AP Microeconomics Unit 1

Cost Benefit Principle/Rational Rule

An economic rule stating that a person should take an action if the benefits of doing so are greater than or equal to the costs.

Economic Surplus

Total Benefits - Total Costs

Framing Effect

A bias where people make decisions based on how the same information is presented

Willingness to Pay

How much a consumer is willing to pay for a specific product

Sunk Cost

A cost that has already been spent and cannot be recovered and should not affect future decisions

Scarcity

The condition that resources are limited while wants and needs are unlimited

Someone Else’ Shoe Technique

A decision-making approach where you consider a choice from another person’s perspective to better understand the costs, benefits, and possible outcomes before making your own decision.

Opportunity Cost

The value of the next best alternative you give up when making a choice. It represents the true cost of a decision in terms of what you sacrifice.

Marginal Cost

The additional cost incurred from producing one more unit of a good or service.

Interdependence Principle

The idea that people’s choices often depend on the choices of others, because actions are connected and one person’s decision can affect the outcomes for others.

Marginal Benefit

The additional benefit received from consuming or producing one more unit of a good or service.

Marginal Principle

The idea that optimal decisions are made by comparing marginal benefits and marginal costs, and that people should take an action as long as the marginal benefit exceeds the marginal cost.

Production Possibility Frontier

A curve that shows the maximum combination of two goods or services that can be produced given available resources and technology, illustrating trade-offs and opportunity costs.

Utility

The satisfaction or benefit a person receives from consuming a good or service.

Budget Constraint

The limit on the amount a person can spend based on their income and the prices of goods and services.

Optimal Consumption Combination

The combination of goods and services that maximizes a person’s total utility given their budget constraint.

Consumer Choice

The decision-making process by which a person allocates their limited income among different goods and services to maximize their satisfaction or utility.

Substitute Goods

Because consumers can replace these goods with each other, an increase in the price of one good leads to an increase in demand for the other.

Complementary Goods

These goods are often used together, so an increase in the price of one good leads to a decrease in demand for the other.

Demand Curve

A graph that shows the relationship between the price of a good and the quantity demanded, typically sloping downward to reflect that lower prices lead to higher demand.

Law of Diminishing Returns

The principle that as more of one input is added to a fixed amount of other inputs, the additional output from each new unit of input eventually decreases.

Individual Demand

The quantity of a good or service that one consumer is willing and able to buy at different prices.

Total Market Demand

The sum of all individual demands for a good or service in a market at each possible price.

Leftward Shift in the Demand Curve

Occurs when demand decreases at every price

Rightward Shift in the Demand Curve

Occurs when demand increases at every price

Network Effect

The phenomenon where the value of a good or service increases as more people use it, making it more desirable to new users.

Congestion Effect

The phenomenon where the value or usefulness of a good or service decreases as more people use it, often due to overcrowding or overuse.

Normal Good

A good for which demand increases as consumer income rises.

Inferior Good

A good for which demand decreases as consumer income rises.

Price Elasticity of Demand

A measure of how sensitive the quantity demanded of a good is to a change in its price.

Tradeoffs

The concept that choosing more of one thing means giving up some of another because resources are limited.

Total Revenue

The total amount of money a firm receives from selling a good or service, calculated as price multiplied by quantity sold.

Price Elasticity of Supply

A measure of how sensitive the quantity supplied of a good is to a change in its price.

Inelastic Good

A good for which quantity demanded or supplied changes very little when the price changes.

Elastic Good

A good for which quantity demanded or supplied changes significantly when the price changes.

Income Elasticity of Demand

A measure of how sensitive the quantity demanded of a good is to changes in consumer income.

Gross Price Elasticity of Demand

A measure of how sensitive the total quantity demanded of a good is to a change in its own price, without adjusting for other factors.

Equilibrium

The situation in a market where quantity demanded equals quantity supplied, so there is no tendency for the price or quantity to change.

Planned/Command Economy

An economic system in which the government makes all decisions about what to produce, how to produce, and for whom to produce, rather than relying on market forces.

Market Economy

An economic system in which decisions about what to produce, how to produce, and for whom to produce are made by buyers and sellers interacting in markets.