AP Microeconomics Vocabulary

scarcity

the idea that resources are limited and cannot meet the unlimited needs and wants

absolute scarcity

a resource with a fixed physical limit; its supply cannot increase no matter how much demand grows

relative scarcity

a resource that society places high value and demand on, making it difficult for its supply to suffice

free resources

a resource that is so abundant that people can have as much of it as they want; someone getting more of it doesn't take away from someone else

four factors of production

land, labor, capital, entrepreneurship

land

natural resources

labor

the actual work put into production

capital

things produced to produce other things

entrepreneurship

the human knowledge to combine the other three factors to produce goods and services

rival goods

a good where one person's use of a specific unit prevents someone else from using that same unit at the same time

economic model

a simplified representation of the real world used to understand economic behavior; makes simplified assumptions -> does not exactly match what happens

ceteris paribus

"all else equal"; when studying how one thing affects another (how price of pizza affects demand), assume other factors (people's income, size of the pizza) stay the same.

positive statement

a statement about what is or what will happen; can be tested with evidence

normative statement

a statement about what should be; based on opinions or values

resource allocation

how an economy decides how to use its limited resources to produce goods and services

market economy

individuals and business make most economic decisions through markets, using supply and demand

command economy

the government makes most economic decisions

mixed economy

an economy that combines market forces with government involvement

incentives

rewards or consequences that encourage people to make certain choices

price signals

change in price that gives information about scarcity and helps consumers and producers make decisions

property rights

legal rights to own, use, control, and transfer property or resources

exclusivity

the owner can prevent others from using the property

enforceability

the owner's rights are protected and can be enforced by law

transferability

he owner can sell, give, or transfer the property

production possibilities curve

a graph that shows every efficient combination of two goods and economy can produce with its current resources and technology

opportunity cost

the value of the next best alternative (the option you would have chosen if your first choice was not available) that you give up when you make a choice

marginal cost

the opportunity cost of producing ONE more unit

increasing opportunity cost

situation in which you produce more of a good, and you have to give up larger and larger amounts of the alternative good each time; bent outwards on PPC

decreasing opportunity cost

situation in which you produce more of a good, and you have to give up smaller and smaller amounts of the alternative good each time; bent inwards on PPC

constant opportunity cost

situation in which you produce more of a good, and you have to give up the same amount of the alternative good each time; linear on PPC

comparative advantage

a situation in which a producer can produce a good or service at a lower opportunity cost than another producer

gains from trade

extra goods and services producers can obtain when they specialize (focus entirely) in producing the product they have a comparative advantage in, then trading, rather than producing all products themselves

absolute advantage

when a producer can produce more of a product than any other producer with the same quantity of resources