AP Micro Exam Review Guide

AP Microeconomics Exam Review Vocabulary Flashcards

Scarcity

Unlimited wants and limited resources

Opportunity Cost

Most highly valued opportunity forfeited when a choice is made

Principle of Increasing Marginal OC

To get more of something, one must give up an increasing quantity of something else

Comparative Advantage

Lower Opportunity Cost than competition, results in Specialization

Absolute Advantage

Able to produce more than competition using less resources

Utility

Satisfaction

Law of Diminishing Marginal Utility

Additional Satisfaction from 1 additional unit

Normal Goods

As income rises, so too does demand for goods

Inferior Goods

As income rises, demand decreases

Substitutes

Good that can be used in place of another good

Compliments

Goods used in conjunction w/other goods

Price Elasticity of Demand

Measures how sensitive Quantity Demanded is to a change in Price

Price Elasticity of Supply

Measures how sensitive Quantity Supplied is to a change in Price

Total Revenue

Price x Quantity

Cross-Price Elasticity

Measures how sensitive quantity demanded of one product is to a change in price of another product

Income Elasticity of Demand

Measures how sensitive Quantity Demanded is to change in Income

Consumer Surplus

Difference between what you are willing to pay and what you actually pay

Producer Surplus

Difference between the price the seller received and how much they are willing to sell it for

Excise Taxes

A Per unit tax on producers, normally aimed at goods that are deemed to be dangerous or unwanted

Tariff

Tax on imports that increase World Price

Quota

Limit of number of Imports

Accounting Profit

Total Revenue less Explicit Costs

Economic Profit

Total Revenue less Explicit and Implicit Costs

Normal Profit

Occurs in Perfectly Competitive Market when Total Revenue = Total Cost (Long Run); No Economic Profit

Perfect Competition

Price Takers. Side-by-Side Graphs of Industry & Firm. Industry Price = MR = D = AR = P

Monopoly

Price Makers. Inefficient because they under produce and over charge which increases Producer Surplus and Decreases Consumer Surplus. Deadweight Loss results

Price Discrimination

Selling same products to different buyers at different prices. Seeks to charge buyers max. they are willing to pay

Monopolistic Competition

Price Makers, so, Marginal Revenue < Demand. Results in Long Run Equilibrium where Total Revenue = Total Cost, Price = Average Total Cost & Marginal Revenue = Marginal Cost

Oligopoly

Game Theory; Game Theory Matrix Includes Dominant Strategy and Nash Equilibrium

Marginal Resource Cost (MRC)

Additional Cost of an additional resource (Worker)

Marginal Revenue Product (MRP)

Equals the Demand. Additional Revenue generated by an additional worker. In a perfectly competitive product market, the Marginal Revenue Product = Marginal Product of Worker x Price of the Product

Monopsony

One firm hiring workers; Wage Makers; To hire additional workers, the firm must increase the wage

Market Failure

Public Goods; Externalities; Imperfect Competition (Monopolies); Unequal Distribution of Wealth

Socially Optimal Quantity

Marginal Social Benefit = Marginal Social Cost

Progressive Tax

Ex. Current Federal Income Tax

Proportional (Flat Tax)

Ex. 20% Flat income tax on all income groups

Regressive Tax

Ex. Sales Tax