AP Microeconomics Unit 1 Vocabulary

Unit 1 terms to know for AP Microeconomics, including examples.

Economics

the study of scarcity and choice

Trade-off

when you give up something in order to have something else.

Individual choice

decisions by individuals about what to do, which necessitate decisions about what not to do

Resource/Factor of production

anything that can be used to produce something else

Land

all resources that come from nature, such as timber, wind, and petroleum.

Labor

the effort of workers.

Capital

manufactured goods used to make other goods and services

Entrepreneurship

describes the efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes.

Scarce

A scarce resource is not available in sufficient quantities to satisfy all the various ways a society wants to use it. (There’s not enough of the resource to go around)

• Example: there are limited supplies of oil and coal, which currently provide most of the energy used to produce and deliver everything we buy.

Marginal analysis

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less.

• Example: what are the costs/benefit of me buying one more cheeseburger to eat vs what are the costs/benefits of me buying one less cheeseburger to eat

Opportunity cost

The real cost of an item is its opportunity cost: the value of the next best alternative that you must give up in order to get the item.

Microeconomics

the study of how individuals, households, and firms make decisions and how those decisions interact.

Household

a person or group of people who share their income.

Firm

any organization that produces goods or services for sale.

Macroeconomics

the overall ups and downs of the economy.

Economy

a system for coordinating a society’s productive and consumptive activities.

Traditional economy

In a traditional economy, production and consumption decisions are based on precedent.

• Visit an Amish community in the United States or a small village in many parts of the world, and you will see the production of traditional goods and services using methods passed down for generations. Even the distribution of goods and services to leaders, elders, women, men, and children is likely to follow tradition.

Market economy

In a market economy, the factors of production are privately owned and the decisions of individual producers and consumers largely determine what, how, and for whom to produce.

• Market economies are also described as capitalist, which means that the factors of production are owned by private households rather than by the government. There is no central authority telling people what to produce or who should receive it.

Command economy

In a command economy, the factors of production are publicly owned and a central authority makes production and consumption decisions.

• Command economies have been tried, notably in the Soviet Union between 1917 and 1991 and in North Korea today, but they don’t work very well. For example, producers in the Soviet Union routinely found themselves unable to meet national production targets because the economic system did not provide adequate supplies of crucial resources. In other cases, production went as planned, but the central authorities failed to order the goods and services people most wanted.

Mixed economy

A mixed economy combines elements of traditional, market, and command economies.

• Most countries today, including the United States, have a mixed economy, meaning one with characteristics of traditional, market, and command economies.

Incentives

rewards or punishments that motivate particular choices.

Other things equal (ceteris paribus) assumption

means that all other relevant factors remain unchanged.

• Models are important because their simplicity allows economists to focus on the influence of only one change at a time. That is, they allow us to hold everything else constant and study how one change affects the overall economic outcome. So when building economic models, it is important to make the other things equal assumption

Production possibilities curve

illustrates the necessary trade-offs in an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

Specialization

Each person specializes in the task that they are good at performing.

• The reason we have an economy, rather than many self-sufficient individuals, is to take advantage of the gains from trade: by dividing tasks and trading, two people (or 7 billion people) can each get more of what they want than they could get by being self-sufficient. The division of tasks that allows gains from trade is known as specialization

Comparative advantage

An individual has a comparative advantage in producing a good or service if that person’s opportunity cost is the lowest among the people who could produce that good or service.

Absolute advantage

An individual has an absolute advantage in producing a good or service if they can make more of it with a given amount of time and resources.

Cost-benefit analysis

the process of comparing the costs and the benefits of an option.