Basic Economics Concepts - Terms AP MacroEcon

Opportunity Cost

The value of the next best alternative that is given up when making a choice.

Economic Resources

The basic resources used to produce goods and services.

Factors of Production

Land, labor, capital

Production Possibilities Curve

A graphical model showing the maximum potential output combinations of two goods or services an economy can produce given full employment of its available resources and technology.

Consumer Goods

Products created for direct consumption by individuals to satisfy personal wants and needs.

Capital Goods

Manufactured goods, tools, machinery, and equipment used to produce other goods and services (distinct from consumer goods).

Increasing Opportunity Cost

An opportunity cost pattern where producing more of one good requires giving up increasingly larger amounts of another good; this yields a bowed-out (concave) PPC because resources are specialized and not easily adaptable to producing both goods.

Constant Opportunity Cost

An opportunity cost pattern where the trade-off ratio between two goods remains the same regardless of production levels; this yields a straight-line (linear) PPC because the resources used to produce both goods are easily adaptable/similar.

Scarcity

The fundamental economic problem of having unlimited human wants and needs in a world with limited resources.

Land

All natural resources provided by nature (e.g., minerals, forests, water, soil).

Labor

The physical and mental effort exerted by human beings in the production of goods and services.

Capital

Manufactured goods, tools, machinery, and equipment used to produce other goods and services (distinct from consumer goods).

Absolute Advantage

The ability of an individual, business, or country to produce more of a good or service than competitors using the same amount of resources (or using fewer resources to produce the same output).

Comparative Advantage

The ability of an individual, business, or country to produce a good or service at a lower opportunity cost than another producer.

Gains from Trade

The net economic benefits (such as increased total output and consumption possibilities) that individuals or countries obtain by specializing according to comparative advantage and trading with one another.

Law of demand

The rule stating there is an inverse (negative) relationship between the price of a good or service and the quantity demanded.

Determinants of demand

The five factors (shifters) other than price that cause the entire demand curve to shift.

Change in demand

A shift of the entire demand curve to the left or right, caused by a change in one of the five determinants of demand (something other than price).

Change in quantity demanded

Movement along an existing demand curve caused strictly by a change in the price of the product.

Equilibrium quantity

The specific quantity demanded or supplied at the equilibrium price.

Price floor

A minimum legal price that buyers are expected to pay for a product; set above equilibrium price, which causes a surplus.

law of supply

The rule stating there is a direct (positive) relationship between price and quantity supplied.

determinants of supply

The five factors (shifters) other than price that cause the entire supply curve to shift.

change in supply

A shift of the entire supply curve to the left or right, caused by a change in one of the five determinants of supply (something other than price).

change in quantity supplied

Movement along an existing supply curve caused strictly by a change in the price of the product.

equilibrium price

The price level where the quantity of a product offered by sellers is equal to the quantity demanded by consumers.

substitute good

A product consumed in place of another good (e.g., chicken sandwiches in place of hamburgers).

complimentary good

A product consumed together with another good.

surplus

A market condition created when the current price is above the equilibrium price, resulting in quantity supplied being greater than quantity demanded.

shortage

A market condition created when the current price is below the equilibrium price, resulting in quantity demanded being greater than quantity supplied.

price ceiling

A maximum legal price a seller is allowed to charge for a product; set below equilibrium price, which causes a shortage.