AP Microeconomics Vocabulary

Absolute quota

a strict limit on the quantity of a good that can be imported or produced during a specific time period

Accounting profit

total revenue minus explicit costs, not accounting for implicit costs

Absolute advantage

the ability of a producer to produce more of a good than another producer using the same amount of resources

Comparative advantage

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

Allocative efficiency

a market condition where resources are distributed so that marginal benefit equals marginal cost, maximizing total societal welfare

Alternative inputs

substitute resources a firm can use in place of another in the production process

Antitrust laws

government regulations designed to promote competition and prevent monopolistic behavior

Average fixed cost

total fixed cost divided by quantity of output produced (AFC = TFC/Q)

Average product

total output divided by the number of units of a variable input used (AP = Total Output/Units of Input)

Average total cost

total cost divided by quantity of output produced (ATC = TC/Q), representing the per

Long run average total cost

the lowest possible average total cost for any level of output when all inputs are variable, represented by the envelope of all short

Average variable cost

total variable cost divided by quantity of output produced (AVC = TVC/Q)

Backward bending labor supply curve

a labor supply curve that slopes upward at lower wages but bends backward at higher wages because the income effect eventually outweighs the substitution effect

Barriers to entry

obstacles that make it difficult for new firms to enter a market, such as high startup costs, patents, or government regulations

Barriers to exit

obstacles that make it difficult for firms to leave a market, such as long

Binding price ceiling

a government-imposed maximum price set below the equilibrium price, causing a shortage

Binding price floor

a government-imposed minimum price set above the equilibrium price, causing a surplus

Budget constraint

the set of all combinations of goods a consumer can purchase given their income and the prices of goods

Capital

human-made resources used in the production of goods and services, such as machinery, tools, and buildings

Cartels

a group of firms that formally agree to coordinate production and pricing decisions to act like a monopoly

Collusion

an agreement between competing firms to coordinate pricing, output, or other business decisions to reduce competition

Command economy

an economic system where the government makes all major decisions about production and distribution of goods and services

Constant-cost industry

an industry where input prices remain unchanged as industry output expands, resulting in a horizontal long-run supply curve

Constraints

limitations on the choices available to economic agents, such as income, time, or resources

Consumer decision

the process by which consumers allocate their limited income among goods and services to maximize utility

Consumer surplus

the difference between what a consumer is willing to pay for a good and what they actually pay, represented by the area above the price and below the demand curve

Consumption

the use of goods and services by households to satisfy wants and needs

Contraction

a decrease in the quantity demanded or supplied due to a change in price, shown as movement along the curve

Cost-benefit analysis

a decision-making process that compares the total costs and total benefits of an action to determine whether it is worth undertaking

Marginal cost

the additional cost incurred from producing one more unit of output (MC = ΔTC/ΔQ)

Opportunity cost

the value of the next best alternative forgone when making a decision

Total cost

the sum of all fixed and variable costs of production (TC = TFC + TVC)

Variable cost

costs that change with the level of output, such as labor and raw materials

Implicit cost

the opportunity cost of using resources the firm already owns, such as the owner's time or capital

Fixed cost

costs that do not change with the level of output in the short run, such as rent or insurance

Cross price elasticity of demand

a measure of how the quantity demanded of one good responds to a change in the price of another good

Cross price elasticity of demand formula

% change in quantity demanded of Good A / % change in price of Good B

Negative cross price elasticity of demand

indicates that two goods are complements; when the price of one rises, demand for the other falls

Positive cross price elasticity of demand

indicates that two goods are substitutes; when the price of one rises, demand for the other rises

Complementary goods

goods that are consumed together, where an increase in the price of one decreases demand for the other

Substitute goods

goods that can be used in place of each other, where an increase in the price of one increases demand for the other

Deadweight loss

the loss of total surplus (consumer and producer) that results from a market inefficiency such as a tax, price control, or monopoly

Factor cost

the price paid for inputs used in the production process

Output price

the price at which a firm sells its finished goods or services

Productivity

the efficiency of production, measured as output per unit of input

Decreasing cost industry

an industry where input prices fall as industry output expands, resulting in a downward

Demand

the relationship between the price of a good and the quantity consumers are willing and able to purchase at various prices during a given time period

Determinants of demand

factors other than price that shift the demand curve, including income, tastes, prices of related goods, expectations, and number of buyers

Law of demand

the principle that, all else equal, quantity demanded of a good falls as its price rises and rises as its price falls

Diminishing marginal utility

the principle that each additional unit of a good consumed provides less additional satisfaction than the previous unit

Discretionary purchase

a non-essential good or service that consumers choose to buy based on preference rather than necessity

Diseconomies of scale

the increase in long-run average total cost that occurs as a firm grows too large, due to management inefficiencies and coordination problems

Division of labor

the specialization of workers in specific tasks to increase overall productivity and efficiency

Duopoly

a market structure in which only two firms compete

Dynamic inefficiency

a situation where a market fails to innovate or improve over time, often associated with monopolies that lack competitive pressure

Economic agents

individuals, firms, or governments that make decisions about production, consumption, or resource allocation

Economic constraints

limitations that restrict the choices available to economic agents, such as scarcity of resources, technology, or legal regulations

Economic depression

a severe and prolonged downturn in economic activity characterized by high unemployment and sharp declines in output

Economic incentive

a reward or penalty that motivates economic agents to take a particular action

Economic inequality

the unequal distribution of income or wealth among individuals or groups in an economy

Economic profit

total revenue minus both explicit and implicit costs; a profit above normal profit

Economic recession

a period of declining economic activity, typically defined as two consecutive quarters of negative GDP growth

Economics

the social science that studies how individuals, firms, and governments allocate scarce resources to satisfy unlimited wants

Economies of scale

the decrease in long-run average total cost that occurs as a firm increases its output, due to specialization and efficiency gains

Economists

social scientists who study how people make decisions under scarcity and how those decisions affect markets and society

Efficient market

a market in which prices fully reflect all available information and resources are allocated to their highest

Efficient scale

the quantity of output at which a firm's average total cost is minimized

Elastic

describes demand or supply that is relatively responsive to price changes, with an elasticity greater than 1

Entrepreneurship

the resource that combines land, labor, and capital to produce goods and services, bearing risk in pursuit of profit

Equilibrium market

a market in which the quantity supplied equals the quantity demanded at the prevailing price

Equilibrium price

the price at which quantity supplied equals quantity demanded, clearing the market

Equilibrium quantity

the quantity of a good bought and sold at the equilibrium price

Established knowledge

existing information, research, or technology available as a public good that can be used in production

Excludable goods

goods for which it is possible to prevent non-payers from consuming them

Explicit costs

direct monetary payments made by a firm for inputs, such as wages, rent, and material costs

Positive externality

a benefit received by a third party not involved in a transaction, causing the market to underproduce relative to the social optimum

Negative externality

a cost imposed on a third party not involved in a transaction, causing the market to overproduce relative to the social optimum

Factor

an input used in the production of goods and services, including land, labor, capital, and entrepreneurship

Factor markets

markets in which firms purchase the inputs needed for production, such as labor and capital markets

Factor prices

the prices paid for inputs in factor markets, such as wages for labor or rent for land

Interest

the payment made for the use of borrowed capital or financial resources

Rent

the payment made for the use of land or other natural resources

Wages

the payment made to workers in exchange for their labor services

Fair-return pricing

a pricing regulation that requires a firm, typically a natural monopoly, to set price equal to average total cost, ensuring normal profit but not economic profit

When does a firm decide to shut down?

a firm shuts down in the short run when the price falls below average variable cost (P < AVC), meaning it cannot cover its variable costs

When does a firm decide to exit the market?

a firm exits the market in the long run when the price falls below average total cost (P < ATC), meaning it earns persistent economic losses

First mover

the firm that enters a market or takes a strategic action before its competitors, potentially gaining a lasting competitive advantage

Fixed inputs

resources that cannot be changed in the short run regardless of the level of output, such as a factory or equipment

Flat tax

a tax system in which all taxpayers pay the same percentage of their income regardless of earnings

Free riders

individuals who benefit from a public good without paying for it, made possible by the non

Friedman Doctrine

Milton Friedman's view that a corporation's sole social responsibility is to maximize profits for its shareholders within legal and ethical rules

Game theory

the study of strategic decision

Dominant strategy

a strategy that yields the best outcome for a player regardless of what the other players choose

Nash equilibrium

a situation in which no player can improve their outcome by unilaterally changing their strategy, given the strategies of all other players

Prisoners' dilemma

a game theory scenario in which two rational individuals acting in self

Gini coefficient

a statistical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality)

Inferior goods

goods for which demand decreases as consumer income increases, such as generic brands or low

Non-excludable goods

goods for which it is impossible or impractical to prevent non-paying individuals from consuming them

Normal goods

goods for which demand increases as consumer income increases

Private goods

goods that are both excludable and rival in consumption, such as food or clothing