AP Economics Unit 1 Vocabulary Review

Economics

The study of how people seek to satisfy their needs and wants by making choices

Trade-off

the act of giving up one benefit in order to gain another, greater benefit

Consumption

using goods and services

Economic Resources

the means through which goods and services are produced

Scarcity

Limited quantities of resources to meet unlimited wants

factors of production

1. Natural Resources/Land

2. Labor

3. Capital (and human capital)

4. Entrepreneurship

Crazy Leopards Envy Narwals

constraint

limitation or restriction

opportunity cost

the most desirable alternative given up as the result of a decision

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

goods and services

the objects (goods) and the actions (services) that people value and produce to satisfy human wants

Rival nature

only one person can consume a product at a time.

non-rival nature

when one person uses a good, it does not prevent others from using it (does not means it is "free")

Economic Systems

the method used by a society to produce and distribute goods and services

Command Economy

An economic system in which the government makes all economic decisions.

free market economy

an economic system in which decisions on the three key economic questions are based on voluntary exchange in markets

Capitalism

an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.

Traditional Economy

An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next.

underutilized

To utilize less than fully or below the potential use.

contraction

a period of economic decline

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

economic growth

the ability of the economy to increase the production of goods and services. On PPC due to increase in resources or technology

Efficiency

using resources in such a way as to maximize the production of goods and services

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

division of labor/specialization

a system in which the members of a group do different tasks according to their abilities and the group's needs

gains from trade

the improvement in outcomes that occurs when producers specialize and exchange goods and services

Total benefits

the sum of all gains that a person realizes from taking an action

In business: revenue = total benefits

mutually beneficial trade

free and informed trade between buyers and sellers which results in benefits to both sides.

Terms of trade

the ratio at which a country can trade its exports for imports from other countries

cost-benefit analysis

a decision-making process in which you compare what you will sacrifice and gain by a specific action

Rational agent's

consumers, producers, and others who behave rationally and make optimal decisions

explicit opportunity costs

-meaning you pay money for it

-easy to measure

implicit opportunity costs

most valued option forgone (what you gave up)

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

util

Measure of utility

Total net benefits

the difference between total benefits and total costs

optimal choice

The feasible decision that maximizes a decision-maker's preferences given any constraints on his or her choice.

Marginal benefits

Additional benefits received when one more unit of a product is produced.

marginal costs

the cost of producing one more unit of a good

Consumer Choice Theory

Relates consumers' wants and preferences to the goods and services they actually buy

1. Consumers are rational

2. Consumers are never 100% satisfied

3. Consumer satisfaction decreases with each unit of consumption

Diminishing marginal utility

Decreasing satisfaction or usefulness as additional units of a product are acquired

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

marginal analysis

analysis that involves comparing marginal benefits and marginal costs

Marginal cost

the cost of producing one more unit of a good

optimal quantity

MB = MC

the quantity that generates the maximum possible total profit

Sunk Costs

costs that have already been incurred and cannot be recovered

Utility Maximization Rule

MUx/Px = MUy/Py