AP Microeconomics Semester Exam Review

Comprehensive vocabulary flashcards covering basic economic concepts, supply and demand, market structures, factor markets, and the role of government for AP Microeconomics.

Opportunity Cost

The next best alternative given up when a choice is made.

Bowed Outward PPC

A production possibilities curve that is concave from the origin, illustrating the Law of Increasing Opportunity Costs.

Underallocation of Resources

Represented by Point 1 on a production possibilities curve graph.

Overallocation of Resources

Represented by Point 2 on a production possibilities curve graph.

Properly Utilized Resources

Represented by Points 3 and 4 on a production possibilities curve graph.

PPC Outward Shift Factors

Trade, new sources of resources, technology, and education.

Demand Determinants

Consumer income, tastes and preferences, expectations, number of buyers, and the price of related goods.

Supply Determinants

Cost of inputs, expectations, government regulation, number of producers, productivity, taxes and subsidies, and technology.

Demand Increase Impact

Demand increases, supply has no change, price increases, and quantity increases.

Demand Decrease Impact

Demand decreases, supply has no change, price decreases, and quantity decreases.

Supply Increase Impact

Demand has no change, supply increases, price decreases, and quantity increases.

Supply Decrease Impact

Demand has no change, supply decreases, price increases, and quantity decreases.

Price Ceiling

Sets a legal maximum on the price at which a good can be sold.

Price Floor

Sets a legal minimum on the price at which a good can be sold.

Normal Good

A good where demand increases when income increases or demand decreases when income decreases.

Inferior Good

A good for which less is consumed when consumer income increases or more is consumed when income decreases.

Economic Profit Formula

$$TR - \text{Explicit costs} - \text{Implicit costs} = \text{economic profit}$$

Input

Any factor of production used to produce goods or services; something that goes into producing a good.

Output

The amount of an item produced; the product put out by the firm.

Perfect Competition Characteristics

Large number of sellers, standardized or homogeneous product, easy entry and exit, and the firm acts as a price taker.

$$MR=D=AR=P$$

In perfect competition, Marginal Revenue ($MR$) equals Demand ($D$), which equals Average Revenue ($AR$), which equals Price ($P$).

Profit-Maximizing Rule

Producing the quantity of output at which the marginal revenue ($MR$) of the last unit produced is equal to its marginal cost ($MC$).

Monopoly Characteristics

Single seller, no close substitutes, price maker, blocked entry, and non-price competition.

Monopoly Profit-Maximizing Point

$$MR=MC$$

Price Discrimination

The practice of charging different people different prices for the same goods or services.

Price Discrimination Criteria

The firm must be able to identify and separate buyers into groups, and buyers must not be able to resell goods to non-members of the group.

Cartel Failure

Occurs because individual members may find it profitable to cheat on agreements.

Game Theory

The study of the output and pricing behavior of oligopolists.

Dominant Strategy

When an oligopolist makes the same decision no matter what the other players do.

Nash Equilibrium

The result when all players choose their optimal action given the actions of other players, ignoring the effect of that action on the payoffs of others.

Excess Capacity

A condition in monopolistic competition where there is more production capability than needed.

Derived Demand

The demand for a factor of production, which is derived from the demand for the goods and services it is used to produce.

Marginal Revenue Product (MRP) Formula

$$MPP \times P = MRP$$

Profit-Maximizing Hiring Rule

$$MRP=W$$

Public Good

A good that is nonexcludable and nonrival in consumption.

Lorenz Curve

A curve illustrating the degree of income inequality in a country.

Gini Ratio Values

$0$ corresponds to perfect equality; $1$ corresponds to perfect inequality.

Regressive Tax

When the average tax rate falls as income rises; an example is sales tax.

Progressive Tax

Exists if the average tax rates increase as income increases; an example is US income tax with tax brackets.

Proportional Tax

Exists if a constant tax rate is applied regardless of income; also known as a flat tax.

Positive Externality

When production increases the well-being of others without compensation, leading to prices and quantities that are too low.

Negative Externality

When production reduces the well-being of others who are not compensated, leading to prices that are too low and quantities that are too high.

Positive Externality Solutions

Vouchers for consumption and subsidies for production.

Negative Externality Solutions

Government regulation or fines for consumption and taxes for production.