AP Microeconomics Monster Vocab

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

accounting profit

total revenue minus total explicit cost

allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

Average Fixed Cost (AFC)

total fixed costs divided by quantity of output

Average Variable Cost (AVC)

total variable costs divided by quantity of output

Ceteris Paribus

all other things held constant

Circular Flow

A model of the movement of goods, services, resources, and money in an economy.

comparative advantage

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

complementary goods

Goods that are commonly used with other goods

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

cross-price elasticity of demand

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

derived demand

Business demand that ultimately comes from (derives from) the demand for consumer goods.

Determinants of Demand

Factors other than price that determine the quantities demanded of a good or service

Determinants of Supply

factors other than price that determine the quantities supplied of a good or service

diseconomies of scale

the situation in which a firm's long-run average costs rise as the firm increases output

economic costs

the payment that must be made to obtain and retain the services of a resource

economic profit

total revenue minus total cost, including both explicit and implicit costs

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

explicit costs

input costs that require an outlay of money by the firm

free rider

a person who receives the benefit of a good but avoids paying for it

game theory

Evaluates alternate strategies when outcome depends not only on each individual's strategy but also that of others.

human capital

the skills and knowledge gained by a worker through education and experience

implicit costs

input costs that do not require an outlay of money by the firm

income effect

the change in consumption that results when a price increase causes real income to decline

inferior goods

Goods for which demand tends to fall when income rises.

law of demand

consumers buy more of a good when its price decreases and less when its price increases

law of supply

Tendency of suppliers to offer more of a good at a higher price

Law of Diminishing Marginal Returns

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

law of increasing costs

law that states that as we shift factors of production from making one good or service to another, the cost of producing the second item increases

Lorenz Curve

Graph showing how much the actual distribution of income differs from an equal distribution

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

marginal product of labor

the change in output from hiring one additional unit of labor

Marginal Resource Cost

The change in total cost when an additional unit of a resource is hired, other things constant

marginal revenue product of labor

the change in total revenue due to a one-unit increase in labor input, holding other inputs fixed

marginal utility

satisfaction or usefulness obtained from acquiring one more unit of a product

market failure

a situation in which a market left on its own fails to allocate resources efficiently

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

Monopoly

A market in which there are many buyers but only one seller.

Monopsony

a market structure in which there is only a single buyer of a good, service, or resource

natural monopoly

a market that runs most efficiently when one large firm supplies all of the output

negative externality

the harm, cost, or inconvenience suffered by a third party because of actions by others

normal profit

the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm

Oligopoly

a market structure in which only a few sellers offer similar or identical products

opportunity cost

the most desirable alternative given up as the result of a decision

perfectly elastic

flat demand curve; consumers are perfectly price sensitive

perfectly inelastic

quantity does not respond at all to changes in price (E=0)

positive externality

beneficial side effect that affects an uninvolved third party

price ceiling

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

Prisoner's Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

producer surplus

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

profit maximizing resource employment

The firm hires the profit maximizing amount of a resource at the point where MRP = MRC

progressive tax

A tax for which the percentage of income paid in taxes increases as income increases

proportional tax

a tax for which the percentage of income paid in taxes remains the same for all income levels

regressive tax

A tax for which the percentage of income paid in taxes decreases as income increases

resources

A source or supply or support

short run

the period of time during which at least one of a firm's inputs is fixed

substitute goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

subsitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

total cost

fixed costs plus variable costs

total fixed cost

the sum of those costs that are fixed in total - no matter how much is produced

total product of labor

The total quantity, or total output of a good produced at each quantity of labor employed

total revenue test

Total revenue rises with a price increase if demand is price inelastic and falls with a price increase if demand is price elastic

total variability costs

The overall expense associated with producing a good or providing a service that change in direct proportion to the quantity produced or provided.

utility maximizing rule

equating the ratio of the marginal utility of a good to its price for all goods