AP Microeconomics Ultimate Guide (copy)

Scarcity

The concept that resources are limited while wants and needs are unlimited, leading to the need for resource allocation and making choices.

Microeconomics

The branch of economics that focuses on the behavior and decision-making of individuals and firms and their impact on the overall economy.

Macroeconomics

The branch of economics that studies the behavior and performance of the entire economy, including factors such as inflation, unemployment, and economic growth.

Factors of production

The resources used in the production of goods and services, including land, labor, capital, and entrepreneurship.

Opportunity Costs

The cost of forgoing the next best alternative when making a decision.

Positive Economics

An approach to economics based on facts and figures, using theories that are proven through hypothesis and testing.

Normative Economics

An approach to economics based on assumptions and opinions, evaluating economic behaviors based on the researcher's perspective.

Centrally-Planned (Command) Economic System

An economic system where the government makes all economic decisions and sets prices and wages.

Market Economic System

An economic system where economic changes are guided by the interactions of buyers and sellers in the market, with competition and a variety of goods and services.

Mixed Economic System

An economic system that combines elements of both centrally-planned and market economic systems, with private property rights protected but government intervention to meet societal aims.

Production Possibilities Curve

A graphical representation of the best possible combinations of goods that can be produced given a fixed amount of resources, illustrating trade-offs and opportunity costs.

Comparative Advantage

The ability of a firm or country to produce a good or service at a lower opportunity cost compared to others.

Cost-Benefit Analysis

An evaluation method that compares the costs and benefits of a decision or action to determine its overall desirability or profitability.

Marginal Analysis

The examination of the additional benefits and costs of producing or consuming one more unit of a good or service.

Demand

The quantity of a good or service that consumers are willing and able to buy at different prices.

Supply

The quantity of a good or service that sellers are willing and able to produce at different prices.

Law of Demand

The inverse relationship between price and quantity demanded, stating that as price increases, demand decreases, and vice versa.

Law of Supply

The direct relationship between price and quantity supplied, stating that as price increases, quantity supplied also increases, and vice versa.

Price Elasticity of Demand

A measure of the responsiveness of quantity demanded to a change in price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

Price Elasticity of Supply

A measure of the responsiveness of quantity supplied to a change in price, calculated as the percentage change in quantity supplied divided by the percentage change in price.

Consumer Surplus

The difference between the price consumers are willing to pay for a good or service and the actual price they pay.

Producer Surplus

The difference between the price producers receive for a good or service and the minimum price they are willing to accept.

Producer surplus

The difference between the actual price a producer receives and the price they are willing to sell for.

Demand increase

When both the price and quantity of a good or service increase.

Demand decrease

When both the price and quantity of a good or service decrease.

Supply increase

When the price of a good or service decreases and the quantity increases.

Supply decrease

When the price of a good or service increases and the quantity decreases.

Double shift

When there is a simultaneous shift in both the demand and supply curves, resulting in an indeterminate change in either price or quantity.

Deadweight loss (DWL)

The loss of economic efficiency that occurs when transactions that should occur do not due to government intervention. It can be calculated using the triangle formula (1/2 x base x height).

Shortage

When the quantity supplied is less than the quantity demanded, resulting in a price lower than the equilibrium price.

Surplus

When the quantity supplied is greater than the quantity demanded, resulting in a price higher than the equilibrium price.

Price floor

A minimum price set by the government that is above the equilibrium price, causing a shortage.

Price ceiling

A maximum price set by the government that is below the equilibrium price, causing a surplus.

Quota

An upper limit on the quantity of a good or service that can be bought or sold.

License

Gives the owner the right to supply a good or service.

Demand price

The price at which consumers are willing to demand a certain quantity of a good or service.

Supply price

The price at which producers are willing to supply a certain quantity of a good or service.

Quota rent

The difference between the demand price and the supply price.

Tariffs

Taxes placed on goods that are imported or exported.

Import quota

A restriction on the quantity of a good that can be imported.

Production function

The relationship between the quantity of inputs a firm uses and the quantity of output it produces.

Fixed input

An input whose quantity does not change.

Variable input

An input whose quantity can change.

Long run

A time period in which all inputs can be variable.

Short run

A time period in which at least one input is fixed.

Marginal product

The change in overall output when an input changes.

Diminishing marginal returns

As input increases, the output of each additional input will be less than the previous input.

Output

The quantity of goods or services produced.

Rental rate

The price of capital.

Capital

Goods that are used to produce goods or services.

Fixed cost

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

Variable cost

Costs that change with the amount of output produced.

Total cost

The sum of fixed cost and variable cost.

Marginal cost

The cost difference of producing one additional unit of output.

Average fixed cost (AFC)

Fixed cost divided by quantity.

Average variable cost (AVC)

Variable cost divided by quantity.

Average total cost (ATC)

Total cost divided by quantity.

Long run average total cost (LRATC)

The same as short run ATC, but on a larger scale.

Economies of scale

LRATC declines as output increases.

Diseconomies of scale

LRATC increases as output increases.

Constant returns to scale

Output increases directly in proportion to an increase in all inputs.

Economic profit

Revenue minus explicit cost minus implicit cost.

Accounting profit

Revenue minus explicit cost.

Implicit cost

A cost that is not an actual cost, but a cost that could have been earned.

Marginal revenue

Additional revenue gained by producing one more unit.

Profit maximization

The point at which marginal revenue equals marginal cost.

Shutdown rule

A firm should not produce if it cannot cover its variable costs.

Exit rule

If the price is below average total cost, a firm should exit the market.

Perfect competition

A market structure with many identical firms competing at a constant market price.

Price takers

Firms in perfect competition that cannot charge a higher price than the equilibrium price.

Monopolistic competition

A market structure with many firms offering competing products that are similar but not perfect substitutes.

Oligopoly

A market structure with a small number of firms producing either standard or differentiated products.

Game theory

The study of strategic decision-making in situations of interdependence.

Payoff matrix

A representation of the payoff to each player in a game.

Dominant strategy

The strategy that has a better

Public goods

Goods or services that are underproduced due to the freeloader problem, where people can enjoy the benefits without paying.

Freeloader problem

The issue where individuals can benefit from a good or service without contributing to its cost.

Subsidies

Financial assistance provided by the government to producers to encourage the production of certain goods or services.

Private goods

Goods produced by private markets that can be excluded from individuals who do not pay for them.

Market power

The ability of a firm or group of firms to influence the market price or quantity of a good or service.

Externalities

Costs or benefits that are not reflected in the market price of a good or service, affecting third parties.

Nonrival and nonexcludable goods (public goods)

Goods that can be consumed by multiple individuals simultaneously without reducing availability for others and cannot be easily excluded from non-payers.

Taxes

Government-imposed charges on individuals or businesses based on their income, consumption, or property.

Price floors/ceilings

Government-imposed minimum or maximum prices for goods or services.

Regulation

Government intervention through rules and restrictions to control or influence market behavior.

Per unit subsidy

A subsidy provided to producers based on the quantity of goods or services produced.

Perfect competition

A market structure where firms are price takers and face no barriers to entry or exit.

Monopolistic competition

A market structure where firms have some degree of market power and can set prices.

Lump sum subsidy

A fixed amount of subsidy provided to producers regardless of the quantity of goods or services produced.

Non-price regulation

Government intervention through measures like taxes to ensure competition, environmental protection, health, and safety.

Antitrust policy

Policies and laws aimed at promoting competition and preventing monopolies.

Price controls

Government-imposed regulations on prices, including price ceilings and price floors.

Gini coefficient

A measure of income inequality, calculated as A/(A+B), where a higher value indicates greater inequality.

Income distribution

The allocation of income among individuals or households in a society.

Lorenz curve

A graphical representation of income distribution, comparing the actual distribution to a perfectly equal distribution.

Causes of income inequality

Factors such as supply and demand in the labor market, human capital, discrimination, inheritance, and bargaining power that contribute to differences in income.

Policies to address inequality

Measures such as taxes and transfers, minimum wage laws, anti-poverty programs, income protection programs, and scholarships aimed at reducing income inequality.

Proportional taxes

Taxes where everyone pays the same percentage of their income, with no impact on income distribution.

Progressive taxes

Taxes that impose a higher percentage on individuals with higher incomes, reducing income inequality.

Regressive taxes

Taxes that impose a lower percentage on individuals with higher incomes, increasing income inequality.