AP micro U1

Economics

The study of scarcity and choice; a social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of wants.

Scarcity

The condition that results from society having unlimited wants but limited resources.

Choice

The act of selecting among alternatives due to scarcity.

Microeconomics

Study of small economic units such as individuals, firms, and specific markets.

Macroeconomics

Study of the economy as a whole, including aggregates like GDP, inflation, and unemployment.

Positive Statement

Statement based on facts, describing “what is.”

Normative Statement

Statement based on value judgments, describing “what ought to be.”

Trade-off

All the alternatives given up when making a decision.

Opportunity Cost

The most desirable alternative given up when making a choice.

5 Key Economic Assumptions

1) Scarcity exists. 2) Choices involve trade-offs. 3) People act in self-interest to maximize satisfaction. 4) Decisions are made by comparing marginal costs and benefits. 5) Models/graphs can explain real-life situations.

Factors of Production

Land (natural resources), Labor (human effort), Capital (human-made goods & human skills), Entrepreneurship (risk-taking to innovate).

Productivity

Measure of efficiency; output per unit of input.

Marginal

Additional or extra.

Marginal Analysis

Decision-making by comparing additional benefits and costs.

Law of Diminishing Marginal Utility

As you consume more of a good, the additional satisfaction from each new unit decreases.

Utility

Satisfaction gained from consuming a good or service.

Utility Maximizing Rule

Allocate spending so that the marginal utility per dollar is equal for all goods.

Production Possibilities Curve (PPC)

Graph showing the trade-offs between two goods given scarce resources; illustrates efficiency, trade-offs, opportunity cost, and scarcity.

Ceteris Paribus

Latin for “all other things equal”; holding other variables constant.

Constant Opportunity Cost

When resources are easily adaptable, PPC is a straight line.

Law of Increasing Opportunity Cost

Producing more of one good increases the opportunity cost because resources are not easily adaptable, causing a bowed-out PPC.

Shifters of the PPC

Change in resource quantity/quality, change in technology, change in trade.

Absolute Advantage

Ability to produce more of a good with the same resources.

Comparative Advantage

Ability to produce a good at a lower opportunity cost than another producer.

Per Unit Opportunity Cost

Opportunity cost / units gained.

Terms of Trade

Agreed-upon exchange rate of goods that benefits both countries.

Economic System

Method a society uses to produce and distribute goods/services.

Command Economy

Government owns resources and makes all economic decisions.

Free Market Economy

Individuals own resources and decisions are driven by self-interest and competition.

Mixed Economy

Combines free markets with some government intervention.

Invisible Hand

Concept that self-interest and competition naturally regulate the market.

Circular Flow Model

Diagram showing how goods, services, and money move between households, businesses, and government.

Private Sector

Economy run by individuals/businesses.

Public Sector

Economy run by government.

Factor Payments

Income for factors of production: rent, wages, interest, profit.

Transfer Payments

Government redistribution of income (e.g., welfare, social security).

Subsidies

Government payments to businesses.