Ap Economics Terms

scarcity

limited resources and unlimited wants

economics

study of how society manages its scarce resources

efficiency

the property of society getting the most from its scarce resources

equity

the property of distributing economic prosperity fairly among society's members

rational

systematically and puposefully doing the best you can to achieve your objective

opportunity cost

whatever is given up to get something else

marginal changes

incremental adjustments to an existing plan

incentive

something that induces a person to act

market economy

an economic system where interaction of households and markets determines the allocation of resources

property rights

the ability of an individual to own and exercise control over scarce resources

invisible hand

the principle that self-interested market participants may unknowingly maximize the welfare of society as a whole

market failure

a situation in which the market fails to allocate resources efficiently

externality

when one persons actions have an impact on a bystander

market power

the ability of an individual or group to substantially influence market prices

monopoly

the case in which there is only one seller in the market

productivity

the amount of goods and services produced per hour by a worker

inflation

an increase in the overall level of prices

business cycle

fluctuations in economic activity

scientific method

objective development and testing of theories

economic models

simplifications of reality based on assumptions

circular-flow diagram

a diagram showing the flow of goods etc between housebolds and firms

factors of production

inputs such as land, labor, and capital

production possibilities frontier

a graph that shows the comibations of output the economy can possibly produce given the available factors of production and the available production technology

micro economics

the study of how households and firms make decisions and how they interact in markets

macroeconomics

the study of economy wide phenomena

positive economics

descriptions of the world as it is

normative economics

prescription for how the world ought to be

utility

the pleasure, happines, or satisfaction obtained from consuming a good or service

marginal analysis

comparisons of marginal benefits and marginal costs, usually for decision making

aggregate

collection of specific economic units treated as if they were one unit

land

all natural resources used in the production precess

labor

physical and mental talents of individuals used in producing goods and services

capital

all manufactured aids used in producing consumer goods

factors of production

land, labor, capital, and entrepreneurial ability

full employment

the economy is employing all its available resources

consumer goods

products that satisfy our wants directly

fallacy of composition

the assumption that what is true for one individual is necessarily true for a group of individuals

economic growth

result of increases in supplies of resources, improvements in resource quality, or technological advances

economic system

a particular set of institutional arrangements and a coordinating mechanism

command system

socialism or communism: government owns most property resources and economic decision making occurs through a central economic plan

market system

capitalism: characterized by pricate ownership of resources and the use of markets and prices to coordinate and direct economic activity

private property

enables individuals and businesses to obtain, use, and dispose of resources as they see fit

self-interest

the motivation force of the various economic units as they express their free choices

competition

what drives a market based system

specialization

specialization is the use of resources of an individual, firm, region, or nation, to produce one or a few goods or services

law of demand

the inverse relationship between the price of a good and the quantity demanded

diminishing marginal utility

each buyer of a product will derive less utility from each sucessive unit consumed

income effect

lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product

substitution effect

lower price buyers have incentive to buy a less expensive product that are now relatively more expensive

determinants of demand

(1) consumers tastes (preferences), (2) the number of potential buyers in the market, (3) consumers income, (4) price of complement, (5) price of substitute, (6) consumer expectations

normal good

products whose demand varies directly with money income

inferior good

goods whose demand varies inversely with money income

substitute good

a good that can be used in the place of another

complementary good

a good that is used together with another good

law of supply

direct relationship between the price of a good and the quantity supplied

determinants of supply

(1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, (6) number of sellers in the market

change in supply

shift of the supply curve

change in demand

shift of demand curve

change in quantity supplied

movement along the supply curve

change in quantity demanded

movement along the supply curve

equilibrium quantity

the intersection between the demand and supply curve

surplus

(excess supply) left overs after a price floor has been set above equilibrium price

shortage

(excess demand) result of a price ceiling below equilibrium price

price ceiling

sets the maximum legal price a seller may charge for a produce or service (must be set below equilibrium to have effect)

price floor

a minimum price a seller may charge for a product or service (must be set below equilibrium to have an effect0

price elasticity of demand

the responsivness of consumers to price change

perfectly elastic

when change in price results in no change whatsoever in quantity demanded

elastic

specific percentage change in price results in larger percentage change in quantity demanded

inelastic

percentage change in price produces smaller percentage change in quantity demanded

unit elasticity

where pecentage change in price and quantity demanded are the same

total revenue

the total amount the seller receives from the sale of a product in a particular time period

price elasticity of supply

depends how easily producers can shift resources between alternative uses

market period

the period that occurs when the time immediately after a change in market price is too short for producers to respond

short run

in microeconomics is a period of time too short to change plant capacity but long enough to use fixed plant more or less intesively

long run

in microeconomics is a time period long enough for firms to adjust their plant sizes and for new firms to enter the industry

cross elasticity of demand

measures how sensitive consumer purchases of one product are to a change in the price of some other product

income elasticity of demand

measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good

consumer surplus

the difference between the maximum price a consumer is willing to pay for a product and the actual price

producer surplus

the difference between the actual price a producer receives and the minimum acceptable price

efficiency losses

reductions of combined consumer and producer surplus associated with underproduction or overproduction of a product