AP Microeconomics Review

Flashcards summarizing key vocabulary and concepts from an AP Microeconomics review lecture.

Scarcity

The concept that we have unlimited wants but limited resources.

Opportunity Cost

The idea that every decision or production has a cost, representing what you give up to do or produce something.

Production Possibilities Curve (PPC)

A graph showing different combinations of producing two goods using all available resources.

Constant Opportunity Cost

When resources to produce different products are very similar, resulting in a straight-line PPC.

Law of Increasing Opportunity Cost

When resources are not very similar, leading to the law of increasing opportunity cost and a PPC concave to the origin.

Comparative Advantage

Countries specialize in producing goods for which they have a lower opportunity cost and then trade with other countries.

Specialization

Countries should specialize in the product where they have a lower opportunity cost.

Absolute Advantage

The ability to produce more of a product, which is less important than comparative advantage in determining trade.

Terms of Trade

How many units of one product should be traded for another to benefit both countries.

Transfer Payments

Payments by the government to individuals, like welfare, not in exchange for goods or services.

Subsidies

Money provided by the government to businesses to encourage increased production.

Factor Payments

Payments made by businesses to individuals for the resources they provide.

Demand Curve

A downward-sloping curve showing that as price increases, quantity demanded decreases.

Law of Demand

When price increases, quantity demanded decreases, and when price decreases, quantity demanded increases.

Downward Sloping Demand Curve

The combined effect of substitution, income, and diminishing marginal utility.

Law of Supply

When price increases, quantity supplied increases, and when price decreases, quantity supplied decreases.

Equilibrium

Where the supply and demand curves intersect, determining the market price and quantity.

Individual Shifts

When demand goes up, or demand goes down, supply goes up, or supply goes down.

Double Shift

When two curves shift at the same time, resulting in either price or quantity being indeterminant.

Substitutes

Products bought in place of each other; when the price of one increases, the demand for the other increases.

Complements

Products bought together; when the price of one increases, the demand for the other decreases.

Normal Goods

Goods for which demand increases as income increases.

Inferior Goods

Goods for which demand decreases as income increases.

Elasticity

Measures how quantity changes in response to a change in price.

Elastic Demand

When quantity is very sensitive to a change in price.

Inelastic Demand

When quantity is insensitive to a change in price.

Elasticity of Demand Coefficient

The percent change in quantity divided by the percent change in price.

Interpreting Elasticity of Demand Coefficient

A coefficient greater than one indicates elastic demand, and less than one indicates inelastic demand.

Cross Price Elasticity

The percent change in quantity of one product relative to the percent change in price of another product, indicating if they are complements or substitutes.

Income Elasticity Coefficient

The percent change in quantity divided by the percent change in income, indicating if a good is normal or inferior.

Total Revenue Test

If price and total revenue move in the same direction, demand is inelastic; if they move in opposite directions, demand is elastic.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

The difference between the price and what producers are willing to sell for.

Deadweight Loss

Lost consumer and producer surplus due to market inefficiency.

Price Controls

Government-imposed restrictions on prices, setting prices above or below the equilibrium.

Price Ceiling

A maximum price set below equilibrium.

Price Floor

A minimum price set above equilibrium.

International Trade

Occurs when we can buy products at a cheaper world price, increasing consumer surplus and decreasing producer surplus.

Tariff

A tax on imported goods that raises the world price, creating deadweight loss and tariff revenue.

Per Unit Tax

A tax per unit that shifts the supply curve to the left.

Tax Incidence and Elasticity

When demand is perfectly inelastic, consumers pay all the tax; the more elastic the demand, the more producers pay.

Consumer Choice

Buying two different products with different additional satisfactions while keeping in mind that they're two different prices.

Maximizing Utility

Marginal utility per dollar of one good equals the marginal utility per dollar of another good.

Law of Diminishing Marginal Returns

As more workers are hired with fixed resources, additional output decreases.

Three Types of Costs

Fixed cost, variable cost, and total cost.

Per Unit Cost Curves

Average total cost, average variable cost, average fixed cost, marginal cost.

ATC Hits Marginal Cost

The quantity where the average total cost is at its minimum.

Long Run

All resources are variable; diminishing marginal returns don't apply. Mass production techniques can be used, and the average cost can fall.

Economies of Scale

Utilizing mass production techniques result in average costs falling.

Constant Returns of Scale

Costs don't fall lower than a certain point and level off.

Disecons of Scale

Long run costs rise and average costs increase.

Perfect Competition

Many small firms, similar products, low barriers to entry, and price takers.

Cost Curves

The idea of profit or a loss, and a long-run, can be drawn from it.

Produce MR=MC

Produce where marginal revenue equals marginal cost.

Shutdown Rule

If the price falls below the average variable cost, you should shut down.

Long Run Equilibrium

Total revenue equals total costs and where they are making no economic profit.

Productive Efficiency

Producing at the productively efficient quantity at the lowest ATC.

Allocative Efficiency

Producing where marginal cost hits the demand.

Monopoly

One firm, unique product, high barriers, and the market is the firm.

Natural Monopoly

It's smarter to have one firm producing because the average total cost is falling.

Price Discriminating Monopoly

Firms charge multiple prices, and marginal revenue becomes the demand curve.

Oligopolies

Many small firms, high barriers, and strategic pricing.

Monopolistic Competition

Price maker however firms can enter.

Derived Demand

The demand for labor depends on the product created by that labor.

MRP and MRC

Shows you additional revenue workers generate by multiplying at the product, the addition output, the marginal product times the price and then compare to marginal revenue cost.

Perfect Competitive Firm

Perfect competitive firm in the resource market is just the flip version of a perfect competitive firm in the product market.

Monopsony

A monopoly for labor, has upward open supply andMRC that's above it.

Least Cost Rule

Calculating additional output one gets from another unit of labor and the price.

Market Failures

Free market is awesome, great, but sometimes it fails.

Market Problems

The wrong quantity and socially optimal quantity is different from the free market.

Public Goods

Shared consumption, non-rivalry, and non-exclusion.

Externalities

Additional cost or benefits on some other person.

Negative Externalities

Adding to another person's costs.

Positive Externalities

Additional benefits.

Solving The Problem

Taxes should always move towards being socially optimal.

Gini Coefficient

Area's A relative area of A and B combined.

Types of Taxes

Progressive, regressive, or proportional.

Progressive Tax

Rich people pay a higher percent of their income.

Proportional Tax

Everyone pays 10% of their income.

Regressive Tax

Poor people pay a higher percent of their income.