AP Microeconomics Monster Vocabulary 2025-2026

Absolute Advantage

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

Accounting Profit

Total revenue minus explicit costs only.

Allocative Efficiency

Producing where price equals marginal cost (P = MC); the socially optimal output level.

Average Fixed Cost (AFC)

Fixed costs divided by quantity of output (TFC / Q).

Average Total Cost (ATC)

Total cost divided by quantity (TC / Q); equals AFC + AVC.

Average Variable Cost (AVC)

Variable costs divided by output (TVC / Q).

Ceteris Paribus

"All else equal"; used to isolate variables in economic analysis.

Circular Flow Model

A diagram showing the flow of goods, services, and money between households and firms.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Complementary Goods

Goods consumed together; if the price of one rises, demand for the other falls.

Consumer Surplus

The difference between what a consumer is willing to pay and what they actually pay.

Cross-Price Elasticity of Demand

Measures how demand for one good changes when the price of another good changes.

Deadweight Loss

The loss of efficiency when a market is not in equilibrium.

Derived Demand

Demand for a resource based on the demand for the product it helps produce.

Determinants of Demand

Factors that shift the demand curve: income, tastes, expectations, related goods, buyers.

Determinants of Supply

Factors that shift the supply curve: input prices, tech, taxes, sellers, expectations.

Diseconomies of Scale

Rising average costs as a firm expands in the long run due to inefficiency.

Economic Costs

The sum of explicit and implicit costs.

Economic Profit

Total revenue minus explicit and implicit costs.

Economies of Scale

Falling average costs as output increases in the long run.

Explicit Costs

Actual monetary payments (e.g., rent, wages, materials).

Free Rider

Someone who benefits from a good without paying for it.

Game Theory

The study of strategic decision-making between interdependent actors.

Human Capital

Skills, knowledge, and experience possessed by workers.

Implicit Costs

Opportunity costs of using owned resources (e.g., owner’s time).

Income Effect

A change in consumption due to a change in real income.

Inferior Goods

Goods for which demand decreases as income increases.

Law of Demand

As price increases, quantity demanded decreases (ceteris paribus).

Law of Diminishing Marginal Returns

Adding more variable input leads to declining additional output.

Law of Diminishing Marginal Utility

As more units are consumed, each additional unit provides less satisfaction.

Law of Increasing Opportunity Cost

Producing more of one good leads to higher opportunity costs.

Law of Supply

As price increases, quantity supplied increases (ceteris paribus).

Lorenz Curve & Gini Ratio

Tools to measure income inequality; Gini closer to 0 = more equal.

Marginal Benefit (MB)

The extra benefit of consuming one more unit.

Marginal Cost (MC)

The extra cost of producing one more unit; MC = ΔTC / ΔQ.

Marginal Product of Labor (MPL)

Extra output from hiring one more worker.

Marginal Resource Cost (MRC)

The cost of hiring one more unit of a resource.

Marginal Revenue Product (MRP)

Extra revenue from one more input; MRP = MPL × MR.

Marginal Utility

Extra satisfaction from consuming one additional unit.

Market Failure

When markets don't allocate resources efficiently.

Monopolistic Competition

Many sellers offering differentiated products with low entry barriers.

Monopoly

One seller dominates the market; high entry barriers.

Monopsony

One buyer in a market (e.g., sole employer in a town).

Natural Monopoly

One firm can supply the market more efficiently due to economies of scale.

Negative Externality

A harmful effect on third parties (e.g., pollution).

Normal Profit

Minimum profit needed to stay in business; economic profit = 0.

Oligopoly

A few large firms dominate the market; interdependent pricing.

Opportunity Cost

The value of the next best alternative forgone.

Perfectly Elastic Demand

Infinite sensitivity to price changes; horizontal demand curve.

Perfectly Inelastic Demand

No change in quantity demanded regardless of price; vertical demand curve.

Positive Externality

A beneficial effect on third parties (e.g., education).

Price Ceiling

Legal maximum price (e.g., rent control); causes shortage if below equilibrium.

Price Floor

Legal minimum price (e.g., minimum wage); causes surplus if above equilibrium.

Prisoners’ Dilemma

Game theory scenario where rational self-interest leads to worse outcomes.

Producer Surplus

The difference between what sellers receive and their minimum acceptable price.

Production Possibilities Frontier (PPF)

Curve showing max output combinations with current resources and technology.

Profit-Maximizing Resource Employment

Hire resources where MRP = MRC.

Progressive Tax

Tax rate increases as income increases.

Proportional Tax

Tax rate stays the same at all income levels.

Regressive Tax

Tax rate decreases as income increases.

Resources (Factors of Production)

Land, labor, capital, and entrepreneurship used to produce goods.

Short Run

Period when at least one input is fixed.

Substitute Goods

Goods used in place of each other; price of one ↑ → demand for the other ↑.

Substitution Effect

Consumers switch to cheaper alternatives when relative prices change.

Total Cost (TC)

Fixed costs plus variable costs (TC = TFC + TVC).

Total Fixed Costs (TFC)

Costs that do not change with output (e.g., rent).

Total Product of Labor (TPL)

Total output produced by all labor.

Total Revenue Test

Test for elasticity: P↑ and TR↓ → Elastic; P↑ and TR↑ → Inelastic.

Total Variable Costs (TVC)

Costs that change with the level of output.

Utility Maximizing Rule

MUx/Px = MUy/Py; spend where marginal utility per dollar is equal.