Ap Econ: 1st exam

Mod 1-6

Economics

the study of scarcity and individual choice

Individual choice

decisions by individuals of what to do and therefore what not to do

Economy

system for coordinating society’s productive and consumptive activities

Market economy

free market with little government involvement where supply and demand control price (producers and consumers determine what to produce and what to buy through supply and demand)

Command economy

a publicly owned market where a central authority control production and consumption decisions

Incentives

rewards or punishments that motivate choices

Property rights

establishes ownership → incentive for ppl to trade

Marginal analysis

study of costs and benefits of doing something again (test studying example - how much time should i spend studying and sleeping?)

Marginal benefit

the benefit of doing something one more time

Marginal cost

the loss of doing something one more time

Resource

anything used to produce something else

Land

resources coming from nature

Labor

effort of workers (human) - PAID

Capital

manufactured goods used to make other goods and services

Entrepreneurship

leaders combining other factors of production to create a good or service that involves taking risks and innovating

Scarcity

resource not available in sufficient quantities to satisfy unlimited wants

Opportunity cost

the cost of the item you give up in favor of another (the most desirable trade off)

Microeconomics

study of how individuals make decisions and how those decisions interact

Macroeconomics

overall trends of the economy

Economic aggregates

economic measures that summarize data across many markets

Positive economics

economic analysis that describes definite right or wrong answers (facts)

Normative economics

suggestions about the economy should work

Business cycle

alternation between recessions and expansions

Depression

very deep and prolonged downturn/recession

Recession

period of economic downturn - employment and output decrease

Expansion

period of economic upturn - employment and output increase (recoveries)

Employment

Unemployment

Unemployment rate

percentage of labor force unemployed

Labor force

sum of employment and unemployment

Output; quantity of goods and services produced

Aggregate output

economy’s total production of goods and services for a time period

Inflation

rising overall price level

Deflation

falling overall price level

Price stability

aggregate price level is changing slowly

Economic growth

increase in maximum amount of goods and services an economy can produce

Model

simplified representation used to understand real life situations

Other things equal assumption

assuming all other factors remain unchanged to observe the effect of one change

Business cycle

alternation between recessions and expansions

Depression

very deep and prolonged downturn/recession

Recession

period of economic downturn - employment and output decrease

Expansion

period of economic upturn - employment and output increase (recoveries)

Employment

Unemployment

Unemployment rate

percentage of labor force unemployed

Labor force

sum of employment and unemployment

Output; quantity of goods and services produced

Aggregate output

economy’s total production of goods and services for a time period

Inflation

rising overall price level

Deflation

falling overall price level

Price stability

aggregate price level is changing slowly

Economic growth

increase in maximum amount of goods and services an economy can produce

Model

simplified representation used to understand real life situations

Other things equal assumption

assuming all other factors remain unchanged to observe the effect of one change

Trade off

giving up something in order to have something else

PPC (production possibilities curve)

shows trade offs facing an economy producing only 2 goods. It shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

Efficient

an economy is efficient when there is no other way to make an economy better off at the expense of another

Technology

technical means for producing goods or services

Trade

exchange of goods and services

Gains from trade

people can get what they want rather than if they tried to be self sufficient

Specialization

when individuals specialize, it is a task that he or she is good at performing a specific task

Comparative advantage

an individual’s opportunity cost for producing a good or service is lower than for other people

Absolute advantage

an individual can produce more goods with the same time and resources

Competitive market

market with many buyers and sellers of the same good or service so none can influence price

Supply and demand model

model of a competitive market

Demand schedule

how much of a good or service consumers are willing to pay at different prices

Quantity demanded

the actual amount of good or service consumers are willing and able to buy at some specific price (one specific point on a demand curve)

Demand curve

graph that shows demand schedule (relationship between quantity demanded and price)

Law of demand

all other things equal, price and demand are inversely related

Change in demand

shift in the demand curve, changing quantity demanded at any price

Movement along the demand curve

a change in quantity demanded as a result of a price change

Substitutes

goods that can be substituted so a rise in price of one increases demand in the other

Complements

goods that when the price of one rises, the demand in the other decreases

Normal good

a good where a rise in income increases its demand

Inferior good

a good where a rise in income decreases its demand

Individual demand curve

graph that illustrates relationship between quantity demand and price for individual consumer

Quantity supplied

the actual amount of a good producers are willing to sell at a specific price

Supply schedule

shows how much of a good or service producers will supply at different prices

Supply curve

shows the relationship between quantity supplied and price

Law of supply

assuming other things equal, price and quantity supplied are positively related

Change in supply

shift of the supply curve, changing the quantity supplied at a given price

Movement along supply curve

a change in the quantity supplied as a result of a change in the good’s price

Input

anything used to produce a good or service

Individual supply curve

graphical representation of relationship between quantity supplied and price for individual producer

Equilibrium

economic situation when no individual would be better off doing something different

Competitive market equilibrium

when quantity supplied equals quantity demanded

Equilibrium price/market-clearing price

price of a good when market in equilibrium

Equilibrium quantity

quantity of good bought and sold at the equilibrium price

Surplus

when the quantity supplied exceeds quantity demanded and price is above equilibrium level

Shortage

when quantity demanded exceeds quantity supplied and price is below equilibrium

Demand

different quantities of goods consumers are willing and able to buy at different prices