AP Macroeconomics U1

economics

The social science of how individuals and institutions make optimal choices under scarcity. Simple: how people choose when there isn't enough of everything.

scarcity

Limited resources against unlimited wants. Simple: we can't have it all, so we must choose.

economy

The system a society uses to produce, distribute, and consume goods and services. Simple: how a place makes and shares stuff.

economic resources (factors of production)

Land, labor, capital, and entrepreneurship, used to produce goods and services. Simple: the four ingredients for making anything.

land

All natural resources used in production. Simple: free gifts of nature, like soil, water, oil, and sunlight.

labor

Mental or physical human effort used in production. Simple: people working.

physical capital

Human-made goods such as tools, machines, and buildings used to produce other goods. Simple: stuff we build to help make more stuff.

entrepreneurship

The risk-taking ability that combines the other three resources into production. Simple: the person who starts the business.

efficiency

Using all resources fully with no waste; producing on the PPC. Simple: getting the most out of what you have.

inefficiency

Resources idle or wasted; producing inside the PPC. Simple: not using everything you've got.

opportunity cost

The value of the next best alternative given up. Simple: what you gave up to get what you chose.

tradeoff

Giving up one thing to gain another. Simple: every choice has a cost.

economic growth

An outward shift of the PPC from more or better resources or improved technology. Simple: the whole economy can make more than before.

economic model

A simplified representation of reality used to explain economic behavior. Simple: a stripped-down picture of how things work.

ceteris paribus

The assumption that all variables except the one being studied stay constant. Simple: all else equal, change one thing at a time.

productivity

Output per unit of input. Simple: how much you make per hour or per worker.

capital stock

The total physical capital available in an economy at a point in time. Simple: all the machines and buildings we own right now.

accumulation

Adding to the capital stock through investment. Simple: building up more tools over time.

trade

Voluntary exchange of goods and services. Simple: you give me this, I give you that.

specialization

Concentrating resources on producing one good or a few goods. Simple: making the thing you're best at.

gains from trade

The extra output trading partners obtain through specialization and exchange. Simple: both sides end up with more.

terms of trade

The rate at which units of one product are exchanged for units of another. Simple: the swap rate.

absolute advantage

Producing more output than another producer using the same resources. Simple: who is flat-out better at it.

comparative advantage

Producing at a lower opportunity cost than another producer; the basis for specialization and trade. Simple: who gives up less to make it.

competitive market

Many buyers and sellers of the same product, none able to set the price. Simple: everyone is a price taker.

law of demand

Law describing ceteris paribus, an increase in price reduces quantity demanded. Simple: price up, buying down.

price

The amount paid per unit of a good or service. Simple: the cost of one.

quantity demanded

The amount buyers are willing and able to buy at one specific price. Simple: one price, one number.

demand schedule

A table showing quantity demanded at various prices. Simple: the buyer's list.

demand curve

The graph of the demand schedule; it slopes downward. Simple: the list drawn as a line.

shift in demand

The entire demand curve moves left or right because of a non-price factor. Simple: something besides price changed.

determinants of demand

Non-price factors that shift demand: tastes, income, prices of related goods, expectations, and number of buyers. Simple: the demand shifters.

complementary good or service

Goods used together; when the price of one falls, demand for the other rises. Simple: peanut butter and jelly, printer and ink cartridges

substitute good or service

Goods used in place of each other; when the price of one falls, demand for the other falls. Simple: Coke or Pepsi.

normal good

A good whose demand rises as income rises. Simple: richer, you buy more.

inferior good

A good whose demand falls as income rises. Simple: richer, you buy less.

law of supply

Law describing ceteris paribus, an increase in price raises quantity supplied. Simple: price up, making up.

quantity supplied

The amount sellers are willing and able to produce at one specific price. Simple: one price, one number.

supply schedule

A table showing quantity supplied at various prices. Simple: the seller's list.

supply curve

The graph of the supply schedule; it slopes upward. Simple: the list drawn as a line.

movement along the supply curve

A change in quantity supplied caused only by a change in the good's own price. Simple: sliding on the same line.

shift in supply

The entire supply curve moves because of a non-price factor. Simple: the whole line jumps.

determinants of supply

Non-price factors that shift supply: input prices, technology, taxes and subsidies, number of sellers, and expectations. Simple: the supply shifters.

equilibrium

The point where quantity demanded equals quantity supplied. Simple: the curves cross, no push either way.

equilibrium price

The price at which quantity demanded equals quantity supplied. Simple: the price at the crossing.

equilibrium quantity

The quantity bought and sold at the equilibrium price. Simple: the amount at the crossing.

surplus

Quantity supplied exceeds quantity demanded because price is above equilibrium. Simple: too much left over, so price falls.

shortage

Quantity demanded exceeds quantity supplied because price is below equilibrium. Simple: not enough to go around, so price rises.

indeterminate price

Both curves shift, so the direction of the price change cannot be known. Simple: can't tell which way price goes.

indeterminate quantity

Both curves shift, so the direction of the quantity change cannot be known. Simple: can't tell which way quantity goes.