AP Micro Test

Economics

The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.

Scarcity

The limits placed on the amounts and types of goods and services available for consumption due to limited economic resources.

Opportunity Cost

The amount of other products that must be forgone or sacrificed to produce a unit of a product.

Utility

The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from consumption.

Marginal Analysis

The comparison of marginal (extra) benefits and marginal costs, usually for decision making.

Economic Principle

A widely accepted generalization about the economic behavior of individuals or institutions.

Microeconomics

The part of economics concerned with decision making by individual units like households or firms.

Macroeconomics

The part of economics concerned with the performance and behavior of the economy as a whole.

Positive Economics

The analysis of facts or data to establish scientific generalizations about economic behavior.

Normative Economics

The part of economics involving value judgments about what the economy should be like.

Budget Line

A line that shows the different combinations of two products a consumer can purchase with a specific income.

Economic Resources

The land, labor, capital, and entrepreneurial ability used to produce goods and services.

Consumer Goods

Products and services that satisfy human wants directly.

Capital Goods

Human-made resources used to produce goods and services that do not directly satisfy human wants.

Entrepreneurs

Individuals who provide entrepreneurial ability by setting strategy and bearing the financial risk.

Production Possibilities Curve

A curve showing the different combinations of two goods or services that can be produced in an economy.

Law of Increasing Opportunity Costs

The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.

Economic Growth

The outward shift in the production possibilities curve resulting from an increase in resource supplies or technology.

Laissez-faire Capitalism

An economic system where the government's role is limited to protecting property and allowing free market transactions.

Command System

An economic system where property resources are publicly owned and government uses central planning.

Market System

All the product and resource markets in a market economy and the relationships among them.

Private Property

The right of private persons and firms to own and control property.

Freedom of Enterprise

The freedom of firms to use resources to produce products of their choosing.

Competition

The effort and striving between firms to secure business by offering the best possible terms.

Specialization

The use of resources to concentrate production on a small number of goods and services.

Medium of Exchange

Any item that sellers generally accept and buyers generally use to pay for goods and services.

Consumer Sovereignty

The determination by consumers of the types and quantities of goods and services produced.

Creative Destruction

The hypothesis that new products and methods destroy the market power of existing monopolies.

Circular Flow Diagram

An illustration showing the flow of resources and products between households and firms.

Households

Economic entities that provide resources to the economy and use income to purchase goods.

Sole Proprietorship

An unincorporated firm owned and operated by one person.

Partnership

An unincorporated firm owned and operated by two or more persons.

Corporation

A legal entity chartered by a state, distinct from its owners.

Product Market

A market where products are sold by firms and bought by households.

Resource Market

A market where households sell and firms buy resources.

Equilibrium Price

The price at which the quantity demanded and quantity supplied are equal.

Equilibrium Quantity

The quantity at which buyers' and sellers' intentions match in a market.

Surplus

The amount by which the quantity supplied exceeds the quantity demanded at a specific price.

Shortage

The amount by which the quantity demanded exceeds the quantity supplied at a particular price.

Price Ceiling

A legally established maximum price for a good or service.

Price Floor

A legally established minimum price for a good or service.

Elasticity of Demand

The ratio of the percentage change in quantity demanded to the percentage change in price.

Inelastic Product

A product that does not change much when the price changes, e.g., gas.

Elastic Product

A product whose demand significantly changes when the price changes, e.g., steak.

Determinants of Demand

Factors like consumer tastes, number of buyers, and income that shift the demand curve.

Change in Demand

A movement of the entire demand curve caused by changes in demand determinants.

Change in Quantity Demanded

A movement along the demand curve as a result of a change in price.

Determinants of Supply

Factors that determine the quantities supplied of a good or service.

Change in Supply

A movement of the entire supply curve that happens due to a change in determinants.

Change in Quantity Supplied

A change in the quantity supplied along a fixed supply curve due to price change.

Total Surplus

The sum of consumer surplus and producer surplus; measures social welfare.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

The difference between what producers receive and the minimum they would accept.

Externality

A cost or benefit that affects third parties not directly involved in a transaction.

Negative Externality

A cost imposed on third parties by the production or consumption of a good.

Positive Externality

A benefit received by third parties from the production or consumption of a good.

Coase Theorem

The idea that some externalities can be resolved through private negotiations.

Direct Controls

Government policies that constrain activities causing negative externalities.

Cost-Benefit Analysis

A comparison of the marginal costs and benefits of a project to decide on resource allocation.

Private Goods

Goods that have rivalry and excludability, e.g., pizza.

Public Goods

Goods that are nonrivalrous and nonexcludable, e.g., street lights.

Price Elasticity of Supply

The responsiveness of quantity supplied to a change in price.

Short Run

The period too short to change plant capacity but long enough to adjust how intensively to use it.

Long Run

The period long enough for firms to adjust plant sizes and for new firms to enter or exit the market.

Cross Elasticity of Demand

The responsiveness of the quantity demanded of good Z to a change in the price of good Y.

Normal Goods

Goods whose demand increases when income increases.

Inferior Goods

Goods whose demand decreases as income rises.

Marginal Utility

The extra satisfaction gained from consuming one more unit of a good.

Law of Diminishing Marginal Utility

The principle that as consumption increases, the additional satisfaction decreases.

Utility Maximizing Rule

To maximize utility, the last dollar spent on each good should yield the same marginal utility.

Rational Behavior

Consumers try to use their income to derive the greatest amount of utility.

Consumer Choice

How consumers allocate their income among available goods and services.

Budget Constraint

The limits imposed on consumers due to their income and the prices of goods.

Total Utility

The total satisfaction received from consuming a specific quantity of a good.

Consumer Equilibrium

The state where a consumer achieves the maximum total utility from their budget.

Market Failure

The inability of a market to allocate resources efficiently for the society's wants.

Deadweight Loss

Reductions in total surplus due to inefficiencies in resource allocation.

Economic Systems

Different ways to organize an economy, including market and command systems.

Freer Market Ideal

A market where the invisible hand leads to efficient resource allocation.

Government Intervention

Actions taken by the government to correct market failures or provide public goods.

Innovation

The process of creating new products or improving existing ones.

Economic Welfare

The overall well-being of people in an economy, usually measured by utilities.

Utility Theory

A theory explaining consumer choices based on the satisfaction received from goods.

Consumer Preferences

The priorities consumers have for different goods and services.

Fiscal Policy

Government adjustments in spending levels and tax rates to influence an economy.

Monetary Policy

Central bank actions that manage the money supply and interest rates.

Labor Market

The marketplace where employers find workers and workers find jobs.

Income Distribution

The way in which total income is divided among the various participants in an economy.

Wealth Effect

The change in spending that results from changes in perceived wealth.

Expectations Theory

The theory that future economic conditions affect current consumer and business behavior.

Comparative Advantage

The ability of an entity to produce a good or service at a lower opportunity cost than others.

Globalization

The process by which businesses develop international influence and operate on an international scale.

Trade Barriers

Government-imposed regulations that increase the cost and restrict the quantity of foreign goods.

Economies of Scale

The cost advantages that enterprises obtain due to scale of operation, with cost per unit of output generally decreasing with increasing scale.

Diseconomies of Scale

The phenomenon where, as a company or organization grows, per-unit costs increase.

Market Structure

The organizational and other characteristics of a market.

Oligopoly

A market structure in which a market is shared by a small number of producers.

Monopoly

A market structure characterized by a single seller, selling a unique product.

Perfect Competition

A market form where no single buyer or seller has the power to influence market prices.

Price Takers

Firms or individuals that must accept the prevailing prices in the market.