AP Macroeconomics Unit 1 Vocab

Theoretical economics

When economics use the scientific method to make generalizations and abstractions to develop theories

Policy economics

theories applied to fix problems or meet economic goals

Positive statements

Based on facts, avoids value judgements

Normative Statements

how we should solve the problems, value judgements (what ought to be)

Marginal Analysis

making decisions based on increments and analyzing additional benefits and additional costs

trade-offs

All the alternatives that we give up when we make a choice

opportunity cost

the single most desirable alternative is given up when you make a choice

price

amount buyer or consumer pays

cost

amount seller pays to produce a good

investment

the money spend by businesses to improve their production

consumer goods

goods created for direct consumption

capital goods

goods created for indirect consumption

land

all the natural resources used to produce goods and services

Labor

any effort a person devotes to a task for which that person is paid

physical capital

any human-made resource that is used to create other goods and services

human capital

any skills or knowledge gained by a worker through education and experience

entrepreneurship

ambitious leaders who combine other factors of production to create goods and services

entreprenuers

take the intiative, innovate, bear the risk of failure, reap the rewards of success

constant opportunity cost

The opportunity cost of producing each unit remains the same because resources are equally adaptable for producing either good. The PPC becomes a straight line.

the law of increasing opportunity cost

As you produce more of one good, the opportunity cost of producing additional units increases. This happens because resources are not perfectly adaptable for producing both goods. This results in a “bowed out” PPC. 

absolute advantage

When a person, business, or country can produce more of a good or service using the same amount of resources as someone else (OR can produce the same amount using fewer resources)

comparative advantage

When a person, business, or country can produce a good or service at a lower opportunity cost than someone else

terms of trade

The mutuals agreed upon trade conditions that would benefit both countries

Law of Demand

Inverse relationship between the price and quantity

Demand

the different quantities of a good that consumers are willing and able to buy at different prices

The Substitution Effect

 If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)

the income effect

If the price goes down for a product, the purchasing power increases for consumers - allowing them to purchase more

The Law of Diminishing Marginal Utility

The law states that as you consume more of any good, the additional satisfaction (marginal utility) you get from each extra unit

ceteris paribus

all other things held constant

normal goods

1. As income increases, demand increases

2. As income falls, demand falls

inferior goods

1. As income increases, demand decreases

   1. As income decreases, demand increases

supply

the different quantities of a good that sellers are willing and able to produce and sell at different prices

law of supply

•  there is a DIRECT (positive) relationship between the price and the quantity supplied

  • As price increases, the quantity producers make falls

  • As price falls, the quantity producers make falls

Shifts in supply

1. Prices and Availability of Inputs

   1. Inputs are Land, Labor, and Capital

2. Number of Sellers

3. Technology

4. Government Action: Taxes and Subsidies

   1. A subsidy is a government payment to a business or market

5. Future Expectations of Profit

Double shift rule

If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous)