AP Econ Unit 1.1-1.6 Test

What is opportunity cost?

The value of the next-best alternative when a decision is made, which can be paid explicitly in dollars or implicitly in time and missed opportunities.

What do rational agents do?

They behave rationally and make optimal decisions.

How is opportunity cost calculated in a purchasing decision?

It is the value of the next best choice, not the total cost of all alternatives.

What do consumers seek in their purchases?

Consumers seek to maximize their satisfaction, known as utility.

What is utility measured in?

Hypothetical units called 'utils'.

What is the primary goal of firms compared to consumers?

Firms seek to maximize profit, while consumers seek to maximize utility.

What is cost-benefit analysis?

The process of comparing costs with benefits to inform a decision.

When do firms decide to proceed with an action?

Firms proceed if the benefit exceeds the cost.

What is marginal analysis?

The comparison of the costs and benefits of one more versus one less unit.

What does the principle of diminishing marginal utility state?

The additional satisfaction from consuming one more unit declines as consumption increases.

How is marginal utility defined?

The change in total utility generated by consuming one additional unit of a good or service.

What does a downward-sloping marginal utility curve indicate?

It indicates that utility decreases as more of a good is consumed.

What is the optimal consumption bundle?

The consumption bundle that maximizes total utility given a consumer's budget constraint.

What is the budget constraint?

A limitation on consumer spending based on total income.

What does the budget line represent?

All the consumption bundles possible when all income is spent.

What is the marginal dollar in consumer spending?

The additional utility gained from spending one more dollar on a good.

How is marginal utility per dollar calculated?

By dividing the marginal utility of a good by its price.

What is the Optimal Consumption Rule?

When maximizing utility under a budget constraint, the marginal utility per dollar spent on each good is equal.

What should be ignored when making decisions about future actions?

Sunk costs, which are costs that have already been incurred and are nonrecoverable.

What is an example of a sunk cost?

The cost of brake pads that have already been replaced on a car, which should not affect the decision to replace the entire brake system.

What is the relationship between total benefit and total cost?

Both consumers and firms aim to maximize the difference between total benefit and total cost.

What is the significance of the marginal utility curve?

It demonstrates how marginal utility changes with the quantity of a good consumed.

What happens when the marginal cost of an additional unit exceeds the marginal benefit?

It indicates that increasing the quantity further would not be optimal.

What is a consumption possibility?

The affordable consumption bundles accessible to a consumer.

What is the effect of limited income on consumer choices?

It constrains how much can be consumed, leading to trade-offs between goods.

Why is it important to consider marginal utility in consumption decisions?

To maximize total utility and make informed choices about resource allocation.

What does it mean if a consumer is indifferent to equal cost and benefit?

They have no preference between two options that yield the same cost and benefit.

How can consumers maximize their total utility?

By focusing on marginal utility and making decisions that increase it.

Scarcity

A condition in which resources are limited relative to wants, forcing trade-offs and choices in how to allocate them.

Choice

The act of selecting among alternatives due to limited resources.

Trade-off

Giving up one thing to obtain something else when resources are limited.

Factors of Production

The resources used to produce goods: Land, Labor, Capital, and Entrepreneurship.

Land

Natural resources used in production (minerals, water, plants, etc.).

Labor

Human effort used in production.

Capital

Manufactured goods used to make other goods (tools, buildings, machinery).

Entrepreneurship

Risk-taking, innovation, and organization of resources for production.

Opportunity Cost

The value of the next-best alternative forgone when making a choice.

Marginal Decisions

Decisions to do a little more or less of something (often in production).

Marginal Benefit

The maximum amount a consumer is willing to pay for an additional unit.

Marginal Cost

The expense of producing one more unit.

Production Possibilities Curve (PPC)

A graph showing the maximum feasible output combinations of two goods given resources and technology.

Efficient on PPC

Points on the curve represent productive efficiency (cost-minimizing production).

Underutilized inside PPC

Points inside the curve indicate idle resources or underused capacity.

Not Feasible outside PPC

Points outside the curve require more resources or better technology; not feasible with current constraints.

Economic Growth

An outward shift of the PPC due to more resources or improved technology.

Productive Efficiency

Producing at the lowest possible cost given available resources and technology.

Allocative Efficiency

Allocating resources to maximize society’s welfare and match consumer preferences.

Gains from Trade

Trade raises living standards by allowing specialization and exchange based on comparative advantage.

Comparative Advantage

Ability to produce a good at a lower opportunity cost than others.

Absolute Advantage

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

Terms of Trade

The rate at which one good can be exchanged for another; beneficial when it lies between parties’ opportunity costs.

Specialization

Focus on tasks you do best, increasing total output when combined with trade.

Market Economy

An economy guided by the price system and individual decision-making, with limited government control.

Command Economy

An economy where the government controls production and consumption.

Traditional Economy

An economy guided by customs and tradition; stable but with limited growth.

Mixed Economy

An economy with both government intervention and market forces.

Incentives

Rewards or punishments that motivate people to act in certain ways.

Property Rights

Legal ownership and control over resources, supporting incentives to use resources efficiently.

Positive Economics

Economic analysis based on facts and objective evidence; describes 'what is'.

Normative Economics

Economic analysis involving value judgments about what ought to be; 'what should be'.

Ceteris Paribus

Latin for 'all else equal'; holding other factors constant to study a single change.

Microeconomics

The study of choices made by individuals, households, and firms.

Macroeconomics

The study of economy-wide aggregates like GDP, unemployment, and inflation.

GDP (Gross Domestic Product)

The total value of all final goods and services produced in an economy.

Unemployment Rate

The percentage of the labor force that is jobless and actively seeking work.

Inflation Rate

The rate at which the overall level of prices is rising.

Invisible Hand

Adam Smith’s idea that individuals pursuing self-interest can benefit society through market prices.

Mutually Beneficial Terms of Trade

Trade terms that make both trading partners better off than no trade, determined by comparing each side’s opportunity costs.