AP MACROECONOMICS Unit 1 Vocab

Aggregate Spending (GDP)

The sum of all spending from four sectors of the economy. GDP = C+I+G+Xn

Business cycle

the periodic rise and fall (in four phases) of economic activity

Expansion

period where real GDP is growing

Peak

the top of a business cycle where an expansion has ended.

Contraction

period where real GDP is falling

Recession

two consecutive quarters of falling real GDP.

Trough

the bottom of the business cycle where a contraction has stopped.

Depression

a prolonged, deep contraction in the business cycle

Inflation

the percentage change in the CPI (prices) from one period to the next.

Human capital

the amount of knowledge and skills that labor can apply to the work they do and the general level of health that the labor force enjoys.

Deflation

a sustained falling price level, usually due to weakened aggregate demand and a constant aggregate supply.

Aggregation

the process of summing the microeconomic activity of households and firms into a more macroeconomic measure of economic activity.

Gross Domestic Product

the market value of the final goods and services produced within a nation in a given year.

Economics

the study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants.

Resources

called factors of production, these are commonly grouped into the four categories of labor, physical capital, land or natural resources, and entrepreneurial ability.

Scarcity

the imbalance between limited productive resources and unlimited human wants. Because economic resources are scarce, the goods and services a society produces are scarce.

Law of Demand

holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good.

All else equal

to predict how a change in one variable affects a second, we hold all other variables constant. This is also referred to as the 'ceteris paribus' assumption.

Demand schedule

a table showing quantity demanded for a good at various prices.

Demand curve

a graphical depiction of the demand schedule.

Determinates of demand

the external factors that shift demand to the left or right.

Normal goods

a good for which higher income increases demand

Inferior goods

a good for which high income decreases demand

Substitute goods

two goods are consumer substitutes if they provide essentially the same utility to the consumer.

Opportunity Cost

the value of the sacrifice made to pursue a course of action.

Production Possibilities

different quantities of goods that an economy can produce with a given amount of scarce resources.

Absolute Advantage

exists if a producer can produce more of a good than all other producers.

Comparative Advantage

a producer has comparative advantage if he can produce a good at lower opportunity cost than all other producers.

Specialization

when firms focus their resources on production of goods for which they have comparative advantage, they are said to be specializing.

Productive Efficiency

production of maximum output for a given level of technology and resources. All points on the PPF are productively efficient.

Allocative Efficiency

production of the combination of goods and services that provides the most net benefit to society.

Economic Growth

occurs when an economy's production possibilities increase.