AP Macroeconomics Page 1 of 5

Test: Basic Economic Concepts

User Name:_ ______ Instructor: _______ Date: _

(print clearly)

Directions

• Neatly write your responses in the spaces provided. Use a blue or black pen. Don’t
write in the margins.
• Remember to complete the submission information on every page you turn in.

1. Economic Analysis

A. What is opportunity cost? (3 points)

Opportunity cost is the value of the next best alternative.

B. Describe how economists use marginal analysis. (3 points)

Economists compare marginal benefits and marginal costs. Since people act based on their own
self-interest, people make a cost benefit analysis and choose the alternative that gives them the
highest benefit after considering the costs.

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AP Macroeconomics Page 2 of 5
Test: Basic Economic Concepts

User Name:_ ______ Instructor: _______ Date: _

(print clearly)

C. Describe the production possibilities frontier (PPF) and explain what

it shows. (3 points)

The PPF is a graph that shows the maximum amount of two or more goods a person or group of people can produce,
given the inputs available. Inside the PPF is where the resources are inefficiently used. A point on the PPF is where
resources are efficiently used. Outside the PPF is unattainable.

2. Define absolute advantage and comparative advantage. (6 points)

A person with an absolute advantage has the ability to produce a good or service using fewer resources than other
producers.
A person with a comparative advantage sacrifices less production of a product than a different producer.

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AP Macroeconomics Page 3 of 5
Test: Basic Economic Concepts

User Name:_ ______ Instructor: _______ Date: _

(print clearly)

3. Equilibrium

A. Draw a graph to show equilibrium price. (3 points)

B. Describe what happens when demand decreases. (3 points)

When demand decreases, the demand curve shifts to the left and both the quantity and price decreases.

C. Explain what happens when a market is out of equilibrium. (3 points)

When market is out of equilibrium, there is pressure on the price to change. For example, when the quantity
demanded is greater than the quantity supplied at the market price, there is excess demand. Consumers are willing
and able to buy more of the good than firms are willing and able to produce for sale. Since consumers try to buy
more than firms are producing, firms increase their prices. As price goes up, consumers are less eager to buy the
good and business are more eager to produce the good. Thus, market forces will push the price up until the market
achieves equilibrium.

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AP Macroeconomics Page 4 of 5
Test: Basic Economic Concepts

User Name:_ ______ Instructor: _______ Date: _

(print clearly)

D. Define price floor. What is the effect of a price floor? (3 points)

Price floor is a government-imposed price control set above the equilibrium price. The price can’t go below the price
floor. There is excess surplus because the quantity supplied exceeds the quantity demanded.

4. Supply and Demand

A. State the law of supply. (3 points)

If the price increases, the quantity supplied will increase, and if price decrease, the quantity supplied will decrease,
ceteris paribus.

B. What causes a change in the quantity demanded? (3 points)

The price causes a change in the quantity demanded.

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AP Macroeconomics Page 5 of 5
Test: Basic Economic Concepts

User Name:_ ______ Instructor: _______ Date: _

(print clearly)

C. Define the price elasticity of demand and explain what makes

demand elastic or inelastic. (6 points)

Price elasticity of demand is a measure of how much consumers’ willingness and ability to purchase a good or
service changes when the price changes. If there are many good substitutes for a good, the demand is elastic because
when the price increases, consumers will go and buy other goods that are substitutes.

5. Explain the difference between a change in supply and a change in the

quantity supplied. What might cause each of these kinds of changes? (6 points)

A change in quantity supplied is a movement along the supply curve. A change in price causes the change in
quantity supplied. A change in supply is a shift of the supply curve. A change in costs causes a change in supply.

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