AP Microeconomics Unit 1

Basic Economic Concepts

Absolute Advantage

the advantage conferred by the ability to produce more of a good or service with a given amount of time and resources

Allocative Efficiency

thing achieved by an economy if it produces at the point along its production possibilities curve that makes consumers as well off as possible.

Capital/Physical Capital

manufactured goods used to make other goods and services

Ceteris Paribus

in the development of a *model*, the assumption that all other relevant factors remain unchanged

Command Economy

an economy in which industry is publicly owned and a central authority makes production and consumption decisions.

Comparative Advantage

the advantage conferred by an individual if the opportunity cost of producing the good or service is lower for that individual than for other people.

Competition

when firms or sellers independently strive for the patronage of buyers in order to achieve a particular business objective

Consumer Good

A good that is bought to be used rather than to produce more goods

Consumption Bundles

Typical groups of goods and/or services purchased

Economic Growth

an increase in the maximum amount of goods and services an economy can produce.

Economics

the study of how choices are made to satisfy needs and wants in the face of scarcity

Efficient

describes a market or economy in which there is no way to make anyone better off without making at least one person worse off.

Entrepreneurship

the efforts of people in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes.

Equity

What is considered to be “fair”

Factors of Production

resources in the economy

Gains from Trade

an economic principle that states that people can get more of what they want through trade than they could if they tried to be self-sufficient; this increase in output is due to specialization.

Incentives

rewards or punishments that motivate particular choices.

Labor/Human Resources

the effort of workers.

Land

all resources that come from nature, such as minerals, timber, and petroleum.

Law of Increasing Opportunity Cost

law that as you increase the production of one good, the opportunity cost to produce the additional good will increase.

Macroeconomics

the branch of economics that is concerned with the overall ups and downs of the economy.

Marginal Analysis

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less.

Marginal Benefit

the gain from doing something one more time.

Marginal Cost

the cost of doing something one more time

Marginal Utility

the change in total utility generated by consuming one additional unit of a good or service.

Marginal Utility per Dollar

shows how marginal utility depends on the quantity of a good or service consumed

Market Economy

an economy in which the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions.

Microeconomics

the branch of economics that studies how individuals, households, and firms make decisions and how those decisions interact.

Mixed Economy

An economic system that combines aspects of a command economy and a market economy, with more emphasis on one or the other.

Normative Economics

the branch of economic analysis that makes prescriptions about the way the economy should work.

Opportunity Cost

the real cost of an item: the value of the next best alternative that you must give up in order to get that item.

Output

the quantity of goods and services produced.

Positive Economics

the branch of economic analysis that describes the way the economy actually works.

Property Rights

establish ownership and grant individuals the right to trade goods and services with each other.

Production Possibilities Curve (PPC)

illustrates the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

Productive Efficiency

state achieved by an economy if it produces at a point on its production possibilities curve.

Resource

anything that can be used to produce something else.

Scarcity

in short supply; when a resource is not available in sufficient quantities to satisfy all the various ways a society wants to use it.

Self-Interest

motivation to satisfy one’s own needs and wants

Specialization

situation in which each person focuses on the task that he or she is good at performing.

Terms of Trade

indicate the rate at which one good can be exchanged for another.

Trade

when, in a market economy, individuals provide goods and services to others and receive goods and services in return.

Traditional Economy

A unique economic system in which things are done as they always have been, and children often follow the career choice of their parents

Utility Maximization

Consumer efforts to raise their satisfaction as high as possible