AP Microeconomics Vocab Unit 1

economic way of thinking

A reasoning process that involves considering costs as well as benefits in making decisions.

invisible hand

Term economists use to describe the self-regulating nature of the marketplace

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

circular flow model

A model that shows the flow of goods and services and the interaction among households, businesses, and banks

command system

system in which the government controls the factors of production and makes all decisions about their use

comparative advantage

The ability to produce a good at a lower opportunity cost than another producer

constant opportunity costs

The constant amount of a commodity that must be given up to produce each additional unit of another commodity.

correlation

a statistical relation between two or more variables such that systematic changes in the value of one variable are accompanied by systematic changes in the other

causation

A cause and effect relationship in which one variable controls the changes in another variable.

direct relationship

the connection between two variables that show the same effect

economic growth

steady growth in the productive capacity of the economy (and so a growth of national income)

economic system

the method used by a society to produce and distribute goods and services

incentive

an additional payment (or other remuneration) to employees as a means of increasing output

explicit costs

the monetary payment a firm must make to an outsider to obtain a resource

factor market

market in which firms purchase the factors of production from households

firm

organization that employs resources to produce a good or service

gains in trade

The extra output that trading partners obtain through specialization of production and exchange of goods and services

households

The consuming units in an economy

implicit costs

The opportunity costs associated with a firm's use of resources that it owns.

inverse relationship

a relationship in which one variable decreases when another variable increases

independent variable

variable that causes dependent variable to change

Law of comparative advantage

the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good

allocation of resources

the apportionment of resources among firms and industries in order to produce products wanted by consumers

dependent variable

variable that changes as a consequence of a change in the independent variable

economics

the branch of social science that deals with the production and distribution and consumption of goods and services and their management

law of increasing opportunity costs

the principle that as the production of a good increases, the opportunity cost of producing an additional unit rises

macroeconomics

the branch of economics that studies the overall working of a national economy

marginal analysis

comparison of marginal costs and marginal benefits

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

marginal cost

the cost of producing one more unit of a good

market system

an economic system in which individuals, not the government control the production and distribution of goods and services; also called capitalism

microeconomics

the branch of economics that studies the economy of consumers or households or individual firms

mixed system

elements of a command and market economies combined

normative economics

part of economics involving judgments about what the economy should be like

opportunity cost

the amount of other products that must be forgone or sacrificed to produce a unit of a product

optimal output

the output of a good that a firm produces that when sold will maximize profit

other things equal assumption

the assumption that factors other than those being considered are held constant

policy economics

formulation of courses of action to prevent unwanted economic issues or bring about desired outcomes

positive economics

the analysis of facts or data to establish scientific generalizations about economic behavior

post hoc fallacy

inaccurate assumption that when two events follow each other, one must have caused the other

product market

the market in which households purchase the goods and services that firms produce

production possibility curve

A curve measuring the maximum combination of outputs that can be obtained from a given number of inputs

scarcity

limited quantities of resources to meet unlimited wants

slope of a straight line

ratio of vertical change to horizontal change between two points on a line

terms of trade

the ratio at which a country can trade its exports for imports from other countries

economic problem

the fact that there are unlimited wants but limited resources to produce the goods and services to satisfy those wants

economic questions

What to produce? Who to produce it for? How to produce it?

trade off

sacrificing one good or service to purchase or produce another

traditional system

economic system based on past ways of life

vertical intercept

point where line meets graph at vertical axis