AP MACROECONOMICS: UNIT 1 BASIC ECONOMICS CONCEPTS

FLVS Course V20 Vocabulary

economics

the study of the **production** and exchange of goods and services

production

the whole process of making goods, including capital goods, or providing services from scarce resources

transaction

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the transfer of a good or the providing of a service, usually involving the exchange of money

microeconomics

studies individual households and businesses and the decisions they face, including: making and buying products, hiring another worker, shutting down, and the impact of government policy and interventions

macroeconomics

studies whole economies—countries and the world. At this level, those individual decisions are too small to see, and big patterns become visible

resources (inputs)

the material, funding, labour, and other elements necessary to produce the things people want or need

trade-off

what is given up in order to do or have something else

consumer good

a final product acquired for direct use

capital good

resource obtained by a business from another in order to produce a consumer good or service (i.e., tools, machinery, intermediate goods)

capital

resources that improve productivity; can include funding, equipment, and buildings

factors of production

the necessary resources to produce any good or service, subdivided into land, labor, and capital

scarcity

the total wants for goods and services from all people in a society exceed the total amounts of those goods and services that the society can produce

resource allocation

distribution or placement of scarce factors of production

distribution

the whole process of delivering goods from where they are produced to the location where consumers want to purchase them

coordinating mechanism

in an economic system, the whole set of institutions that determine resource allocation

command economic system

central planning by the government using involuntary laws, taxes, regulations, and restrictions—the planning agency determines production quantities for goods and services. It also allocates resources to firms to meet the target production quantities. 

market economic system

price determined by voluntary negotiation of buyers and sellers. protection for private ownership **property rights** and control of resources by households and businesses

property rights

the individual ownership of resources protected in law

traditional economic system

economic activity is determined by customs and traditions. these societies are usually based on farming, hunting, and/or fishing and are rural. transactions are often determined by barter. traditional economies are not a focus in macroeconomics since their impact at that large a scale is limited

incentivize

to motivate or encourage someone through the possibility of some type of gain (incentive)

constraint

a limit on the availability of or ability to do something

positive

in economics, stating (or positing) what is the case, often contrasted with normative

normative

in economics, suggesting what should be, generally based on a personal value system

what fact of life is the foundation of the science of economics?

scarcity:

every person and society has unlimited wants and needs and limited resources to meet them, which requires choices. economics is the science of those choices.

what is the essential difference between consumer goods and capital goods?

their intended uses:

consumer goods are directly used by the person who acquires them, and capital goods are used to produce consumer goods.

what are the three factors of production?

land, labour, and capital (be sure to include examples)

the opposite of increase is

decrease

outputs

a good or service produced by a firm

opportunity cost

the next-best alternative sacrificed or foregone in any choice

production possibility curve

a graph illustrating the possible output combinations of two goods based on a set amount of resources, also called a production possibilities frontier (PPF) and production possibility boundary (PPB)

The Law of Increasing Opportunity Cost

to produce more units of one good, you will give up more and more of the other good

Constant Opportunity Cost

situation in which the most valuable trade-off required to produce another unit remains the same as output increases; two products that require similar resources cause this

PPC Inefficient

inside the curve

PPC Efficient

anywhere on the curve

PPC Unattainable

anywhere above, or outside the curve

efficient

optimizing the use of all resources; unable to produce more of one good without giving up producing some of another or without an improvement in technology

Increasing Opportunity Cost

situation in which the most valuable trade-off required to produce another unit increases as output increases; you have to give up increasing amounts of one to make the other

Decreasing Opportunity Cost

situation in which the most valuable trade-off required to produce an additional unit of a good lowers as output increases

recession

significant downturn in the economy

underutilized resources

land, labor, or capital that is not being used for maximum productivity, such as unused land or part-time workers who would prefer to be full-time

economic contraction

a decrease in a society’s ability to produce goods and services (PPCC)

economic growth

expansion of a society’s ability to produce goods and services (PPCG)

PPCC and PPCG

calculating opportunity cost

good A / good B

overanalyzes leads to

brain paralysis

mutual benefits

when both parties gain or profit from an agreement or exchange

specialization

the designation of resources and workers to specific tasks to produce in a more efficient and effective way

absolute advantage

the ability to produce more of a certain good with the same or fewer resources

comparative advantage

the ability to produce something with a lower opportunity cost than producing another good or than someone else can produce it

How does production specialization affect a country’s PPC?

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**Technically, it doesn't.** Neither specializing in one's comparative advantage nor trade allows for producingbeyond the production possibilities curve (PPC). However, specialization and trade allows a country's people to benefit by consuming beyond the PPC.

Law of Comparative Advantage

the total output of the world economy is maximized when each country specializes in producing the good for which it has the lowest opportunity cost

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To express a good's opportunity cost as a fraction, the ...

other good's quantity goes over in output problems

other good's quantity goes under in input problems

demand

the willingness and ability of consumers to buy a range of quantities at every possible price

demand schedule

the quantity that will be purchased of a good or service at every possible price

quantity demanded

the number of units of a good or service that will be purchased at a particular price

Law of Demand

the quantity demanded of a good or service is indirectly related to its price, ceteris paribus

Ceteris Paribus

Latin for "other things equal," meaning all other variables are unchanged

Income Effect

the principle that says as price increases, people are willing to buy less because higher prices take a greater portion of their income

Purchasing Power

the quantity of goods and services that a consumer can buy with an amount of income

Substitution Effect

the change in the demand for a good or service caused by a change in the price of a similar product, one that directly competes with it

The greater the price…

the more likely it is that consumers will find a substitute product to purchase instead, reducing the quantity demanded for the original good.

Law of Diminishing Marginal Unity

as more of a good or service is consumed, the personal satisfaction derived from it decreases with each unit

How does an increase in price affect demand?

It doesn't. An increase in price lowers quantity demanded.

determinants of demand

the factors that move the entire demand curve for a good or service

Law of Supply

the quantity supplied of a good or service is directly, or positively, related to its price, ceteris paribus

Supply Schedule

the quantity that will be supplied of a good or service at every possible price

determinants of supply

factors that change the quantity supplied at every price level

subsidy

a government payment to an individual or business to encourage a certain activity

Left is less…

Right is more

market equilibrium

the price and quantity level where supply and demand are in balance

market shortage

when quantity supplied is less than quantity demanded at the current price

market surplus

when quantity supplied is greater than quantity demanded at the current price

market disequilibrium

a condition where there is imbalance between quantity supplied and quantity demanded in a market

price floor

a minimum price set by policy; if binding, will be above market equilibrium

price ceiling

a maximum price set by policy; if binding, will be below market equilibrium