AP Microeconomics Exam Review Flashcards

Vocabulary and major concepts from the AP Microeconomics curriculum, including market structures, elasticity, factor markets, and market failures.

Scarcity

The inability of limited resources to satisfy our wants; it exists if there is less of an item than is wanted and results in a positive price.

Factors of Production

The resources used to produce goods and services, categorized as land, labor, capital, and entrepreneurship.

Command Economy

An economic system run by central planners where government bureaucrats allocate resources and goods.

Market-based Economies

Economies that emphasize private property rights and use prices to distribute scarce resources and goods.

Opportunity Cost

The value of the next best alternative not chosen when making a choice.

Production Possibilities Curve ($PPC$)

A graph showing all combinations of two goods that can be produced with fixed resources.

Law of Increasing Opportunity Costs

Occurs when a $PPC$ is bowed out because resources are not perfectly adaptable to produce different goods.

Absolute Advantage

The ability to produce more of a good or the same amount using fewer resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost.

Marginal Analysis

An examination of the change in the total; benefit maximizing behavior occurs where marginal benefit equals marginal cost.

Utility Maximizing Rule

The formula used to find the best combination of goods: \frac{MU_A}{P_A} = rac{MU_B}{P_B}.

Law of Demand

Ceteris paribus, consumers will buy more of a good at low prices and fewer units at higher prices, resulting in a downward sloping curve.

Substitution Effect

As prices increase, consumers buy other substitute items instead of the original product.

Income Effect

As prices rise, income has less purchasing power, so consumers can afford fewer units.

Inelastic Demand

A condition where consumers are insensitive to price changes, often for necessities with few substitutes; the elasticity coefficient absolute value is less than $1$.

Elastic Demand

A condition where a small change in price causes a large change in quantity demanded; the elasticity coefficient absolute value is greater than $1$.

Total Revenue Test

A method to determine elasticity: if price and total revenue ($P \times Q$) move in opposite directions, demand is elastic; if they move in the same direction, demand is inelastic.

Income Elasticity

Calculated as $\frac{\%\text{Change in Quantity}}{\%\text{Change in Income}}$; a positive coefficient indicates a normal good, and a negative coefficient indicates an inferior good.

Cross-price Elasticity

Calculated as $\frac{\%\text{Change in Quantity of A}}{\%\text{Change in Price of B}}$; positive indicates substitutes, negative indicates complements.

Equilibrium

The market-clearing price where quantity demanded equals quantity supplied ($QD = QS$).

Consumer Surplus

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

Producer Surplus

The difference between the marginal cost of production and the price the producers receive.

Allocative Efficiency

Occurs when total surplus is maximized at equilibrium and there is no deadweight loss; where marginal social benefit equals marginal social cost.

Price Floor

A government intervention that sets a minimum price above equilibrium, causing a surplus if binding.

Price Ceiling

A government intervention that sets a maximum price below equilibrium, causing a shortage if binding.

Law of Diminishing Marginal Returns

A production principle stating that as more variable inputs are added to workers, marginal product will eventually fall.

Fixed Costs

Costs that do not change with the quantity of output produced.

Variable Costs

Costs that increase as more output is produced.

Economies of Scale

When doubling inputs leads to more than double output, causing long-run average total cost to downward slope.

Economic Profit

Total revenue minus both explicit costs (direct payments) and implicit costs (opportunity costs).

Normal Profit

Occurs when economic profit is zero and accounting profit equals implicit costs.

Perfectly Competitive Market

A market with many firms selling identical products, no barriers to entry, and zero economic profits in the long run; firms are price takers.

Monopoly

A market with one seller, high barriers to entry, a unique good, and price seeking behavior.

Monopolistic Competition

A market with many sellers and low barriers to entry where products are differentiated.

Oligopoly

A market with few sellers, high barriers to entry, and interdependent strategic behavior.

Nash Equilibrium

The most likely outcome in game theory where neither player has an incentive to change their strategy.

Marginal Revenue Product ($MRP$)

The demand for a firm's labor, calculated as marginal revenue (or price) times the marginal product of workers.

Monopsony

A factor market with only one buyer of labor, resulting in an upward sloping supply curve where the firm hires where $MRC = MRP$ but pays a lower wage on the supply curve.

Externalities

Market failures where costs or benefits fall on people who do not produce or buy the product.

Public Goods

Goods that are both non-rival and non-excludable, often suffering from the free rider problem.

Lorenz Curve

A graphical representation showing income distribution; the closer it is to the line of equality, the more equal the distribution.

Gini Coefficient

A numeric measure of equality where a lower coefficient represents a more equal income distribution.

Progressive Tax

A tax system where marginal tax rates increase as income increases, taking a higher percentage of income from the wealthy.