AP Micro Unit 1

Economics

the study of scarcity and choice

Market economy

an economy in which the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions

Command economy

an economy in which industry is publicly owned and a central authority makes production and consumption decisions

Marginal Analysis

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less

Opportunity Cost

the real cost of an item: the value of the next best alternative that you must give up in order to get that item

Microeconomics

the branch of economics that studies how individuals, households, and firms make decisions and how those decisions interact

Macroeconomics

the branch of economics that is concerned with the overall ups and downs of the economy

Other things equal assumption

In the development of a model, the assumption that all other relevant factors remain unchanged; also known as the ceteris paribus assumption

Production Possibilities Curve (PPC)

illustrates the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced

Productive efficency

Achieved by an economy if it produces at a point on its production possibilities curve

Allocative efficency

Achieved by an economy if it produces at the point along its productive possibilities curve that makes consumers as well off as possible

Comparative Advantage

the advantage conferred by an individual if the opportunity cost of producing the goal or service is lower for that individual than for other people

Absolute advantage

the advantage conferred by the ability to produce more of a good or service with a given amount of time and resources; different from comparative advantage

Terms of trade

indicate the rates at which one good can be exchanged for another

Utility

a measure of personal satisfaction

Marginal utility

the change in total utility generated by consuming one additional unit of a good or service

Principle of dimishing marginal utility

states that each successive unit of a good or service consumed adds less to the total utility that does the previous unit

Optimal consumption bundle

the consumption bundle that maximizes the consumer’s total utility given his or her budget constraint

Marginal utility per dollar

the additional utility from spending one more dollar on a good or service

Optimal consumption rule

says that in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle