AP MACRO REVIEW

society's virtually unlimted wants paired our scarce and limited resources create this problem

the "economizing problem"

usefulness or satisfaction

utility

all natural, human, and manufactured items that go into the production of goods and services

economic resources

they are the four factors of production (AKA economic resources)

land, labor, capital, entrepreneurship

all gifts of nature

land

manufactured/manmade tools used in production

capital

all human effort, physical and mental

labor

the risktaker that combines land, labor, and capital in order to create a new product

entrepreneur

income received by labor

wages

income received by capital

interest

income received by land

rent

income received by entrepreneurs

profit

use of all available resources

full employment

production of any particular mix of goods and services in the least costly way

productive efficiency

production of the particular mix of goods and services most wanted by society

allocative efficiency

products that satisfy our wants directly

consumer goods

products that satisfay our wants indirectly, by producing the goods and services we do want

capital goods

a graph that shows the maximum combination of any two goods that a business or economy may produce at a given time

production possibilities curve

law that states that the more of a product that is produced, the greater its opportunity cost

THE LAW OF INCREASING OPPORTUNITY COSTS

"too little of a good thing"

MB\>MC

"too much of a good thing"

MC\>MB

"just right"

MB=MC

an economic system characterized by producers and consumers acting in their own self-interest

market economy AKA capitalism AKA free enterprise

an economic system characterized by government control of resources ; all economic decisions made by government

command AKA communism AKA socialism

an economic system in which economic decisions are based on custom and religion

traditional

a model that shows the flow of resources, products, and money in our economy

circular flow model

In the circular flow model, they own/sell the factors of production and buy products

households

In the circular flow model, they sell products and buy the factors of production

firms/businesses

On the production possibilities curve, it is represented by a point outside the curve

currently unattainable

On the production possibilities curve, it is represented by a point inside the curve

inefficient (caused by recession, depression, disaster)

To achieve "full production" both of these must be achieved

allocative efficiency and productive efficiency

An economy can achieve the most rapid rate of growth if it focuses its resources on production of these

capital goods

In any given situation, they are the choices you have (also labels on the PPC)

trade-offs

What you give up when you make a choice

opportunity cost

Statement that summarizes the concept of opportunity cost; implies that there is always a cost for any choice or activity

There is no such thing as a free lunch (TINSTAAFL)

scarcity

the basic economic problem; it is a lack of needed or wanted resources relative to the demand for the resources.

TINSTAAFL

acronym for THERE IS NO SUCH THING AS A FREE LUNCH; means that there is always a cost for a product, even if it is not evident.

rational self-interest

individuals pursue actions that will enable them to achieve their greatest satisfaction

opportunity cost

what you give up when you make a choice

marginal analysis

comparisons of costs and benefits

theoretical economics

process of deriving theories and principles in order to interpret and generalize collected facts

economic principles

statements about economic behavior that enable prediction

ceteris paribus

other-things equal assumption; assumes that all other variables except those under immediate consideration are held constant

microeconomics

looks at specific economic units such as businesses and consumer behavior

macroeconomics

study of the economy as a whole, such as total output, total employment, total income, etc.

fallacy of composition

a statement that is valid for an individual or part is not necessarily valid for the larger group or whole

post hoc fallacy

AKA post hoc, ergo propter, "after this, therefore because of this; therefore, just because A precedes B does not mean A is the cause of B

correleation v. causation

because two sets of date are associated does not mean that cause and effect are present

positive economics

states economics by facts,avoiding value judgements

normative economics

incorporates value judgements

It is the responsiveness to a price change, for either supply or demand.

elasticity

A change in this causes a change in quantity demanded ( movement along the curve)

price

The market is in this state when QS=QD.

equilibrium

They are the determinants of demand, also known as ceteris paribus conditions; they cause a shift in the demand curve.

Taste, income, number of buyers, expectations, related goods.

This condition exists when QD\>QS.

shortage

An increase in demand or supply will shift the curve in this direction.

right

This condition exists when QS\>QD.

surplus

A decrease in demand or supply will shift the curve in this direction.

left

When demand increases (shifts right), both price and quantity will do this.

increase

It states that as the price of a product increases, the quantity that producers are willing to supply increases.

the law of supply

When demand decreases (shifts left), both price and quantity will do this.

decrease

On a supply curve, it is the relationship between price and quantity supplied.

positive/direct

A change in this causes a change in the quantity supplied (movement along the supply curve).

Price

When supply decreases (shifts left), what happens to price and quantity?

Price increases, quantity decreases

They are the determinants of supply.

Resources, other goods that may be produced with the resources, techonology,taxes,expectations of sellers, number of sellers, subsidies.

When supply increases, what happens to price and quantity?

Price decreases, quantity increases.

They are the characteristics of the market system.

economic freedom, voluntary exchange, private property, profit motive.

The production and use of capital goods to aid in the production of consumer goods.

roundabout production

The separation of work required to produce a product into a number of tasks.

division of labor

Resulting from division of labor, it occurs when a worker is assigned to a single task and becomes proficient in it.

specialization

The function of money that allows goods and services to be traded for it.

medium of exchange

The practice of swapping goods for goods (ex: trade wheat for oranges).

barter

It is total revenue - total cost ; also known as pure profit, it is total revenue from a sale after the entrepreneur has been rewarded.

Economic profit

It is the profit earned by the entrepreneur.

Normal profit

An industry that is earning economic profit.

expanding industry

An industry that is unprofitable.

declining industry

The concept in the market economy in which the consumer is the ultimate "ruler" in the marketplace.

consumer sovereignty

Demand for a resource created by the demand for the goods and services it helps produce.

derived demand

The "father" of classical economics, author of THE WEALTH OF NATIONS.

Adam Smith

The combined forces of self-interest and competition working within the free market, guiding resources to where they do the most good for society.

the invisible hand

The way in which the WRIP earned by the nation is distributed among the factors of production.

Functional distribution of income

The way in which the nation's money income is divided among the nation's households.

Personal distribution of income.

The part of after-tax income that is not spent.

saving

Products that have expected lives of 3 years or more.

durable goods

Products that have expected lives of less than three years.

nondurable goods

A factory, mine, store, or warehouse

plant

A business organization that owns and operates plants.

firm

A group of firms that produce the same (or similar) products

industry

A business owned and operated by one person.

sole proprietorhship

A business owned and operated by two or more people.

partnership

A business owned by stockholders and run by a Board of Directors.

corporation

Complete responsibility for all business debts; a disadvantage for sole proprietorships and partnerships.

unlimited liability

An owner is responsible for only the amount of money invested.

limited liability

Shares of ownership in a corporation.

stocks

A promise to repay a loan.

bond

A disadvantage of a corporation ; refers to the taxes paid by both the corporation and the shareholders .

double taxation

The dilemma in which the wishes of the owners of a corporation (stockholders) may not coincide with the wishes of the managers.

principal-agent problem

A situation in which a single seller controls an industry; in a market system, this is typically illegal.

monopoly

A situation in which an uninvolved third party is helped or hurt by an economic activity.

spillover or externality

It is a positive externality; an uninvolved third party benefits from an economic activity.

spillover benefit