AP Microeconomics/ Macroeconomics Key Terms – Flashcards
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Scarcity
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The limited nature of society's resources
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Economics
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The study of how society manages its scarce resources
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Principle 1 of Economics
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People Face Trade-offs
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Efficiency
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The property of society getting the most it can from its scarce resources
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Equality
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The property of distributing economic prosperity uniformly among the members of society
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Principle 2 of Economics
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The Cost of Something is What You Give Up to Give It
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Opportunity Cost
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Whatever must be given up to obtain some item
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Principle 3 of Economics
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Rational People Think at the Margin
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Rational People
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People who systematically and purposefully do the best they can to achieve their objectives
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Marginal Changes
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Small incremental adjustments to a plan of action
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Principle 4 of Economics
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People Respond to Incentives
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Incentive
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Something that induces a person to act
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Principle 5 of Economics
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Trade Can Make Everyone Better Off
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Principle 6 of Economics
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Markets Are Usually a Good Way to Organize Economic Activity
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Market Economy
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An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
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Principle 7 of Economics
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Governments Can Sometimes Improve Market Outcomes
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Property Rights
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The ability of an individual to own and exercise control over scarce resources
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Market Failure
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A situation in which a market left on its own fails to allocate resources efficiently
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Externality
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The impact of one person's actions on the well-being of a bystander
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Market Power
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The ability if a single economic actor (or small group of actors) to have a substantial influence on market prices
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Principle 8 of Economics
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A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
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Productivity
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The quantity of goods and services produced from each unit of labor input
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Principle 9 of Economics
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Prices Rise When the Government Prints Too Much Money
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Inflation
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An increase in the overall level of prices in the economy
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Principle 10 of Economics
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Society Faces a Short-run Trade-off between Inflation and Unemployment
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Business Cycle
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Fluctuations in economic activity, such as employment and production
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Circular-flow Diagram
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A visual model of the economy that shows how dollars flow through markets among households and firms
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Production Possibilities Frontier
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A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
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Microeconomics
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The study of how households and firms make decisions and how they interact in markets
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Macroeconomics
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The study of economy-wide phenomena, including inflation, unemployment, and economic growth
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Positive Statements
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Claims that attempt to describe the world as it is
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Normative Statements
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Claims that attempt to prescribe how the world should be
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Absolute Advantage
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The ability to produce a good using fewer inputs than another producer
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Comparative Advantage
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The ability to produce a good at a lower opportunity cost than another producer
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Imports
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Goods produced abroad and sold domestically
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Exports
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Goods produced domestically and sold abroad
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Market
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A group of buyers and sellers of a particular good or service
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Competitive Market
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A market in which there are many buyers and many sellers so that each has a negligible impact on the market price
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Quantity Demanded
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The amount of a good that buyers are willing and able to purchase
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Law of Demand
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The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
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Demand Schedule
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A table that shows the relationship between the price of a good and the quantity demanded
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Demand Curve
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A graph of the relationship between the price of a good and the quantity demanded
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Normal Good
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A good for which, other things equal, an increase in income leads to an increase in demand
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Inferior Good
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A good for which, other things equal, an increase in income leads to a decrease in demand
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Substitutes
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Two goods for which an increase in the price of one leads to an increase in the demand for the other
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Complements
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Two goods for which an increase in the price of one leads to a decrease in demand for the other
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Quantity Supplied
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The amount of a good that sellers are willing and able to sell
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Law of Supply
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The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
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Supply Schedule
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A table that shows the relationship between the price of a good and the quantity supplied
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Supply Curve
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A graph of the relationship between the price of a good and the quantity supplied
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Equilibrium
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A situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded
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Equilibrium Price
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The price that balances quantity supplied and quantity demanded
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Equilibrium Quantity
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The quantity supplied and the quantity demanded at the equilibrium price
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Surplus
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A situation in which quantity supplied is greater than quantity demanded
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Shortage
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A situation in which quantity demanded is greater than quantity supplied
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Law of Supply and Demand
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The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
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Elasticity
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A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
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Price Elasticity of Demand
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A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
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Total Revenue
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The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
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Income Elasticity of Demand
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A measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded by the percentage change in income
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Cross-price Elasticity of Demand
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A measure of how much the quantity demanded of one good responds to a change in price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good
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Price Elasticity of Supply
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A measure of how much the quantity supplied of a good responds to a change in price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
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Price Ceiling
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A legal maximum on the price at which a good can be sold
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Price Floor
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A legal minimum on the price at which a good can be sold
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Tax Incidence
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The manner in which the burden of a tax is shared among participants in a market
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Welfare Economics
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The study of how the allocation of resources affects economic well-being
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Willingness to Pay
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The maximum amount that a buyer will pay for a good
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Consumer Surplus
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The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
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Cost
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The value of everything a seller must give up to produce a good
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Producer Surplus
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The amount a seller is paid for a good minus the seller's cost of providing it
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Efficiency
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The property of a resource allocation of maximizing the total surplus received by all members of society
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Equality
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The property of distributing economic prosperity uniformly among the members of society
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Deadweight Loss
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The fall in total surplus that results from a market distortion, such as a tax
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World Price
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The price of a good that prevails in the world market for that good
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Tariff
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A tax on goods produced abroad and sold domestically
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Externality
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The uncompensated impact of one person's actions on the well-being of a bystander
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Internalizing the Externality
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Altering incentives so that people take account of the external effects of their actions
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Corrective Tax
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A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
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Coase Theorem
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The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
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Transaction Costs
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The costs that parties incur in the process of agreeing to and following through on a bargain
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Excludability
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The property of a good whereby a person can be prevented from using it
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Rivalry in Consumption
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The property of a good whereby one person's use diminishes other people's use
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Private Goods
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Goods that are both excludable and rival in consumption
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Public Goods
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Goods that are neither excludable nor rival in consumption
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Common Resouces
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Goods that are rival in consumption but not excludable
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Free Rider
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A person who receives the benefit of a good but avoids paying for it
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Cost-benefit Analysis
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A study that compares the costs and benefits to society of providing a public good
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Tragedy of the Commons
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A parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
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Budget Deficit
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An excess of government spending over government receipts
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Budget Surplus
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An excess of government receipts over government spending
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Average Tax Rate
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Total taxes paid divided by total income
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Marginal Tax Rate
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The extra taxes paid on an additional dollar of income
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Lump-sum Tax
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A tax that is the same amount for every person
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Benefits Principle
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The idea that people should pay taxes based on the benefits they receive from government services
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Ability-to-pay Principle
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The idea that taxes should be levied in a person according to how well that person can shoulder the burden
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Vertical Equity
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The idea that taxpayers with a greater ability to pay taxes should pay larger amounts
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Horizontal Equity
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The idea that taxpayers with similar abilities to pay taxes should pay the same amount
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Proportional Tax
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A tax for which high-income and low-income taxpayers pay the same fraction of income
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Regressive Tax
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A tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers
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Progressive Tax
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A tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers
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Total Revenue
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The amount a firm receives for the sale of its output
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Total Cost
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The market value of the inputs a firm uses in production
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Profit
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Total revenue minus total cost
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Explicit Costs
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Input costs that require an outlay of money by the firm
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Implicit Costs
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Input costs that do not require an outlay of money by the firm
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Economic Profit
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Total revenue minus total cost, including both explicit and implicit costs
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Accounting Profit
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Total revenue minus total explicit cost
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Production Function
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The relationship between quantity of inputs used to make a good and the quantity of output of that good
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Marginal Product
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The increase in output that arises from an additional unit of input
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Diminishing Marginal Product
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The property whereby the marginal product of an input declines as the quantity of the input increases
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Fixed Costs
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Costs that do not vary with the quantity of output produced
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Variable Costs
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Costs that vary with the quantity of output produced
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Average Total Cost
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Total cost divided by the quantity of output
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Average Fixed Cost
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Fixed cost divided by the quantity of output
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Average Variable Cost
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Variable cost divided by the quantity of output
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Marginal Cost
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The increase in total cost that arises from an extra unit of production
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Efficient Scale
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The quantity of output that minimizes average total cost
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Economies of Scale
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The property whereby long-run average total cost falls as the quantity of output increases
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Diseconomies of Scale
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The property whereby long-run average total cost rises as the quantity of output increases
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Constant Returns to Scale
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The property whereby long-run average total cost stays the same as the quantity of output changes
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Competitive Market
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A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
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Average Revenue
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Total revenue divided by the quantity sold
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Marginal Revenue
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The change in total revenue from an additional unit sold
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Sunk Cost
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A cost that has already been committed and cannot be recovered
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Monopoly
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A firm that is the sole seller of a product without close substitutes
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Natural Monopoly
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A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
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Price Discrimination
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The business practice of selling the same good at different prices to different customers
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Oligopoly
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A market structure in which only a few sellers offer similar or identical products
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Monopolistic Competition
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A market structure in which many firms sell products that are similar but not identical
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Game Theory
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The study of how people behave in strategic situations
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Collusion
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An agreement among firms in a market about quantities to produce or prices to charge
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Cartel
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A group of firms acting in unison
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Nash Equilibrium
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A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
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Prisoners' Dilemma
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A particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
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Dominant Strategy
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A strategy that is best for a player in a game regardless of the strategies chosen by the other players
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Factors of Production
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The inputs used to produce goods and services
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Production Function
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The relationship between the quantity of inputs used to make a good and the quantity of output of that good
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Marginal Product of Labor
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The increase in the amount of output from an additional unit of labor
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Diminishing Marginal Product
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The property wherevy the marginal product of an input declines as the quantity of the input increases
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Value of the Marginal Product
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The marginal product of an input times the price of the output
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Capital
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The equipment and structures used to produce goods and services
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Compensating Differential
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A difference in wages that arises to offset the nonmonetary characteristics of different jobs
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Human Capital
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The accumulation of investments in people, such as education and on-the-job training
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Union
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A worker association that bargains with employers over wages, benefits, and working conditions
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Strike
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The organized withdrawal of labor from a firm by a union
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Efficiency Wages
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Above-equilibrium wages paid by firms to increase worker productivity
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Discrimination
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The offering of dufferent opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics
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Poverty Rate
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The percentage of the population whose family income falls below an absolute level called the poverty line
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Poverty Line
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An absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty
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In-kind Transfers
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Transfers to the poor given in the form of goods and services rather than cash
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Life Cycle
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The regular pattern of income variation over a person's life
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Permanent Income
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A person's normal income
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Utilitarianism
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The political philosophy according to which the government should choose policies to maximize the total utility of everyone in society
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Utility
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A measure of happiness or satisfaction
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Liberalism
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The political philosophy according to which the government should choose policies deemed just, as evaluated by an impartial observer behind a "veil of ignorance"
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Maximin Criterion
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The claim that the government should aim to maximize the well-being of the worst off person in society
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Social Insurance
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Government policy aimed at protecting people against the risk of adverse events
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Libertarianism
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The political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income
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Welfare
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Government programs that supplement the incomes of the needy
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Negative Income Tax
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A tax system that collects revenue from high-income households and gives subsidies to low-income households
