AP Microeconomics Review

AP Microeconomics vocabulary flashcards.

Law of Demand

As price increases, quantity demanded decreases (inverse relationship).

Law of Supply

As price increases, quantity supplied increases (direct relationship).

Market Equilibrium

The price at which quantity demanded equals quantity supplied.

Surplus

When price is above equilibrium and quantity supplied exceeds quantity demanded.

Shortage

When price is below equilibrium and quantity demanded exceeds quantity supplied.

Shifters of Demand

Tastes, Related goods, Income, Buyers, Expectations (TRIBE).

Shifters of Supply

Resource prices, Other goods, Technology, Taxes/subsidies, Expectations, Number of sellers (ROTTEN).

Price Ceiling

A legal maximum price set below equilibrium; causes a shortage.

Price Floor

A legal minimum price set above equilibrium; causes a surplus.

Price Elasticity of Demand (PED)

A measure of how much quantity demanded responds to a change in price.

Elastic Demand

Quantity demanded changes significantly with price changes (PED > 1).

Inelastic Demand

Quantity demanded changes little with price changes (PED < 1).

Elasticity and Total Revenue

If demand is elastic, raising price lowers revenue; if inelastic, raising price increases revenue.

Marginal Analysis

Comparing marginal benefits to marginal costs for decision making.

Rule for Rational Decision-Making

Continue an activity as long as MB >= MC.

Utility Maximization Rule

MU/P should be equal across all goods: MUx/Px = MUy/Py.

Fixed Costs

Costs that do not vary with output (e.g., rent).

Variable Costs

Costs that change with the level of output (e.g., materials).

Marginal Cost (MC)

The cost of producing one additional unit.

Law of Diminishing Marginal Returns

As more variable input is added to fixed input, additional output eventually decreases.

Perfect Competition

A market with many firms, identical products, and no control over price.

Monopoly

A single seller with significant control over price and barriers to entry.

Monopolistic Competition

Many firms selling similar but differentiated products.

Oligopoly

A few large firms dominate the market; may involve collusion or strategic behavior.

Profit-Maximizing Rule

Produce where MR = MC.

Marginal Revenue Product (MRP)

The additional revenue generated from hiring one more unit of input.

Hiring Rule

Hire workers where MRP = MRC (marginal resource cost).

Monopsony

A labor market with a single buyer (employer) that has wage-setting power.

Negative Externality

A cost imposed on third parties not involved in the transaction (e.g., pollution).

Positive Externality

A benefit received by third parties (e.g., education).

Public Good

A good that is non-rival and non-excludable (e.g., national defense).

Deadweight Loss

Loss of total surplus due to inefficiency, often from taxes or market failure.

Economic Profit

Total revenue minus both explicit and implicit costs.

Accounting Profit

Total revenue minus only explicit costs.

Normal Profit

The minimum profit needed to keep a firm in business; occurs when economic profit is zero.