All AP Microeconomics Terms

Quantity control

upper limit on quantity of a good that can be bought or sold, also known as quota

Utility

measure of satisfaction a consumer desires from consumption of a good

Allocatively efficient

when you produce until the benefit of producing another good does not exceed the cost of producing another good (no DWL, optimal use of resources)

Productively efficient

when the cost of producing goods are minimized (lowest per unit cost)

Monopsony

when a firm has a monopoly over a type of input

Efficient scale

lowest per unit cost of producing a good (refers to monopolies, where MC intersects ATC)

Break even

when a firm's profit is 0 (costs equals revenue)

Normal economic profit

when a firm's profit is 0 (costs equals revenue)

MRDARP

refers to perfect competition, made of: marginal revenue, demand, average revenue, and price

Income effect

when the price of a good changes the amount of purchasing power a person has increases/decreases

Substitution effect

change in price of one good or service relative to another good or service (quantity demanded increases/decreases)

Progressive tax

a tax in which higher income earners pay a larger percentage of their income compared to lower income earners

Marginal tax bracket

pay income on the next dollar you earn

Regressive tax

higher income earners pay a smaller percentage of their income compared to lower income earners

Proportional tax

everyone pays the same percentage of their income

Elasticity

measure changes in quantity when something else changes

Price elasticity of demand

measures the percent change in quantity demanded with respect to percent change in price

Unit elastic

when consumers equally to decrease the quantity demanded in proportion to price (E=1)

Elastic

when consumers are more responsive to changes in the market price (E>1) [characterized by having many substitutes, a luxury, and a long time frame]

Perfectly Elastic

when any change in price will cause a 100% change in the quantity demanded (horizontal)

Inelastic

when consumers are less responsive to changes in market price (E<1) [characterized by being a necessity, no substitutes, and extremely cheap]

Perfectly Inelastic

when the quantity demanded does not change from changes in price

Excludable goods

when suppliers of goods can prevent non-payers from using the good (ex. food)

Non excludable goods

when suppliers of a good can't prevent non payers from using the good (ex. information)

Rival goods

one person's consumption of a good decreases the amount available for others to consume (ex. food)

Non rival goods

one person's consumption of a good does not affect the amount available for others to consume

Public goods

both non rival and non excludable

Private goods

both rival and excludable

Artificially scarce good

both non rival and excludable (sometimes called club/low congestion goods)

Common goods

both rival and nonexcludable, the amount depletes but can't stop people from using them

Point of tangency (monopolistic competition)

point on graph where ATC bounces off D curve

Absolute advantage

one party can produce a larger quantity of a good using the same resources

Comparative advantage

one party can produce a good at a lower opportunity cost than another (refers to pay off matrix)

Positives economics

data driven ideas that can be checked

Normative economics

opinion based ideas that can not be checked

Price floors

creates a minimum price that producers must charge, when they are binding they help the producer (higher price) and creates a surplus [goes above equilibrium]

Price ceilings

creates a maximum price that producers can charge, when they are binding they help the consumer (lower price) and creates a shortage [goes below the equilibrium]

Normal goods

better goods that are more expensive, buy more of when your income increases

Inferior goods

worse goods that are less expensive, buy more of when your income decreases

Substitute goods

goods and services that can substituted out for each other, when consumers buy less of one of the substitutes, they buy more of the other (applies both ways)

Complementary goods

goods and services that are bought together, when consumers buy less of one of the compliments they buy less of the other (applies both ways)

Cross price elasticity of demand

used to find whether goods are substitutes, compliments, or unmatched (%change in quantity demanded of good x divided by %change in price of good y) [if + substitutes, if - compliments, if 0 unmatched]

Command and control policy

regulate behavior in the market directly (ex. Limit pollution by forcing firms to adapt new technology)

Market based policy

provide incentives so private decision makers (consumers and producers) solve problems on their own (ex. Taxes and subsidies)

Coase theorem

if private parties costlessly bargain over allocation of resources, then they can solve the problem of externalities on their own

Negative externalities

bystanders harmed from production and consumption of a good or service

Positive externalities

bystanders benefit from production and consumption of a good or service

Economies of scale

when a firm is benefiting from expansion (seen when LRATC curve is downward sloping)

Diseconomies of scale

when a firm is not benefiting from expansion (seen when LRATC curve is upward sloping)

Constant returns to scale

when a firm is not benefiting nor being harmed from expansion (seen when LRATC curve is flat)

Long run

when every cost is variable

Short run

when there are variable costs and fixed costs

Fixed cost

costs that do not vary with changes in short run output (only exist in short run)

Variable costs

costs that change based on level of output (all costs are variable in long run)

Tax incidence

the portion of the tax that buyers/sellers pay determined by the market

Production function

tells us how a firm combines inputs to produce outputs

Economic Profit

total revenue minus implicit and explicit costs (takes all costs into account)

Accounting Profit

total revenue minus explicit costs (takes only costs that you had to pay into account)

Implicit cost

cost that are foregone when you do something else (opportunity cost)

Explicit cost

actual money that you paid for a good or service

Centrally planned economies

state determines how businesses run (communism)

Free market economies

firms and consumers allow market supply and demand to dictate price, quantity, etc. (capitalism)

Consumer surplus

difference between consumers willingness to pay and the price they actually paid for all units purchased

Producer surplus

difference between price producers collected and the price they were willing to take for all units sold

Total surplus

helps to measure how well off the market is (consumer surplus plus producer surplus)

Deadweight loss

represents the reduction in total economic surplus that occurs when the market is not at a free-market equilibrium

Perfect competition

market structure where there are many buyers and sellers, the goods being offered are the same, and there is free entry and exit

Monopoly

a market structure that has a single seller in the market (due to high barriers too entry)

Natural monopoly

a monopoly that exists where the ATC of producing the entire market demand is lower if one firm exists than if several small firms exist

Oligopoly

a market with very few producers, each with substantial market power, selling identical goods (take other firms actions into account)

Monopolistic competition

firms in between perfect competition and monopolies, they have many firms, sellers of similar but not identical products, and some power over price

Collusion

make an agreement with a competitor to fix price and/or quantity (illegal)

Cartels

group of competitors working together (illegal)

Perfect price discrimination

when a firm charges each buyer up to their "willingness to pay"

Price effect

when price increases, each unit sold sells at a higher price which raises revenue (opposite is true)

Quantity effect

when quantity decreases, fewer units are sold, which decreased total revenue (opposite is true)