AP econ terms

Market Economy

An economic system where supply and demand determine production, prices, and distribution, with minimal government intervention.

Command Economy

An economic system where the government centrally controls production, distribution, and pricing of goods and services.

Factors of Production

Any input that can be used to produce goods or services that satisfy human wants, typically classified into categories such as land, labor, capital, and entrepreneurship.

Land

All naturally occurring resources with a fixed supply, including geographic land, minerals, forests, water, and airspace, considered a fundamental factor of production.

Labor

Human effort—both physical and mental—applied to the production of goods and services, considered a fundamental factor of production.

Physical Capital

Tangible, human-made assets used in the production of goods and services.

Business Cycle

Recurring pattern of expansion and contraction in an economy's output, measured primarily by GDP, reflecting periods of growth and recession.

Expansion

Phase of the business cycle marked by rising production, employment, and income, leading to increased consumer and business spending.

Recession

Significant decline in economic activity across the economy, lasting more than a few months and affecting production, employment, income, and spending.

Depression

Severe and prolonged downturn in economic activity, far more intense than a typical recession.

Economic Growth

Sustained increase in a country's production of goods and services, reflecting rising wealth, income, and living standards.

Labor Force

Total number of people in a population who are either employed or actively seeking employment, excluding those not participating in the workforce.

Unemployment Rate

The percentage of the labor force that is currently without a job but actively seeking employment.

Inflation

Sustained increase in the general price level of goods and services, reducing the purchasing power of money over time.

Deflation

Sustained decrease in the general price level of goods and services, increasing the real value of money but potentially harming economic growth.

Production Possibilities Curve

Graphical tool that shows the maximum combinations of two goods or services an economy can produce in a given time period, assuming all resources are fully and efficiently used.

Opportunity Cost

The value of the next-best alternative that is forgone when a choice is made.

Absolute Advantage

The ability of a party—an individual, firm, or country—to produce a good or service more efficiently than others, using fewer resources or less time.

Comparative Advantage

The ability of a country, firm, or individual to produce a good at a lower opportunity cost than others, enabling gains from trade.

Law of Demand

As the price of a good or service increases, the quantity demanded decreases, and vice versa, reflecting an inverse relationship between price and demand.

Law of Supply

An increase in the price of a good or service leads to an increase in the quantity supplied, while a decrease in price leads to a decrease in quantity supplied.

Shift in Supply/Demand

Factors other than price change, causing the entire supply or demand curve to move, altering market equilibrium prices and quantities.

Movements along Supply/Demand Curves

Changes in the quantity of a good or service bought or sold due to a change in its own price, while all other factors remain constant.

Surplus

The quantity of a good, service, or resource exceeds the quantity demanded, creating an excess that can benefit consumers, producers, or both.

Shortage

The quantity demanded of a good or service is greater than the quantity supplied at the current market price.

Circular Flow

Illustrates how money, goods, and services move continuously between households, firms, and other sectors, forming the foundation of economic activity and national income.

Gross Domestic Product (GDP)

Total monetary value of all final goods and services produced within a country during a specific period, serving as a key measure of economic activity.

Nominal GDP

Total market value of all final goods and services produced in a country, measured at current market prices without adjusting for inflation.

Real GDP

Total value of all goods and services produced in an economy, adjusted for inflation, to reflect true economic growth.

Labor Force Participation Rate

Percentage of the working-age population that is either employed or actively seeking employment.

Frictional Unemployment

Short-term unemployment that occurs when workers are transitioning between jobs or entering the workforce for the first time.

Structural Unemployment

When there is a mismatch between workers' skills and the skills demanded by available jobs, often caused by technological changes, industry decline, or geographic factors.

Cyclical Unemployment

The rise in unemployment that occurs during economic downturns or recessions, caused by reduced demand for goods and services.

Nominal Wages

The amount of money an employee earns for their work, expressed in current currency units without adjusting for inflation.

Real Wages

Wages adjusted for inflation, reflecting the true purchasing power of income and the amount of goods and services a worker can afford.

Consumer Price Index

Measures the average change in prices of a fixed basket of goods and services purchased by households.

Marginal Propensity to Consume

An economic measure that shows the proportion of an additional dollar of income that a household or individual is likely to spend on goods and services rather than save.

Marginal Propensity to Save

An economic measure of the proportion of each additional unit of income that households save rather than spend.

Aggregate Demand

Total demand for all goods and services in an economy at a given time and price level, encompassing consumption, investment, government spending, and net exports.

Short-Run Aggregate Supply

Total goods and services that firms in an economy are willing and able to produce at different price levels in the short term.

Long-Run Aggregate Supply

Total output an economy can produce when all resources are fully employed at their natural rates, independent of price levels.

Fiscal Policy

The use of government spending, taxation, and borrowing to influence a nation's economic activity, growth, and stability.

Monetary Policy

Set of actions taken by a central bank or government to control the money supply and interest rates to achieve economic objectives.

Stagflation

Economic condition characterized by the simultaneous occurrence of high inflation, stagnant economic growth, and elevated unemployment.

Automatic Stabilizers

Built-in fiscal mechanisms in a government's budget that automatically adjust taxes and spending in response to economic conditions.

Bank Reserves

Cash and digital balances that financial institutions hold either in their vaults or in accounts at their central bank.

Required Reserves

Minimum fraction of a bank's deposits that must be held in cash or deposited with the central bank.

Excess Reserves

Funds that banks hold above the minimum required reserves set by a central bank.

Federal Funds Rate

The interest rate at which U.S. banks lend their excess reserve balances to each other overnight.

Discount Rate

Interest rate used to determine the present value of future cash flows.

Open Market Operations

The buying and selling of government securities by a central bank to regulate the money supply.

Loanable Funds Market

A simplified economic model that shows how saving (supply) and investment (demand) interact to determine the real interest rate in an economy.

Rate of Return

Measures the profit or loss generated by an investment relative to its initial cost.

Crowding Out

Increased government spending reduces private sector investment.

Fisher Effect

The relationship between nominal interest rates, real interest rates, and expected inflation.

Phillips Curve

Inverse relationship between unemployment and inflation.

Keynesian Economics

A macroeconomic theory emphasizing that aggregate demand drives economic activity.

Supply-Side Economics

A macroeconomic theory that emphasizes increasing the production of goods and services through lower taxes.

Balance of Payments Accounts

The official records of all international monetary transactions.

Tariffs

A tax imposed by a government on goods as they cross national borders.

Quotas

A government-imposed limit on the quantity or value of a good that can be imported or exported.