis to find the optimal consumption bundle.
5. Understand how choices by individual consumers give rise to the market demand curve.
6. Define both the income and substitution effects.
UNIT V: THE PRODUCER
This unit is the heart of a Microeconomics course. This material will be difficult because it is abstract, and it is important not to get bogged down in details and miss the major theoretical conclusions in this unit. We will learn to differentiate between short-run and long-run equilibrium for both a profit-maximizing firm and for an industry, and to understand the relationships among price, marginal revenue, average revenue, marginal cost, average cost and profit.
Lesson #1, “Theory of the Firm,” we develop the production function and the various cost measures of the firm. There is an extensive discussion of the difference between average cost and marginal cost, illustrated by examples such as a student’s grade point average. This is a mathematical lesson and students need a solid understanding of all calculations and formulas, as well as understanding how they translate into the vital shapes of cost curves on a firm graph
Lesson #2 “Perfect Competition” explains the output decision of the perfectly competitive firm, its entry/exit decision, the industry supply curve, and the equilibrium of a perfectly competitive market. We draw on examples such as generic pharmaceuticals and agriculture. Students must grasp the construction of the perfectly competitive firm graph and its concepts, as well as finding economic profit and creating a side-by-side analysis.
This unit will make up 40-50% of the AP Exam.
1. Distinguish between a fixed cost and a variable cost
2. Define and Graph total fixed cost, total variable cost, average fixed cost, average variable cost, average total cost and marginal cost
3. Define and plot total revenue, average revenue, marginal revenue and price
4. Define and identify profit, loss, the break-even point and the shutdown point
5. Distinguish between normal profit and economic profit
6. Distinguish between productive and allocative efficiency
7. Distinguish between the short-run and the long-run
9. State the Law of Diminishing Returns
10. Explain the Long-run average cost curve
11. Explain the profit-maximizing rule
12. List the characteristics of perfect competition and graph perfect competition.
UNIT VI: MARKETS & EFFICIENCY
This is a very quick unit that isolates the goal of Microeconomics, the search for efficiency and what it truly means to a firm. Students will define the types of efficiency and see how firms strive for efficiency in hiring and purchasing within the factor markets. The Labor Market Graph is introduced in this unit.
Lesson #1 “Factor Markets and the Distribution of Income,” covers the competitive factor market model and the factor distribution of income. It also contains modifications and alternative interpretations of the labor market: the efficiency-wage model of the labor market is discussed, and the influences of education, discrimination, and market power are also addressed. It presents, we hope, a balanced and well-rounded view of the strengths and limitations of the competitive market model of labor markets and leads to a greater appreciation of the issues of efficiency and equity discussed in the next chapter.
Lesson #2, “Efficiency and Equity,” after recapping efficiency in a single market, we compare and contrast this to what it means to have efficiency in a market economy as a whole. Students will learn the types of efficiency in markets, with particular emphasis on allocative and productive efficiency and where to locate it on a firm graph. The trade-off of sacrificing equity for efficiency in then discussed in the realm of quantities and profit.
This unit will make up 10-15% of the AP Exam.
1. Explain the efficiency of wages theory and find the efficient quantities within factor markets.
2. Explain and define the three types of efficiency within the market - productive, allocative and pareto.
3. Understand how efficiency and equity can conflict as economic policy goals.
4. Construct a Labor Market graph and understand the determinants of labor supply and factor demand
UNIT VII: MARKET STRUCTURE: BEYOND PERFECT COMPETITION - MARKET INEFFICIENCY
This big unit dedicates attention to instances in which the market is not in perfect competition and produces at inefficient levels to make abnormal profits. Market structures of monopoly, oligopoly and monopolisitic competition are studied as to how their actions effect price limit competition in the market. Focus is given to monopoly and monopolistic competition in terms of firm graphing. Oligopoly will be explained in terms of the concept of game theory and the use of a payoff matrix.
Lesson #1, “Monopoly,” is a full treatment of monopoly, including topics such as price discrimination and the welfare effects of monopoly. Students will explore the creation of monopolies as well as the sources of their inefficiencies on society. Students must be comfortable creating a monopoly graph and interpreting the differences and components of the graph. A distinction between a regulated and unregulated monopoly will be introduced.
Lesson #2, “Monopolistic Competition and Product Differentiation,” we start with an example of monopolistic competition that is a familiar feature of students’ lives: the food court at the local mall. We go on to cover entry and exit, efficiency considerations, and advertising in monopolistic competition. Students must understand the fundamental differences of these firms versus the two extremes of monopoly and perfect competition.
Lesson #3, “Oligopoly,” we present basic game theory and the payoff matrix, with the introduction of the prisoner's dilemma. AP College Board no longer requests the construction of an Oligopoly graph.
This unit will make up 40-50% of the AP Exam.
1. List the characteristics of a Perfectly Competitive. Monopolistically Competitive, Oligopolistic and Monopolistic market
2. Graph a Perfectly Competitive, Monopolistically Competitive, Oligopolistic and Monopolistic market
3. Distinguish between a Perfectly Competitive, Monopolistically Competitive, Oligopolistic and Monopolistic market
4. Define the Concentration ratio
5. Describe the effects of different markets on the price of a product, the quantity of a product, the allocation of society's resources, the distribution of income and the rate of technological progress
6. Distinguish between homogenous and differentiated Oligopoly
7. Define collusion and list the advantages and disadvantages of collusion
8. Describe the Prisoner's Dilemma
9. Describe different types of non-price competition
10. Explain the theory of the regulated market place
11. Identify the socially optimal and fair return price for a regulated monopoly
12. Compare perfect competition and imperfect competition
UNIT VIII: MARKET FAILURE - EXTERNALITIES AND PUBLIC GOODS
In this unit, it is important for students to understand the arguments for and against government intervention in otherwise competitive markets. In this unit, we will examine market failures due to negative and positive externalities, and analyze government microeconomic policies such as subsidies, taxes and the provision of public goods. Government policies will be evaluated against a criteria of efficiency and equity. The Lorenz Curve will be used as an illustration of unequal income distribution.
Lesson #1, “Externalities,” covers positive and negative externalities on society and asks students to be able to show the effects of each on a MB / MC graph. The concept of private and social cost and benefit is introduced.
Lesson #2, “Public Goods and Common Resources,” Students learn how to classify goods into four categories (private goods, common resources, public goods, and artificially scarce goods) based on two dimensions (excludability and rivalry in consumption). With this system, they can develop an intuitive understanding of why some goods but not others can be efficiently managed by markets. Students also will see how a Lorenz Curve is used to show inequality.
This unit will make up 8-12% of the AP Exam.
1. Define public goods
2. Describe the characteristics of a public good
3. Develop a rationale for determining which goods should be produced by the private sector and which goods should be produced by the public sector
4. Develop a criteria for evaluating the effectiveness of government programs
5. Define and give examples of externalities and third-party costs
6. Explain overproduction and underproduction
7. Define and differentiate between the progressive, regressive, proportional, ability-to-pay and benefits-received theories of taxation
8. Develop a criteria for evaluating the effectiveness and fairness of a tax
Semester #2: Macroeconomics
The "nuts and bolts" performance of any national economy is usually measured in terms of Gross National Product, Gross Domestic Product, and the levels of inflation and unemployment. This unit will cover the components of gross income measures and the costs of inflation and unemployment. Students will learn to distinguish between nominal and real values, and how to use price indices to convert nominal magnitudes into real magnitudes. As the course moves from static descriptions to dynamic models, we will discuss the actual levels of inflation, unemployment, GNP and GDP in the United States.
LESSON #1 introduces the big ideas in macroeconomics. Starting with an example close to students’ hearts – how the business cycle affects the job prospects of graduates, this lesson provides a quick overview of recessions and expansions, employment and unemployment, long-run growth, inflation versus deflation, and the open economy.
Lesson #2 explains how the numbers macroeconomists use are calculated, and why. We start with a real-world example of how an estimate of real GDP helped save a country from policy mistakes, then turn to the basics of national income accounting, unemployment statistics, and price indexes.
This unit will make up 8-12% of the AP Exam.
1. Define the study of Macroeconomics
2. Describe the purpose of National Income Accounting
3. Define Gross National Product, Gross Domestic Product, Net National Product, National Income, Personal Income, and Disposable Income
4. Explain how we measure GNP and GDP
5. Explain what Goods and Services are counted in GNP and GDP as Consumption, Investment, Government Expenditures, and Net Exports
6. Compute GNP, GDP, NI, PI, and DI when given National Income Accounting data
7. Compute GNP and GDP using both the Income and Expenditure methods
8. Describe the purpose of a Price Index
9. Explain how a Price Index is calculated
10. Use a Price Index to calculate the rate of Inflation
11. Distinguish between Demand-Pull inflation and Cost-Push Inflation
12. Describe the difference between Nominal and Real GNP
13. Describe the phases of the Business Cycle
14. Identify the phases of the Business Cycle when given the appropriate economic data
The macroeconomy's circular flow diagram is introduced and students will need to grasp the various components that interplay within our nation's economy. Students will see how consumer decisions effect the nation's growth as well as a focus on saving and investing components. Students will build the components of the Classical and Keynesian models, including the consumption function, the marginal propensity to consume and to save, and the spending multiplier. All of these concepts provide the building blocks for understanding the macro policies later revealed in future units.
Lesson #1 has students understand the components of National Income and eventually the aggregate demand of the nation. Students will discover the essential concept that every dollar spent in our economy becomes someone's income.
Lesson #2 leads into an analysis of how both demand shocks and supply shocks affect the economy. In analyzing demand shocks, we offer a simple, intuitive explanation of the concept of the multiplier, using the idea of successive increases in spending after an initial shock to explain how the aggregate demand curve shifts. In analyzing supply shocks, we emphasize positive shocks such as the productivity surge of the late 1990s as well as negative shocks. The chapter concludes with the key insight that demand shocks only affect output in the short run.
This unit will make up 12-15% of the AP Exam.
1. Define Aggregate Demand, Aggregate Supply and Equilibrium
2. List and explain the basic causes of shifts in Aggregate Demand and Aggregate Supply
3. Graph Aggregate Demand and Aggregate Supply
4. Analyze the components of the Circular Flow Diagram and use it to explain how a single purchase can influence all the Macro flows in the country.
5. Understand the meaning of the aggregate consumption function.
6. Understand how expected future income and aggregate wealth affect consumer spending.
7. Learn the determinants of investment spending, and the difference between planned and unplanned investment spending.
8. Know how the economy achieves an outcome known as income-expenditure equilibrium.
9. Understand how the inventory adjustment process moves the economy to a new equilibrium after a demand shock.
10 Understand why investment spending is considered a leading indicator of the future state of the economy.
11. Analyze the relationship between savings and investment spending.
In this unit, students will be exposed to the idea of long run productivity and how it is tied into out labor force. Concepts such as technology, job training and re-structuring are applied to graphical analysis within the PPF model, AD / AS model and the introduction of the Phillips Curve. We then look at the problem of unemployment in terms of its impact on growth, its origins and causes and the social costs to society as a result. Students will calculate the unemployment rate and Labor Participation Rate of nations, and derive the concept of "full employment" GDP, so as to identify output gaps within the economy.
Lesson #1 focuses on the measuring of unemployment as a problem studied by Macroeconomists. Students will learn the types of unemployment and their impact of society. They also will calculate the unemployment rate and Labor Participation Rate and be able to apply these concepts to a Phillips Curve graph and a PPF model.
Lesson #2 will concentrate on the interpretation of the graphs on a nation - the effects of long run productivity and how to represent it on a model.
This unit will make up 15-20% of the exam
Identify the three types of unemployment.
Define the Natural Rate of Unemployment
Graph the effects of unemployment on a Phillips Curve and on a PPF graph
Show the impact of unemployment on a AD/AS model
Explain sources of long run productivity and how it impacts economic graphs.
Calculate the rate of unemployment and the Labor Participation Rate.
The material in this unit is the heart of a Macroeconomics course. Since the material is complex, students will need a theoretical construct to organize the concepts; that construct will be the Aggregate Supply-Aggregate Demand model. The relevance of this analysis to fiscal policy decisions will be shown by identifying the goals and tools of fiscal policy and end by analyzing fiscal policy through the economic concepts developed in this unit.
Lesson #1 starts the students with an introduction to John Maynard Keynes and his revolution of modern economic theory of Keynesian Fiscal Policy used during the Great Depression. The course describes the tenants of fiscal policy and the introduction of government deficit spending and crowding out. Students will learn about automatic stabilization policies used to justify the use of fiscal policy. The concept of Keynesian policy on the demand-side will be applied to both an AD/AS graph and a Loanable Funds market graph.
Lesson #2 compares Keynesian demand-side policies to the use of "Supply-Side" fiscal policies, with the introduction of Say's Law. Students will apply the tenants of supply side fiscal policy to the AD/AS model. Students will also apply the two policies to the problems of inflation and economic growth.
This unit will make up 25-30% of the AP Exam.
1. Explain and show graphically how Fiscal Policy can be used to reduce and Inflationary or Recessionary Gap
2. Describe how Fiscal Policy can be used to stabilize the economy
3. Distinguish between Automatic and Discretionary Stabilizers
4. Distinguish between a Contractionary and and Expansionary Fiscal Policy
5. Evaluate Macroeconomic conditions and determine the Fiscal Policy that can be used to improve those conditions
6. List and explain the complications encountered in employing Fiscal Policy
An important step in analyzing Aggregate Demand is the study of the effect of Monetary Policy. The concepts in this unit include the definition of money, fractional reserve banking, and the Federal Reserve System. Students should learn how multiple deposit expansion affects the money supply and how the money supply affects the economy. From this, we can define the determinants of the demand for money and investigate how equilibrium in the money market determines interest rates, and how the investment demand curve provides the link between changes in the money market and changes in Aggregate Demand.
Lesson #1 covers the roles of money, how banks create money, and the structure and role of the Federal Reserve and other central banks. Students will learn the types and roles of money and what economists will constitute as the money supply. The money multiplier is then introduced.
Lesson #2 introduces “Monetary Policy,” and covers the role of Federal Reserve policy in driving interest rates and aggregate demand. In the real-world examples we took full advantage of the dramatic developments in monetary policy since 2000, which make it easier than ever before to illustrate what the Federal Reserve does. We also made a special effort to build a bridge between the short run and the long run. For example, we carefully explain how the Federal Reserve can set the interest rate in the short run, even though that rate reflects the supply and demand for savings in the long run. The Money Market Graph is introduced and applied to the AD/AS model.
This unit will make up 20-25% of the AP Exam.
1. Define and explain the functions of money
2. Explain what determines the value of money
3. Define and contrast the definitions of M1, M2, and M3
4. Define and compare Required Reserves and Excess Reserves
5. Explain how the banking system creates money
6. Calculate the Money Multiplier and money growth possible from a given value of Excess Reserves
7. Describe the organizational structure of the Federal Reserve System
8. Define and explain Open Market Operations
9. Explain how Open Market Operations, the Discount Rate, and the Reserve Requirement are used to expand or contract the money supply
10. Evaluate the effectiveness of the three main tools of Monetary Policy
11. Write and explain the Equation of Exchange (Quantity Theory of Money)
12. Compare and contrast the Keynesian and Monetarist views
13. Given a series of data, identify the economic problem and prescribe the proper Monetary Policy to correct that problem
14. Identify the economic problems and recommend Monetary and Fiscal policies to improve economic performance when given economic statistics
15. Use Aggregate Demand and Aggregate Supply to analyze the economic problems and proposed solutions to those problems
The focus of this unit is world trade, the conduct of commerce among individuals, firms, and governments. This unit will cover concepts such as opportunity cost, comparative and absolute advantage, free trade, protectionism, the balance of payments, and exchange rates. It is important to examine why a country trades, what the effects of restrictions are, how the international payments system helps or hinders trade, and how international exchange rates affect domestic policy goals.
Lesson #1 “International Trade,” contains a recap of comparative advantage, traces the sources of comparative advantage, considers tariffs and quotas, and explores the politics of trade protection. In response to current events, we give in-depth coverage to the controversy over imports from low-wage countries.
Lesson #2 “Macroeconomic Policy in Open Economies,” analyzes the special issues raised for macroeconomics by the open economy. We frame the discussion with real-world concerns such as America’s current account deficit, and China’s accumulation of dollar reserves. Students learn the concept of Foreign Exchange Markets and how the value of currencies interact with interest rates and exchange rates. THe will be able to depict these changes in terms of graphing government international policies.
This unit will make up 15-20% of the AP Exam.
1. Define Comparative and Absolute Advantage
2. Describe and give examples of the Law of Comparative Advantage
3. Define Specialization and Exchange
4. Explain how both parties to a trade gain from voluntary exchange
5. Explain Comparative Advantage in terms of Opportunity Cost
6. When given necessary data, compute the costs of producing two commodities in two countries, determine which nation has the Comparative Advantage in the production of each commodity, calculate the trading ratio, and explain the gains to each nation and the world from Specialization and Trade
7. Describe and evaluate the case for Free Trade
8. Describe and evaluate the case for Protectionism
9. Describe the Balance of Payments
10. Describe how Exchange Rate Systems work and convert currency using current exchange rates
11. Describe the effects of Depreciating or Appreciating Curency Rates on a nation's imports and exports