AP Mirco Flashcards

Absolute Advantage

The ability to produce more of a good or service using the same resources than another

Accounting Profit

Total revenue- explicit costs

Allocative Efficiency

Producing the quantity where marginal benefit = marginal cost so resources are used where society values them most

Average Fixed Cost

Total fixed cost divided by quantity produced. It decreases as output increases

Average Total Cost

Total cost divided by quantity produced

Average Variable Cost

Total variable cost divided by quantity produced

Ceteris Paribus

Latin for “all else equal” assuming other factors remain constant

Circular Flow

A model showing the flow of money, resources, goods, and services between households and firms

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer

Complementary Goods

Goods that are used together; when the price of one rises, demand for the other usually falls

Consumer Surplus

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

Cross-Price Elasticity of Demand

Measures how the quantity demanded of one good responds to a change in the price of another good

Deadweight Loss

The loss of total economic surplus caused by an inefficient market outcome

Derived Demand

Demand for a resource because it is needed to produce another good or service

Determinants of Demand

Factors that shift demand: income, tastes/preferences, prices of related goods, expectations, and number of buyers

Determinants of Supply

Factors that shift supply: input prices, technology, taxes/subsidies, expectations, number of sellers, and prices of related goods

Diseconomies of Scale

When increasing all inputs causes long-run average total cost to increase

Economic Costs

Explicit costs and implicit costs

Economic Profit

Total revenue minus economic costs

Economies of Scale

When increasing all inputs causes long-run average total cost to decrease

Explicit Costs

Actual out-of-pocket payments made by a firm, such as wages or rent

Free Rider

Someone who benefits from a good without paying for it, commonly associated with public goods

Game Theory

The study of how people’s or firms’ decisions are affected by the decisions of others

Gini Ratio

A measure of income inequality; 0 represents perfect equality and 1 represents perfect inequality

Human Capital

The skills, knowledge, education and training possessed by workers

Implicit Costs

The opportunity costs of using resources the owner already owns, without direct monetary payment

Income Effect

The change in quantity demanded caused by a change in a good’s price that changes the consumer’s purchasing power

Inferior Goods

Goods for which demand decreases when income increases and increases when income decreases

Law of Demand

Price and quantity demanded have an inverse relationship

Law of Diminishing Marginal Returns

As more units of a variable input are added to fixed inputs, the marginal product eventually decreases

Law of Diminishing Marginal Utility

As a person consumes more units of a good, the additional satisfaction from each extra unit eventually decreases

Law of Increasing Costs

As an economy produces more of one good, the opportunity cost of producing additional units increases

Law of Supply

Price and quantity supplied have a direct relationship

Marginal Benefit

The additional benefit gained from consuming one more unit of a good or service

Marginal Cost

The additional cost of producing one more unit of output

Marginal Product of Labor

The additional output produced by hiring one more worker

Marginal Resource Cost

The additional cost of employing one more unit of a resource

Marginal Revenue Product of Labor

The additional revenue generated by hiring one more worker

Marginal Utility

The additional satisfaction received from consuming one more unit of a good or service

Market Failure

When a market produces an outcome that is not economically efficient

Monopolistic Comptition

A market with many firms, differentiated products, and relatively easy entry and exit

Monopoly

A market with one seller, no close substitutes, and high barriers to entry

Monopsony

A market with one buyer of a resource

Natural Monopoly

A monopoly that exists because one firm can produce the entire market output at a lower average cost than multiple firms

Negative Externality

A spillover cost imposed on third parties who are not directly involved in the transaction

Normal Profit

He minimum profit necessary to keep a firm operating in its current business; occurs when economic profit = 0

Oligopoly

A market dominated by a small number of interdependent firms with significant barriers to entry

Opportunity Cost

The value of the next-best alternative given up when making a choice

Perfectly Elastic

A situation where a tiny change in price causes an infinite change in quantity demanded or supplied; represented by a horizontal curve

Perfectly Inelastic

A situation where quantity demanded or supplied does not change when price changes; represented by a vertical curve

Positive Externality

A spillover benefit received by third parties who are not directly involved in the transaction

Price Ceiling

A legal maximum price that can be charged. A binging price ceiling creates a shortage

Price Floor

A legal minimum price that can be charged. A binding price floor creates a surplus

Prisoners’ Dilemma

A situation where individuals acting in their own self-interest reach an outcome that is worse for everyone than if they cooperated

Producer Surplus

The difference between the price producers receive and the minimum price they are willing to accept

Production Possibilities Frontier

A model showing the maximum combinations of two goods an economy can produce using its available resources and technology

Profit-Maximizing Resource Employment

Employing a resource up to the point where MRP = MRC

Progressive Tax

A tax in which the tax rate increases as income increases

Proportional Tax

A tax where everyone pays the same percentage of income, regardless of income level

Regressive Tax

A tax that takes a larger percentage of income from lower-income people than from higher-income people

Resources

The inputs used to produce goods and services: land, labor, capital, and entrepreneurship

Short Run

A period in which at least one input is fixed

Substitution Effect

When a good becomes relatively more or less expensive, consumers tend to substitute toward the relatively cheaper good

Total Cost

The total cost of production: TFC+TVC

Total Fixed Costs

Costs that do not change with output, such as rent

Total Product of Labor

The total amount of output produced by a given number of workers

Total Revenue Test

A method of determining elasticity by observing how total revenue changes when price changes

Total Variable Costs

Costs that change as the quantity of output changes, such as raw materials

Utility Maximizing Rule

Consumers maximize utility when the marginal utility per dollar is equal across goods

Total Revenue

The total amount of money a firm receives from selling its output: Price x Quantity

Marginal Revenue

The additional revenue earned from selling one more unit output

Economic Efficiency

Using scarce resources in a way that maximizes total economic surplus

Productive Efficiency

Producing goods and services at the lowest possible average total cost

Price Elasticity of Demand

Measures how responsive quantity demanded is to a change in price

Price Elasticity of Supply

Measures how responsive quantity supplied is to a change in price

Total Utility

The total satisfaction a consumer receives from consuming a certain quantity of a good or service