AP Econ 1.1-1.4

Economics

The study of scarcity and how people allocate limited resources.

Scarcity

The condition that arises because resources are limited but wants are unlimited.

Resources

Anything used to produce goods and services.

Scarce Resource

A resource that is limited and cannot satisfy all wants.

Choice

A decision made because scarcity forces people to select among alternatives.

Trade-Off

What must be given up to get something else.

Factors of Production

The resources used to produce goods and services.

Land

All natural resources used in production such as land, water, and minerals.

Labor

Human effort used in production including workers and managers.

Capital

Man-made goods used to produce other goods such as machines and tools.

Entrepreneurship

Risk-taking and innovation involved in creating and managing a business.

Opportunity Cost

The value of the next best alternative given up when making a decision.

Microeconomics

The study of individual decision-makers such as households and firms.

Macroeconomics

The study of the economy as a whole using aggregate data.

Aggregate

A total or grouped measure of economic activity.

Positive Economics

Describes what is; based on facts and data; can be proven true or false.

Normative Economics

Describes what should be; based on opinions and value judgments.

Marginal

Additional or one more.

Marginal Benefit

The benefit gained from doing something one more time.

Marginal Cost

The cost of doing something one more time.

Marginal Decision Rule

Continue an activity if marginal benefit is greater than marginal cost; stop when marginal cost exceeds marginal benefit.

Economy

A system that produces, distributes, and consumes goods and services.

Three Basic Economic Questions

What to produce, how to produce, and for whom to produce.

Traditional Economy

An economy where decisions are based on customs and traditions.

Market Economy

An economy where individuals and firms make decisions based on supply and demand.

Command Economy

An economy where the government owns resources and makes production decisions.

Mixed Economy

An economy that combines market and command systems.

Incentives

Rewards or punishments that influence behavior.

Property Rights

Legal ownership that gives individuals control over resources and goods.

Economic Model

A simplified representation of reality used to analyze economic situations.

Ceteris Paribus

A Latin phrase meaning other things equal.

Production Possibilities Curve

A graph showing the trade-offs between producing two goods.

Productive Efficiency

Producing at any point on the production possibilities curve.

Allocative Efficiency

Producing the mix of goods consumers want most where marginal benefit equals marginal cost.

Straight-Line PPC

A PPC that indicates constant opportunity cost.

Law of Increasing Opportunity Cost

Opportunity cost rises as more of one good is produced because resources are not perfectly interchangeable.

Economic Growth

An outward shift of the production possibilities curve.

Trade

The voluntary exchange of goods and services.

Gains from Trade

Benefits that result when individuals or countries specialize and trade.

Specialization

Focusing on producing what one does best to increase total output.

Absolute Advantage

The ability to produce more of a good using the same resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost.

Output Method

A method that uses total production numbers to calculate opportunity cost.

Input Method

A method that uses labor hours instead of output to calculate opportunity cost.

Terms of Trade

The rate at which goods are exchanged.

Mutually Beneficial Trade

A trade where the price falls between the opportunity costs of both parties.