AP Microeconomics Unit 1 Terms

Economics

the study of how societies manage their scarce resources

Scarcity

our wants exceed our available resources

Human Capital

the skills, knowledge, and experiences a worker posses

Improve their edu + cannot be taken away + higher earning potential

Established Knowledge

the existing body of information, technology and methods that anyone can use without reducing its availability to others

Trade offs

the inability to do all the desired possibility

Opportunity cost

the value of the next best alternative you give up when making choice, what we give up to gain something else

Invisible Hand

A theory created by Adam Smith the idea that markets regulate themselves through individual decision-making rather than central planning. Buyers and sellers interact freely, and their choices naturally direct resources and prices.

Efficiency

How well resources are allocated to meet society’s needs and minimize waste

Equity

the fairness resource distribution and economic opportunities among individual and groups

Economic Growth

the system’s ability to expand productivity capacity and increase output overtime

Environmental Sustainability

The system’s long-term impact on natural resources and ecological balance.

Economic Stability

How well the system manages fluctuations, economic shock, crises

Production possibilities Curve

a graph that shows all possible combinations of two goods an economy can produce using all available resources, helps understand opportunity cost.

Inefficiency

wasted resources that could be used for better

Absolute advantage

the ability to produce more of a good or service than someone else, using the same resources. More output with equal resources, but doesn’t dictate choices

Comparative advantage

the ability of a producer (country, individual, firm) to make a good or service at a lower opportunity cost than another producer. Lowest opportunity cost matters, not total output.

Output data

physical object

Show how much output can be produced for a given quantity of inputs

We want to produce the most of a good or service

“Other over” formula

opportunity cost of 1A= B/A of B- Output

Input Data

time, materials

Tells us how many resources are required to produce constant output

We want to use the LEAST amount of a resource

“It over” formula

opportunity cost of 1A= A/B of B- Input 

Terms of trade

Terms of trade is the amount of one good that a country must give up to obtain one unit of another good through international trade.

Total Benefit

the sum of all benefits gained from consuming or producing a product

Marginal Benefit

the change in total benefit obtained from consuming one more unit of a good

Cost benefit Analysis

is a systematic decision- making tool that evaluates whether the total benefits of an action outweigh its total costs, using the formula Net Benefit= Total benefit- Total Costs, compare what you give up (costs) vs what you get ( benefits), evaluate potential value of a project, policy, investment

The law of Diminishing Marginal Utility

as you consume more of something, the additional satisfaction (marginal utility) from each extra unit decreases

Explicit Costs

straightforward + measurable used in financial planning and budgeting; direct out of pocket expenses you pay for goods, services, and money

Ex. price tag, movie ticket, bus ticket, payment of food

Implicit Costs

represent the opportunities give up when choosing one option over the other

Ex. time spent studying instead of hangout with friends

Marginal Analysis

A decision-making tool that compares the extra costs and benefits of doing something, like buying one or more units of a good. consumers make smart spending choice in limited budget

Diminishing marginal benefit

as more units of good are consumed, the additional benefit received from each additional unit decreases

Diminishing marginal utility

the principle that each additional unit of a good provides less additional satisfaction than the previous unit

Marginal utility per dollar

measures satisfaction for each dollar spent, to goods you are buying

←Marginal Utility per dollar= marginal utility/ price

Optimal consumption rule

maximize satisfaction Marginal utility/ price equal across all goods

←MUx/ Px= MUy/Py

“Other over” formula

opportunity cost of 1A= B/A of B- Output

“It over” formula

opportunity cost of 1A= A/B of B- Input

Total costs EQ

Total cost= Explicit cost + implicit cost

Optimal number of hours occur...

when the marginal benefit= marginal cost

Marginal benefit EQ

Marginal benefit= change in total benefit/ change in quality

Optimal Consumption Rule formula

MUx/ Px= MUy/Py

Marginal Utility

the additional satisfaction or benefit a consumer gains from consuming one more unit of a good or service.