AP Macroeconomics 2025

Learning and memorizing key terms (only the ones I am not familiar or estranged with)

Command economy

An economic system where the government makes all decisions regarding production and distribution of goods and services, often associated with centralized planning.

Market economy

An economic system where decisions regarding investment, production, and distribution are driven by supply and demand in the marketplace with minimal government intervention.

PPC (or PPF)

A graphical representation of the maximum possible output combinations of two goods or services an economy can achieve given available resources and technology.

On PPC frontier

represents efficient production points, where all available resources are fully utilized.

Within PPC frontier

represents inefficient production points, where resources are underutilized or not fully employed.

outside of PPC frontier

represents unattainable production points given current resources and technology.

constant marginal opportunity costs

occurs when the opportunity cost of producing additional units remains constant, indicating that resources are readily adaptable between different goods.

marginal opportunity cost

refers to the amount of one good that must be given up to produce an additional unit of another good, highlighting the trade-off in production.

opportunity cost

the value of the next best alternative that is foregone when a choice is made.

Implicit Cost

the cost of resources that are not explicitly paid for, representing the opportunity cost of using resources for one activity over another.

Scarcity

the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources, necessitating choices about resource allocation.

Macroeconomics

the branch of economics that studies the behavior and performance of an economy as a whole, including factors like inflation, unemployment, and gross domestic product (GDP).

GDP

the total monetary value of all final goods and services produced within a country's borders in a specific time period, used as a measure of economic performance.

Mixed economy

an economic system that combines elements of both capitalism and socialism, incorporating both private and public sector participation in the economy.

socialism

an economic system where the means of production are owned and controlled by the state or public, aiming to achieve equality and eliminate class distinctions.

The Invisible Hand

a metaphor introduced by Adam Smith to describe the self-regulating nature of the marketplace, where individuals' pursuit of their own interests inadvertently benefits society as a whole.

It argues that markets allocate resources efficiently through the price mechanism.

The price mechanism is the process by which supply and demand interact in a market to determine prices, which in turn allocate resources and influence how much of a good or service is produced and consumed. It acts as a signaling system, an incentive for producers, and a rationing device for scarce resources

pure capitalism

an economic system where private individuals own and control all means of production, and market forces determine prices and allocation of resources with minimal government intervention.

property rights

legal and ethical principles that define the ownership and control of assets, allowing individuals and entities to use, manage, and transfer property.

Adam Smith

A Scottish economist and philosopher, best known for his work "The Wealth of Nations," which laid the foundations of classical economics and introduced concepts such as the division of labor and the invisible hand.

Karl Marx

A German philosopher and economist, known for his critique of capitalism and his theory of historical materialism, which asserts that economic forces drive societal change. He co-authored "The Communist Manifesto."

Trade Theory

A set of ideas explaining how countries engage in trade, the benefits of specialization, and the basis for international economic exchange.

trade

The study of how countries exchange goods and services, emphasizing the benefits of specialization and comparative advantage.

absolute advantage

The ability of a country to produce a good more efficiently than another country, using fewer resources to achieve the same output. comparative advantage

comparative advantage

The ability of a country to produce a good or service at a lower opportunity cost than another country, allowing for more efficient trade.

Terms of trade

The ratio at which a country can trade its exports for imports, reflecting the relative value of goods exchanged between trading partners.

Distribution cost

The expenses incurred in delivering goods from the manufacturer to the consumer, including transportation, warehousing, and handling fees.

Global trade

The exchange of goods and services across international borders, allowing countries to specialize in production based on their comparative advantages and to access a wider variety of products.

Market Equilibrium

The point at which the quantity of goods demanded by consumers equals the quantity supplied by producers, resulting in a stable market price.

Supply, Demand

The relationship between the quantity of a good that producers are willing to sell and the quantity that consumers are willing to buy at various prices, influencing market equilibrium.

Law of Demand

As the price of a good decreases, the quantity demanded by consumers increases, and vice versa, reflecting an inverse relationship.

Law of Supply

The principle stating that as the price of a good increases, the quantity supplied by producers also increases, and vice versa, showing a direct relationship.

Free Market Price system (aka the Price Mechanism)

An economic system in which the prices of goods and services are determined by the forces of supply and demand without direct government control.

Shifts in supply/demand

Refers to changes in the quantity of a good or service that producers or consumers are willing to sell or purchase at any given price, often caused by factors such as changes in consumer preferences, income levels, or production costs.

substitute

goods that can replace each other in consumption, leading to a decrease in demand for one when the price of the other rises.

marginal cost

the additional cost incurred from producing one more unit of a good or service.

marginal benefit

the additional satisfaction or value gained from consuming one more unit of a good or service, which is compared against its marginal cost.

marginal cost VS marginal benefit

the comparison between the additional costs incurred from producing one more unit of a good or service and the additional satisfaction gained from consuming that unit, guiding decision-making in resource allocation.

PPC and MOC

A Production Possibility Curve (PPC) shows the trade-off between two goods. The shape of the PPC reflects the marginal opportunity cost (MOC).

• If MOC increases → PPC is bowed out (normal case)

• If MOC is constant → PPC is a straight line

• If MOC decreases → PPC is bowed in

principle of increasing marginal opportunity

Also known: law of increasing opportunity costs.

As you continue to produce more of a good, the opportunity cost of producing additional units rises.

Resources are not equally efficient in producing all goods. You use the best-suited resources first (low opportunity cost), but as you increase production, you must start reallocating resources that are better suited for producing something else. This increases the cost of what you give up — hence, opportunity cost increases.