AP Macroeconomics Unit 1 Review

economics

the study of scarcity and choice.

individual choice

decisions by individuals about what to do, which necessarily involve decisions about what not to do.

economy

a system for coordinating a society's productive and consumptive activities.

market economy

an economy in which the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions.

command economy

an economy in which industry is publicly owned and a central authority makes production and consumption decisions.

incentives

rewards or punishments that motivate particular choices.

property rights

establish ownership and grant individuals the right to trade goods and services with each other.

marginal analysis

the study of the costs and benefits of doing alittle bit more of an activity versus a little bit less.

resource

anything that can be used to produce something else.

land

all resources that come from nature, such as minerals, timber, and petroleum.

labor

the effort of workers.

capital

manufactured goods used to make other goods and services; also called "physical capital."

entrepreneurship

the efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes.

scarce

in short supply; when a resource is not available in sufficient quantities to satisfy all the various ways a society wants to use it.

opportunity cost

the real cost of an item: the value of the next best alternative that you must give up in order to get that item.

microeconomics

the branch of economics that studies how individuals, households, and firms make decisions and how those decisions interact.

macroeconomics

the branch of economics that is concerned with the overall ups and downs of the economy.

economic aggregates

economic measures that summarize data across many different markets.

positive economics

the branch of economic analysis that describes the way the economy actually works.

normative economics

the branch of economic analysis that makes prescriptions about the way the economy should work.

business cycle

the alternation between economic downturns, known as recessions, and economic upturns, known as expansions.

recession

a period of economic downturn when output and employment are falling.

expansion

a period of economic upturn in which output and employment are rising; also referred to as recovery.

depression

a very deep and prolonged economic downturn.

employment

the number of people who are currently working for pay in the economy.

unemployment

the number of people who are actively looking for work but aren’t currently employed.

labor force

the number of people who are either currently holding a job (full time or part time) in the economy or are actively looking for work but aren’t currently employed; the sum of employment and unemployment.

unemployment rate

the percentage of the labor force that is unemployed.

output

the quantity of goods and services produced.

aggregate output

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

inflation

a rising overall price level.

deflation

a falling overall price level.

price stability

when the overall price level is changing only slowly if at all.

economic growth

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

model

a simplified representation used to better understand a real-life situation.

other things equal assumption

in the development of a model, the assumption that all other relevant factors remain unchanged; also known as the ceteris paribus assumption.

trade-off

when you give up something in order to have something else.

production possibilities curve (PPC)

illustrates the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

efficient

describes a market or economy in which there is no way to make anyone better off without making at least one person worse off.

productive efficiency

achieved by an economy if it produces at a point on its production possibilities curve.

allocative efficiency

achieved by an economy if it produces at the point along its production possibilities curve that makes consumers as well off as possible.

technology

the technical means for producing goods and services.

trade

when, in a market economy, individuals provide goods and services to others and receive goods and services in return.

gains from trade

an economic principle that states that people can get more of what they want through trade than they could if they tried to be self-sufficient; this increase in output is due to specialization.

specialization

situation in which each person specializes in the task that he or she is good at performing.

comparative advantage

the advantage conferred by an individual if the opportunity cost of producing the good or service is lower for that individual than for other people.

absolute advantage

the advantage conferred by the ability to produce more of a good or service with a given amount of time and resources; different from comparative advantage.

terms of trade

indicate the rate at which one good can be exchanged for another.

competitive market

A market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold.

supply and demand model

A model of how a competitive market works.

demand schedule

Shows how much of a good or service consumers will be willing and able to buy at different prices.

quantity demanded

Is the actual amount of a good or service consumers are willing and able to buy at some specific price. It is shown as a single point in a demand schedule or along a demand curve.

demand curve

A graphical representation of the demand schedule. It shows the relationship between quantity demanded and price.

law of demand

Says that a higher price for a good or service, all other things being equal, leads people to demand a smaller quantity of that good or service.

change in demand

Is a shift of the demand curve, which changes the quantity demanded at any given price.

movement along the demand curve

A change in the quantity demanded of a good that is the result of a change in that good's price.

substitutes

If a rise in the price of one of the goods leads to an increase in the demand for the other good.

complements

A rise in the price of one of the goods leads to a decrease in the demand for the other good.

normal good

When a rise in income increases the demand for a good—the normal case.

inferior good

When a rise in income decreases the demand for a good.

individual demand curve

Illustrates the relationship between quantity demanded and price for an individual consumer.

quantity supplied

The actual amount of a good or service people are willing to sell at some specific price.

supply schedule

Shows how much of a good or service producers

would supply at different prices.

supply curve

Shows the relationship between the quantity supplied and the price.

law of supply

Says that, other things being equal, the price and quantity supplied of a good are positively related.

change in supply

Is a shift of the supply curve, which changes

the quantity supplied at any given price

movement along the supply curve

Is a change in the quantity supplied of a good arising from a change in the good's price.

input

Is a good or service that is used to produce another good or service.

individual supply curve

Illustrates the relationship between quantity supplied and price for an individual producer.

equilibrium

An economic situation when no individual

would be better off doing something

different.

equilibrium price

When the price has moved to a level at which

the quantity demanded of a good equals the quantity supplied of that good. Also referred to as the market-clearing price.

equilibrium quantity

The quantity of the good bought and sold at the equilibrium price.

surplus

When the quantity supplied exceeds the quantity

demanded.

shortage

When the quantity demanded exceeds the quantity supplied.

price controls

Legal restrictions on how high or low a market price may go.

price ceiling

A maximum price sellers are allowed to charge for a good or service.

price floor

A minimum price buyers are required to pay for a good or service.

inefficient allocation to consumers

People who want the good badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are only willing to pay a relatively low price do get it.

wasted resources

People expend money, effort, and time

to cope with the shortages caused by the price ceiling.

inefficiently low quality

Sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price.

black market

A market in which goods or services are

bought and sold illegally—either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.

minimum wage

A legal floor on the hourly wage rate paid for a worker's labor.

inefficient allocation of sales among sellers

Those who would be willing to sell the good at the lowest price are not always those who manage to sell it.

inefficiently high quality

Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.

quantity control or quota

Is an upper limit on the quantity of some good that can be bought or sold.

license

Gives its owner the right to supply a good or service.

demand price

The price at which consumers will demand that quantity.

supply price

The price at which producers will supply that quantity.

wedge

The price paid by buyers ends up being higher than that received by sellers.

quota rent

The earnings that accrue to the license-holder from ownership of the right to sell the good. It is equal to the market price of the license when the licenses are traded.

deadweight loss

The value of forgone mutually beneficial transactions.