Unit 1 - AP Microeconomics Vocabulary

Define Economics

the study of the allocation of scarce resources.

Scarcity

Society has unlimited wants and limited resources.

Example of scarcity

Productive resources, consumer goods, services, time and energy

Factors of production

(land, labor, capital, and entrepreneurship

Wants are….

unlimited

Payment for the use of land is called

rent

Payment for the use of labor is

wages

Payment for the use of capital is

interest

Entrepreneurs are paid in

profit

What is the fundamental problem of economics?

scarcity

Forms of income

rent, wages, interest, and profit

Microeconomics

studies small economic units such as individuals, firms, and markets.

ex: Supply and demand in an industry, production cost, labor markets

Macroeconomics

studies the economy as a whole, or economic aggregates

ex: Economic growth, government spending, inflation, unemployment

Positive statements

based on facts and avoid value judgments; they state what is, outside of personal opinions.

Normative statements

include value judgments; they state how someone thinks something ought to be.

Price

amount the consumer, or buyer, pays to acquire a good or service.

Cost

amount the seller pays to produce a good.

Consumer goods

goods created for direct consumption, like t-shirts or pizza

Capital goods

goods like ovens and hammers that are created for indirect consumption; they are used to make consumer goods

Physical capital

any human-made resource used to create other goods and services, like tractors and factories.

Human capital

the skills and knowledge of workers and entrepreneurs.

Utility

the satisfaction received from consuming a good or service.

Marginal

means additional; marginal cost is the extra cost of producing or consuming one more unit.

Allocate

distribute resources for production.

Investment

refers to money spent by businesses to improve their production.

Trade-offs

Scarcity forces choices, each with a cost.

Self-interest

Everyone makes decisions in their own self-interest to maximize their own satisfaction

Marginal analysis

People make decisions by comparing the marginal costs and marginal benefits of each choice.

Productivity

measure of efficiency that shows the number of outputs per unit of input.

Why do businesses and countries want to improve their productivity?

Since all resources are scarce, improving productivity allows us to produce more stuff with the same amount of resources

Fundamental economic questions

• Which goods and services will be produced?

• How will they be produced?

• Who will get the goods and services?

Command economy

The government owns all resources and determines what gets produced, how to produce it, and who receives the finished products.

Free Market economy

Private citizens own resources and make economic choices based on exchange in the market

Mixed economy

• Mix of command and market

• The goal is to allow as much economic freedom as possible while regulating abusive behaviors and inequality

The Invisible Hand

Decisions made by self-interested consumers and producers.

Opportunity cost

• the value of the next best option.

• the ratio of what is given up/what is gained

• constant, increasing, decreasing along PPC/data set

Productive possibilities curve/frontier

It represents combinations of the two goods that are efficient; they fully utilize all available resources.

ceteris paribus

all other things equal

productive efficiency

Full employment of resources

Inefficient

Not all resources are utilized, resulting in waste and less output than potential.

Unattainable

The curve represents the maximum usage of all resources; you can’t go beyond your maximum.

Constant

Equal trade-off between goods.

What can make it possible to expand PPC?

trade

Absolute Advantage

the ability to produce more of a good/service than someone else in the same amount of time (doesn’t count opportunity costs) - only look at bigger cost

Comparative Advantage

the ability to produce something at a lower opportunity cost than someone else, given the same resources (ppl specialize)

Output table calculation

other goes over

Input table calculation

other goes under - to produce ONE unit of output

Terms of trade

• The range of exchange rates where trade is mutually beneficial.

• Must fall between the opportunity costs of both nations (or individuals) for both to benefit.

Explicit costs

costs involving monetary payments

Implicit costs

non-monetary costs

Utility

measure of satisfaction

Total Net Benefit =

Total Benefit - Total Costs

Diminishing Marginal Utility

As a consumer purchases more of a good/service, the additional satisfaction from each additional unit decreases

Sunk Cost

a cost that has already been paid and cannot be recovered

Utility-Maximizing Rule

MUx/Px = MUy/Py