No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

How does the law of supply and the law of demand work?

Posted on April 15, 2014 at 9:35 AM Comments comments (0)

In a market, buyers and sellers come together to establish prices and quantities of goods and services. The law of supply consists of a direct relationship between price and quantity and the law of demand consists of an inverse relationship between price and quantity. When the supply and demand curves intersect, a market equilibrium is established. Assuming no externalities exists, the intersection of supply and demand is allocatively efficient.


The No Bull Review video below shows you how the laws of supply and demand work in a market.

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AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

What is a command economy?

Posted on April 15, 2014 at 9:30 AM Comments comments (0)

A command economy occurs when central planners (not markets) make all of the economic decisions. The planners determine what will be produced, how many units will be produced, and for whom the goods will be produced for. Command economies in practice are highly inefficient compared to market economies.


AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

What is a market economy?

Posted on April 15, 2014 at 9:30 AM Comments comments (0)

A market economy exists when buyers and sellers allocate scarce economic resources. The laws of supply and demand decide what goods are produced, how goods are produced, and for whom the goods are produced for. The market decides the prices and quantities of goods and services.


AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

How are macroeconomics and microeconomics different?

Posted on April 15, 2014 at 9:25 AM Comments comments (0)

Economics is a social science that deals with the problem of scarce economic resources and incentives. Macroeconomics looks at the economy as a whole (GDP, unemployment, inflation, fiscal policy, monetary policy, etc.). Microeconomics looks at individual economic units (the firm, perfectly competitive market, monopoly, oligopoly, labor market, etc).


AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

What are the effects of a price floor?

Posted on April 15, 2014 at 9:15 AM Comments comments (0)

A price floor is a government price control that should be placed above market clearing equilibrium price to be effective. A floor price is a legal minimum price that aims to help low income producers.


A price floor is inefficient because it misallocates economic resources and leads to a surplus of goods (the quantity supplied is greater than the quantity demanded). It creates deadweight loss. The area of consumer and producer surplus is no longer maximized as a result of a price floor.


Watch this No Bull Review video on price floors to see the effects within a market.

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AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

Why is the demand curve downward sloping?

Posted on April 15, 2014 at 9:10 AM Comments comments (0)

The demand curve slopes downward for the following three reasons:


1. Law of diminishing marginal utility - As you purchase an additional unit, your additional satisfaction decreases. Therefore, the price must fall for you to want to purchase more.

2. Substitution effect - As the price of a good increases, you look for cheaper alternatives to purchase.

3. Income effect - As the price of a good increases, your income has less purchasing power and you cannot afford to purchase as much.


AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

What happens when the demand and supply curves shift at the same time?

Posted on April 15, 2014 at 9:00 AM Comments comments (0)

When the supply and demand curves shift at the same time, the change in market price or quantity will be indeterminate (increase, decrease, or stay the same). For example: when supply and demand both increase (shift to the right), the equilibrium quantity will increases, but market price will be indeterminate.


See the No Bull Review chart below for a complete summary of what happens to market equilibrium after dual shifts occur.


AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

What is the difference between a change in supply and quantity supply?

Posted on April 15, 2014 at 8:55 AM Comments comments (0)

The law of supply states that as the price increases, the quantity supplied will increase. A change in quantity supplied occurs when the price of the product changes. This means that you move point-to-point along the supply curve.


A change in supply refers to a shift of the entire supply curve. This is caused by a change in the determinants of supply.


Change in quantity supplied: point-to-point movement along supply curve

Change in supply: shift of the supply curve


AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

How is a change in quantity demanded different from a change in demand?

Posted on April 15, 2014 at 8:50 AM Comments comments (0)

The law of demand states that as the price decreases, the quantity demanded will increase. A change in quantity demanded occurs when the price of the product changes. This means that you move point-to-point along the demand curve.


A change in demand refers to a shift of the entire demand curve. This is caused by a change in the determinants of demand.


Change in quantity demanded: point-to-point movement along demand curve

Change in demand: shift of the demand curve


AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

What types of goods are excluded from the GDP?

Posted on April 14, 2014 at 8:10 PM Comments comments (0)

A nation's gross domestic product reflects the production of goods and services produced legally within a country's borders in one year. The following items are NOT included in the calculation of a country's GDP:


1. Financial transactions (stocks,bonds)

2. Transfer payments

3. Used goods

4. Goods produced overseas

5. Non-market transactions

6. Illegal transactions

7. Unreported transactions

8. Intermediate goods


This No Bull Review video explains the list above in more detail

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AP Macroeconomics Unit 2 Economic Performance

What is the tax multiplier?

Posted on April 14, 2014 at 7:55 PM Comments comments (0)

In the Keynesian model, the tax multiplier is -MPC/MPS. The tax multiplier is less than the spending multiplier because this formula accounts for savings, which is a leakage. Leakages are not directly used for spending in the short run.


If there is an increase in taxes, multiply the negative tax mulitplier by the change in taxes to see the potential change in real GDP. If there is a decrease in taxes, do the same thing as before, but ignore the negative  sign to see the potential increase in real GDP.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

How does the spending multiplier work?

Posted on April 14, 2014 at 7:50 PM Comments comments (0)

To calculate the spending multiplier, simply divide 1 by the marginal propensity to save (1/MPS or 1/1-MPC). Once you have the spending multiplier, multiply the change in spending by the spending multiplier. This is used within the Keynesian model.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

What is the difference between fiscal policy and monetary policy?

Posted on April 14, 2014 at 7:45 PM Comments comments (0)

Fiscal policy consists of actions taken by the government to bring about full employment. In the Keynesian model, fiscal policy consists of changes in government spending and/or changes in income taxes.


Monetary policy consists of actions taken by the Federal Reserve to bring about full employment and to promote price stability. The most important tool of the Fed is open market operations (buying and selling of government bonds).


AP Macroeconomics Unit 4 Monetary Policy

How do you graph long run economic growth?

Posted on April 14, 2014 at 7:40 PM Comments comments (0)

Economic growth is an increase in real GDP or real GDP per capita over time. You can illustrate long run economic growth in two ways:


1) Rightward shift of the long run aggregate supply curve

2) Outward shift of a nation's production possibilities curve.


AP Macroeconomics Unit 5 Macroeconomic Theory

What is a trade deficit?

Posted on April 14, 2014 at 7:00 PM Comments comments (0)

A trade deficit occurs when a country's imports (M) are greater than its exports (X) in the short run. Net exports (Xn) are negative. Imports and exports are current account transactions. A trade deficit often contributes to a current account deficit (of capital account surplus).


In the long run, a nation's imports (a leakage) will equal its exports (an injection).


AP Macroeconomics Unit 6 International Trade

What are the effects of a price ceiling?

Posted on April 14, 2014 at 6:50 PM Comments comments (0)

A price ceiling is a price control set by the government. A ceiling is a legal maximum price that must be below the free market equilibrium. The government's intent is to help consumers with low incomes. An effective price ceiling leads to a shortage of goods (quantity demanded is greater than the quantity supplied). It causes a misallocation of economic resources and deadweight loss (inefficiency). In the long run, the shortage worsens as producers exit the industry. Sometimes illegal markets (black markets) will develop to attempt to satisfy the high quantities demanded.


The No Bull Review video below discusses the effects of price ceilings and shows the areas of deadweight loss, consumer surplus, and producer surplus.

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AP Macroeconomics / Microeconomics Unit 1 Basic Economic Concepts

What is a budget deficit?

Posted on April 14, 2014 at 6:20 PM Comments comments (0)

A budget deficit occurs when the government spends more than it receives in tax revenue. The government must borrow (issue bonds) to finance its spending. This will often lead to the crowding out effect, a problem associated with expansionary fiscal policies.


A budget surplus occurs when the government receives more money in tax revenue than it spends.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

What is the discount rate?

Posted on April 14, 2014 at 6:15 PM Comments comments (0)

The discount rate is the interest rate which the Fed lends to banks over night. When the discount rate is low, interest rates fall and investment spending rises. Aggregate demand shifts to the right in the AD/AS model.


When the discount rate is high, interest rates rise and investment spending falls. Aggregate demand would then shift to the left in the AD/AS model.


AP Macroeconomics Unit 4 Monetary Policy

How does the crowding out effect work?

Posted on April 14, 2014 at 6:10 PM Comments comments (0)

The crowding out effect is an unintended consequence of expansionary fiscal policy. When the government increases spending, it borrows from the loanable funds market causing real interest rates to rise. The increase in interest rates causes households and businesses to cut back on spending. This means that consumption and gross investment is "crowded out" by the expansionary fiscal policy that caused real interest rates to rise.


The heavy metal music video below explains everything that you need to know about the crowding out effect in the short run and the long run.

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AP Macroeconomics Unit 5 Macroeconomic Theory

What are the top 10 macroeconomics concepts to know?

Posted on April 14, 2014 at 5:45 PM Comments comments (0)

There are far more than 10 important concepts in macroeconomics, but this video does a great job at highlighting some of the concepts that come up often. It includes fiscal policy, monetary policy, foreign exchange markets, the Phillips curve, loanable funds market, crowding out effect, money multiplier, spending multiplier, and more.

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AP Macroeconomics Review