AP Microeconomics Flashcards

Flashcards of key vocabulary terms and definitions from the AP Microeconomics course study guide.

Economics

Social science that studies how resources are used and how they can be used to their full potential

Macroeconomics

The study of economic problems encountered by the nation as a whole

Microeconomics

The study of economic problems encountered by the individuals within the economy

Positive Economics

Based on the scientific method, so hypotheses are formed and tested

Normative Economics

Based on the way things “should” be; valuing judgments

Resources

Anything that can be used to produce other goods or services

Land

Considered to be all natural resources

Labor

Considered to be all human attributes that are productive

Capital

Productive equipment/machinery

Opportunity Cost

What is sacrificed in order to obtain something else

Production Possibility Curve

Shows the combination of two goods being produced using the economy’s resources

Comparative Advantage

Where specialization can improve productivity

Absolute Advantage

When both products can be produced more efficiently by one party itself

Market

Mechanism that allows buyers and sellers to exchange goods and services

Law of Supply

When the price of a product increases, the quantity supplied increases

Law of Demand

When the price of a product increases, the quantity demanded decreases

Command Economy

Where a central government dictates what will/will not be produced, how much of it will be produced, and who gets the final products

Capitalism

Where supply and demand determine the prices in a free market

Allocative Efficiency

Where resources are deployed in the optimal way to ensure the right products are sold in the right amounts to satisfy consumers

Mixed Economy

Blend of government commands and capitalism

Circular Flow Diagram

The idea that shows how households and firms are related by the flow of resources/products

Market Equilibrium

Where quantity demanded equals the quantity supplied, determining the level of output and price

Demand

The quantity of a product a consumer would purchase at a given price

The Income Effect

When prices fall, consumers can afford to buy more of a certain good/service

The Substitute Effect

When the price of a good increases, its price also increases relative to the prices of other equivalent goods

Substitute Goods

When an increase in the price of one good results in an increased demand for the other good

Preferences

Consumers’ taste for a good/service (taste increases = demand increases)

Population

Number of consumers in the market, so a bigger market is more demand

Normal Good

As income increases, demand increases (direct relationship)

Inferior Good

As income increases, demand decreases (indirect relationship)

Complementary Goods

Goods that are purchased separately but used together, and as the price for one good increases, the demand for the other decreases

Expectations

If consumers expect future prices to increase, the demand for the product today increases

Supply

Quantity a producer would produce at a given price

Cost of Inputs

When the cost of producing a product increases the supply decreases

Opportunity Cost of Alternative Production

If a firm can switch between production of different products, they will choose what to produce to give them maximum profit

Technology

Better technology can decrease production costs and increase productivity, increasing supply

Taxes

A tax on the good will result in increased production costs, which will decrease supply

Subsidies

The government paying for the production of a product => supply will increase

Expectations

If expectations of prices increasing in the future are held, the supply will decrease at the present moment

Number of Sellers

If there is more competition in the market, supply will increase

Surplus

Above the equilibrium price, when quantity supplied is greater than quantity demanded

Shortage

Below the equilibrium price, when quantity demanded is greater than quantity supplied

Ceteris Paribus

Holding all other factors/conditions constant

Price Ceiling

A government-mandated control on the max price a seller can put their product at

Price Floor

A government-mandated control on the lowest price something can be at

Unit Elastic

If price increases by a factor and quantity demanded decreases by the same factor, total revenue stays the same

Elastic Demand

If the price increases by a factor and quantity demanded decreases by a greater factor, total revenue decreases

Inelastic Demand

If the price increases by a factor and quantity demanded decreases by a smaller factor, total revenue increases

Cross-Price Elasticity of Demand

The percentage change in demand for good X based on the price change for good Y

The Short Run

Period of time where supply cannot fully adjust to demand changes so there is more demand than supply; prices begin to skyrocket

The Long Run

Period of time where more choices are available, so consumers are more sensitive to price changes

Income Elasticity of Demand

How changes in income affects quantity demanded for a product

Producer Surplus

The difference between the lowest price a producer would sell a product, and the actual price it was sold for

Consumer Surplus

The difference between the highest price a consumer would pay for a product and the actual price paid

Deadweight Loss

It is the loss of total surplus for a society when a market fails to reach a competitive equilibrium due to a market distortion (ex. taxes)

Quota

Sets a limit on the quantity of goods imported/exported

Tariff

A tax on imports/exports

Utils

A measurement of utility/satisfaction

Utility

How much satisfaction a consumer has

Total utility

Total amount of satisfaction from the consumption of a good

Marginal utility

The addition to total satisfaction

Diminishing Marginal Utility

When the consumption pattern of a good yields less additional satisfaction with every additional unit consumed

Accounting Profit

The difference between total revenues and explicit costs

Average Fixed Cost

A firm’s total fixed cost divided by total output

Average Product

Total product divided by the variable input used in production

Diseconomies of Scale

As a firm’s output increases, it’s long-run average total cost curve increases as well

Economic Profit

Total revenues that are subtracted by both explicit/implicit costs

Excise Tax

A per-unit tax that is placed on the sales of a specific product

Fixed Costs

These costs cannot change when quantity changes in the short run, but can change in the long run

Law of Diminishing Marginal Returns

The range of output where production increases at a decreasing rate

Long Run

The long-term view of a situation where supply fully adjusts to changes in demand and wages aren’t sticky

Lump-Sum Tax

A fixed tax that is put on producers regardless of how much they produce; affects both the average fixed and total costs

Marginal Product

How much more product can be produced when another input is added by a firm

Normal Profit

Where an entrepreneur will not be better off in any other venture

Short Run

A period of time where supply does not adjust to changes in demand

Total Costs

All fixed and variable costs in total

Variable Costs

Costs that change as production increases

Monopolistic Competition

A market structure characterized by many medium sized firms who are innovative and differentiate their products in both price and non price ways

Monopoly

One firm that constitutes the entire industry selling a product, for there are no close substitutes

Oligopoly

A market structure characterized by few sellers that are interdependent of each other to create control over price markets

Perfect Competition

A market structure characterized by a large number of sellers with a homogeneous product, infinitely elastic demand for firms, and no price takers

Price Takers

Cannot control the price of their goods because they don't have enough market power and must accept the market price

Price Makers

Can control and manipulate markets by charging prices that is in excess of marginal costs to maximize profits

Economic Efficiency

The distribution of resources to their most productive and desired uses

Shut-Down Point

When the price is less than the average variable cost, the firm should shut down in the short-run

Herfindahl Index

The sum of the squares of market shares of a firm in a particular market or industry; used to measure the level of concentrated power of said firm in an industry

Natural Monopolies

Monopolies that have many cost advantages and can offer a lower cost for a product than most other firms

Price-Discrimination

When different customers are charged with different prices for the same product

Socially-Optimal Pricing

Where government regulators force monopolies to have allocatively efficient pricing, which can force firms to go out of business, or require large subsidies to compensate

Fair-Return Pricing

Regulators created to set prices deliberately to let monopolies break-even and earn normal profits like the other firms in the same industry

Cartel

A group of firms that act together and have a formal agreement not to compete with one another

Collusion

An agreement that is usually illegal to agree on the price and quantity produced in a given market

Dominant Strategy

The best choice for one player regardless of what the other player may end up choosing

Game Theory

The study of how firms and people act tactically during a game

Coase Theorem

Theory that states private parties have the ability to solve issues created by externalities by themselves without needing government assistance

Free-Rider Problem

Government ends up providing public goods because people benefit from public goods that they didn’t pay for

Gini Coefficient

A measure of income inequality with a range of 0 to 1

Lorenz Curve

Shows how much a country’s total income is earned by a household

Marginal Social Benefit

The benefits that come with society’s consumption of products

Marginal Social Cost

The costs that came to society when additional units of goods are produced