ap microecon

Scarcity

The condition that exists because resources are limited while human wants are unlimited.

You have $20 but want a $15 shirt and a $15 meal. You cannot afford both.

Opportunity Cost

The next-best alternative given up when making a choice.

You study economics instead of going to a movie. The movie is your opportunity cost.

Trade-off

The alternatives that must be given up when choosing one option over another.

Spending $50 on shoes means having $50 less available for other purchases.

Marginal Analysis

Making decisions by comparing the additional benefit and additional cost of one more unit.

You decide whether studying one additional hour is worth losing one hour of sleep.

Marginal Benefit (MB)

The additional benefit received from consuming or doing one more unit of something.

Your first slice of pizza gives you a lot of satisfaction, while your fourth gives you much less.

Marginal Cost (MC)

The additional cost of producing or consuming one more unit.

Producing 100 shirts costs $1,000 and producing 101 costs $1,008. The MC of the 101st shirt is $8.

Incentive

A reward or penalty that encourages or discourages a behavior.

A $500 tax credit for buying an EV encourages consumers to buy EVs.

Factors of Production

The resources used to produce goods and services: land, labor, capital, and entrepreneurship.

A bakery uses flour/land, bakers/labor, ovens/capital, and an owner/entrepreneurship.

Physical Capital

Human-made resources used to produce other goods and services.

A factory's machines are physical capital.

Human Capital

The knowledge, education, skills, and experience that make workers more productive.

A programmer takes a coding course and becomes more productive.

Production Possibilities Curve (PPC)

A graph showing the maximum combinations of two goods that can be produced with current resources and technology.

An economy can produce either 100 computers or 500 bicycles, or combinations of both.

Productive Efficiency

Producing the maximum possible output from available resources. Points on the PPC are productively efficient.

A factory uses all available workers and machines efficiently, placing production on its PPC.

Inefficiency

Producing less than the maximum possible output because some resources are unused or misallocated. Represented by a point inside the PPC.

High unemployment leaves workers unused, causing the economy to operate inside its PPC.

Unattainable Production

A production combination that cannot currently be produced with available resources and technology. Located outside the PPC.

An economy capable of producing at most 100 cars cannot currently produce 150 cars without gaining resources or technology.

Economic Growth

An increase in an economy's productive capacity, represented by an outward shift of the PPC.

New technology allows factories to produce more goods, shifting the PPC outward.

Increasing Opportunity Cost

As more of one good is produced, increasing amounts of another good must be sacrificed. Creates a bowed-out PPC.

Moving workers who are increasingly better at farming into computer production causes larger and larger losses of food.

Constant Opportunity Cost

Each additional unit of a good requires giving up the same amount of another good. Creates a straight-line PPC.

Every additional pizza produced requires giving up exactly 2 burgers.

Absolute Advantage

The ability to produce more output with the same resources than another producer.

Mia can make 10 pizzas while Jake can make 6 in an hour. Mia has the absolute advantage in pizza.

Comparative Advantage

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

Mia gives up 2 burgers per pizza while Jake gives up 1 burger. Jake has the comparative advantage in pizza.

Specialization

When individuals or countries concentrate on producing goods for which they have a comparative advantage.

The U.S. specializes in airplanes while another country specializes in coffee, and they trade.

Terms of Trade

The rate at which goods are exchanged between two producers or countries. For mutually beneficial trade, the rate generally falls between their opportunity costs.

If Country A's cost of a pizza is 2 burgers and Country B's is 4, a trade of 1 pizza for 3 burgers can benefit both.

Gains from Trade

The benefits obtained when producers specialize according to comparative advantage and trade.

After specializing and trading, two countries can consume more than they could without trade.

Demand

The quantities of a good consumers are willing and able to buy at different prices.

A demand curve shows how many concert tickets consumers would buy at $20, $40, $60, etc.

Law of Demand

Price ↑ → Quantity demanded ↓, and vice versa, ceteris paribus.

If Starbucks raises a drink from $5 to $8, consumers buy fewer drinks.

Quantity Demanded (Qd)

The amount of a good consumers are willing and able to purchase at one specific price.

At $3 per taco, consumers demand 500 tacos.

Supply

The quantities producers are willing and able to sell at different prices.

A supply curve shows how many pizzas restaurants would sell at various prices.

Law of Supply

Price ↑ → Quantity supplied ↑, and vice versa, ceteris paribus.

If the price of strawberries rises, farmers are willing to sell more strawberries.

Quantity Supplied (Qs)

The amount producers are willing and able to sell at one specific price.

At $10 per shirt, companies supply 1,000 shirts.

Equilibrium

The market condition where quantity demanded equals quantity supplied (Qd = Qs).

At $5, consumers want 500 burgers and restaurants supply 500 burgers. $5 is the equilibrium price.

Shortage

A situation where Qd > Qs, usually because price is below equilibrium.

At $2, consumers want 1,000 tickets but only 600 are available. There is a shortage of 400.

Surplus

A situation where Qs > Qd, usually because price is above equilibrium.

At $20, companies supply 1,000 shirts but consumers buy only 700. There is a surplus of 300.

Normal Good

A good for which demand increases when consumer income increases.

After getting a raise, you buy more restaurant meals. Restaurant meals are a normal good for you.

Inferior Good

A good for which demand decreases when consumer income increases.

After getting a raise, you stop buying instant ramen and buy restaurant meals instead.

Substitute Goods

Goods that can be used in place of each other. If the price of one increases, demand for the other tends to increase.

Pepsi and Coke are substitutes. If Pepsi becomes more expensive, demand for Coke increases.

Complementary Goods

Goods that are typically consumed together. If the price of one increases, demand for the other tends to decrease.

Game consoles and video games are complements. If console prices rise substantially, demand for games may fall.

Price Elasticity of Demand (PED)

Measures how responsive quantity demanded is to a change in price. Formula: %ΔQd ÷ %ΔP.

Price rises 10% and Qd falls 20%. PED = 2, so demand is elastic.

Elastic Demand

Demand where quantity demanded is relatively responsive to price changes. PED > 1.

A 10% increase in restaurant prices causes customers to buy 20% fewer meals.

Inelastic Demand

Demand where quantity demanded is relatively unresponsive to price changes. PED < 1.

The price of an essential medication rises 10%, but quantity demanded falls only 2%.

Total Revenue (TR)

The total money a firm receives from sales. TR = Price × Quantity.

A company sells 100 shirts for $20 each. TR = $2,000.

Price Ceiling

A government-set maximum legal price. A binding price ceiling is set below equilibrium and causes a shortage.

Equilibrium rent is $2,000, but the government limits rent to $1,500. More people want apartments than landlords supply.

Price Floor

A government-set minimum legal price. A binding price floor is set above equilibrium and causes a surplus.

Equilibrium wage is $10/hour but minimum wage is $15. The quantity of labor supplied can exceed quantity demanded.

Consumer Surplus (CS)

The difference between the maximum price consumers are willing to pay and the price they actually pay.

You're willing to pay $100 for shoes but buy them for $70. Your consumer surplus = $30.

Producer Surplus (PS)

The difference between the price a producer receives and the minimum price they would accept.

A seller would accept $40 for a product but sells it for $60. Producer surplus = $20.

Deadweight Loss (DWL)

The loss of total surplus caused when the market does not produce the efficient quantity.

A tax makes some mutually beneficial transactions no longer occur, creating deadweight loss.

Excise Tax

A tax charged per unit of a good or service, creating a wedge between the price buyers pay and sellers receive.

The government imposes a $2 tax per pack of cigarettes.

Tax Incidence

How the economic burden of a tax is divided between consumers and producers. The more inelastic side generally bears more of the burden.

If consumers continue buying gasoline despite higher prices, consumers may bear much of a gasoline tax.

Total Surplus

The total benefit society receives from a market. Total Surplus = Consumer Surplus + Producer Surplus.

Consumers receive $500 of CS and producers receive $300 of PS. Total surplus = $800.

Ceteris Paribus

Latin for “all other things held constant.” Used to isolate the effect of changing one variable.

The law of demand says that when price rises, Qd falls assuming everything else stays the same.

Change in Quantity Demanded

A movement along an existing demand curve caused only by a change in the good's own price.

Nike lowers the price of shoes from $100 to $80, so consumers buy more Nike shoes. You move down the demand curve.

Change in Demand

A shift of the entire demand curve caused by a non-price determinant of demand.

Consumer income increases and Nike shoes are a normal good → demand for Nike shoes shifts right.