AP Economics Unit 1

Scarcity

Fundamental economic problem of meeting people's visually unlimited wants with scarce resources.

TINSTAAFL

There's no such thing as a free lunch.

Utility

The pleasure, happiness, or satisfaction obtained from consuming a good or service.

Rational Self-Interest

Buying something out of both self-interest and rationality (for example: health care)

Economics

Social science concerned with how individuals, institutions, and society make best choices under conditions of scarcity.

Marginal Analysis

Comparisons of marginal benefits and marginal costs, usually for decision making.

Marginal Benefit (MB)

The additional satisfaction or utility that a person receives from consuming an additional unit of a good or service.

Marginal Cost (MC)

The change in the total cost that arises when the quantity produced changes by one unit.

Economic Principle

A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.

Ceteris Paribus

Commonly known as "All other things being equal".

Microeconomics

Branch of economics concerned with individual units such as a person, a household, a firm, or an industry.

Macroeconomics

Branch of economics that examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors.

Aggregate

A collection of specific economic units treated as if they were one unit.

Positive Economics

Focuses on facts and cause-and-effect relationships.

Normative Economics

Incorporates value judgements about what the economy should be like or what particular actions should be recommended to achieve a desirable goal.

Economizing Problem

The need to make choices because economic wants exceed economic means.

Budget Line

Schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income.

Trade-offs

Situations that involve losing one quality aspect of something in return for gaining another quality or aspect.

Opportunity Costs

The cost of an alternative that must be forgone in order to pursue a certain action.

Economic Resources

All natural, human, and manufactured resources that go into the production of goods and services.

Land

All natural resources ("gifts of nature") used in the production process, such as arable land, forests, mineral and oil deposits, and water resources.

Labor

Consists of the physical and mental talents of individuals used in producing goods and services.

Capital

All manufactured aids used in producing consumer goods and services.

Investment

The purchase of capital.

Entrepreneurial Ability

A special human resource, distinct from labor.

Function of an Entrepreneur

Takes the initiative in combining the resources of land, labor, and capital to produce a good or a service.

Function of an Entrepreneur

Makes the strategic business decisions that set the course of an enterprise.

Function of an Entrepreneur

Being an innovator.

Function of an Entrepreneur

Being a risk bearer.

Factors of Production

Land, labor, capital, and entrepreneurial ability. Commonly referred to as "inputs".

Consumer Goods

Products that satisfy our wants directly (pizza).

Capital Goods

Products that satisfy our wants indirectly by making possible more efficient production of consumer goods (robots).

Production Possibilities Curve

A graphical representations of the data presented in a production possibilities table.

Good

Material that satisfies human wants and provides utility.

Services

An intangible commodity.

Law of increasing opportunity costs

As the production of a particular good increases, the opportunity cost of producing an additional unit rises.

Optimal Output

The output of a good that, when sold, maximizes profit.

Economic Growth

A larger total output.

Fallacy of composition

One infers that something is true of the whole from the fact that it is true of some part of the whole.

Economics system

A particular set of institutional arrangements and a coordinating mechanism.

Traditional Economy

Economic system involving extensive subsistence agriculture or one that otherwise falls outside the definitions of market or command economies.

Command Economy

Government owns most property resources and decision making occurs through a central economic plan.

Market Economy

Private ownership of resources and the use of markets and prices to coordinate and direct economic activity.

Socialism

Government owns most property resources and economic decision making occurs through a central economic plan.

Laissez-faire

Government's role would be limited to protecting private property and establishing an environment appropriate to the operation of the market system.

Private Property Rights

Enables individuals and businesses to obtain, use, and dispose of property resources as they see fit.

Freedom of Enterprise

An economic system where few restrictions are placed on business activities and ownership.

Freedom of Choice

Enables owners to employ or dispose of their property and money as they see fit.

Self-interest

Motivating force of the various economic units as they express their free choices.

Competition

Rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume.

Market

An institution or mechanism that brings buyers and sellers into contact.

Production

The act of making products (goods and services)

Technology

Innovations that solve problems and make life easier.

Specialization

The use of resources to produce one or a few goods or services rather than an entire range of goods and services.

Division of Labor

Human Specialization

Medium of Exchange

The first and most important function of money.

Barter

Swapping goods for goods.

Money

Convenient social invention to facilitate exchanges of goods and services.

Five Economic Questions

1. What goods and services will be produced?

2. How will the goods and services be produced?

3. Who will get the goods and services?

4. How will the system accommodate change?

5. How will the system promote progress?

Consumer Sovereignty

Consumers are in command - crucial in determining the types and quantities of goods produced.

Dollar Votes

Used to register wants in the market.

Creative Destruction

Process of industrial mutation that revolutionizes the economic structure from within, destroying the old one, creating the new one.

Invisible Hand

Natural phenomenon that guides free markets and capitalism through competition for scarce resources.

Circular Flow Diagram

Illustrates the continuous, repetitive flow of goods and services, resources, and money.

Private Sector

Part of economy that is not state controlled, and is run by individuals and companies for profit.

Public Sector

Part of economy concerned with providing basic government services.

Households

Multiple streams of income used to buy goods and services.

Business Firm

Organization involved in the trade of goods, services, or both to consumers.

Law of Diminishing Returns

The marginal product of an employee will eventually decrease as the number of employees increase.

Paradox of Value

Although water is more useful for survival, diamonds command a higher price in the market.

Comparative Advantage

The ability to produce goods and/or services at a lower opportunity cost than others.

Absolute Advantage

The ability to produce a good or service at a lower cost per unit than any other.

Protective Tariffs

Excise taxes or duties placed on imported goods.

Import quotas

Limits on the quantities or total value of specific items that may be imported.

Nontariff Barriers

A form of restrictive trade where barriers to trade are set up and take a form other than a tariff.

Export Subsidies

Government payments to domestic producers of export goods.

Depreciation

A method of allocating the cost of a tangible asset over its useful life.

Principle of comparative advantage

Total output is greatest when each good is produced by the nation that has the lowest domestic opportunity cost for that good.

Terms of Trade

Value of a country's exports relative to that of its imports

Trading Possibilities Line

Different combinations of two products that an economy is able to obtain when it specializes in the production of one product and trades it to obtain the other product.

Productive Efficiency

The production of any particular good in the least costly way.

Allocative Efficiency

The particular mix of goods and services most highly valued by society.