AP Macroeconomics

Scarcity

The fundamental economic problem where unlimited wants exceed limited resources.

Opportunity Cost

The value of the next-best alternative given up when a choice is made.

Trade-off

All alternatives given up when choosing one option.

Factors of Production

Resources used to produce goods—land, labor, capital, entrepreneurship.

Land

Natural resources used to produce goods and services.

Labor

Human effort used in production.

Capital

Tools, machines, and buildings used to produce goods.

Entrepreneurship

Risk-taking and innovation that combine resources to produce goods.

Positive Economics

Objective, fact-based economic analysis.

Normative Economics

Opinion-based analysis about what should be.

Production Possibilities Curve (PPC)

Model showing maximum output combinations using all resources efficiently.

Law of Increasing Opportunity Cost

Opportunity cost rises as production shifts toward more of one good.

Efficiency

Using all resources to maximize output.

Allocative Efficiency

Producing the mix of goods most desired by society.

Productive Efficiency

Producing at the lowest possible cost.

Economic Systems

The method a society uses to allocate resources.

Market Economy

System where decisions come from individuals and markets.

Command Economy

System where government controls economic decisions.

Mixed Economy

System combining market forces and government intervention.

Circular Flow Model

Shows movement of money, goods, and resources between households and firms.

GDP (Gross Domestic Product)

Total value of all final goods and services produced in one year.

Nominal GDP

GDP measured in current prices.

Real GDP

GDP adjusted for inflation.

GDP Deflator

Price index converting nominal GDP to real GDP.

Business Cycle

Fluctuations in economic activity over time.

Expansion

Period of rising GDP and falling unemployment.

Peak

Highest point before economic contraction.

Contraction

Period of declining GDP and rising unemployment.

Trough

Lowest point before recovery.

Unemployment Rate

Percent of labor force unemployed but seeking work.

Frictional Unemployment

Short-term unemployment due to job searching.

Structural Unemployment

Unemployment from changes reducing demand for certain skills.

Cyclical Unemployment

Unemployment caused by economic downturns.

Natural Rate of Unemployment

Frictional + structural unemployment; full employment.

Inflation

General increase in prices over time.

Disinflation

A decrease in the rate of inflation.

Deflation

A general decrease in price levels.

Price Index

Measures average price changes over time.

Consumer Price Index (CPI)

Measures average price levels of a fixed basket of goods.