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. A positive result means the goods are substitutes, while a negative result indicates they are complements.

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. The downward part of the Long Run Average Total Cost Curve (LRATC).

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 in an oligopoly.

Human Capital

Skills, knowledge, and experience possessed by workers.

Implicit Costs

Opportunity costs of using owned resources (e.g., forgone wage, forgone rent, 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; income elasticity of demand is negative.

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 highest amount that a consumer would be willing to pay for one additional unit of a good, additional satisfaction or value that a consumer derives from consuming one more unit of a good or service, that is typically compared to marginal cost.

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 of Labor (MRP)

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

Marginal Utility

Extra satisfaction from consuming one additional unit, a change in total utility. Consumers typically want to maximize this.

Market Failure

Occurs when the allocation of goods and services by a free market is not efficient, leading to a net social welfare loss. markets don't allocate resources efficiently.

Monopolistic Competition

An imperfect market structure where many, various sized firms compete for market demand share; many sellers offering differentiated products with low entry barriers.

Monopoly

One seller dominates the market selling a unique product with no close substitutes, resulting in no competition and the firm having significant market power to control prices and output.

Monopsony

An imperfectly competitive factor market where only a single firm buys resources. More broadly, it is any market which has one buyer and many sellers (e.g., wage setter, 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). It is represented by the marginal social cost (MSC) curve being above the marginal private cost (MPC) or supply curve, indicating that the total cost to society is greater than the private cost to producers.

Normal Profit

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

Oligopoly

A market structure characterized by a few firms that dominate the market, leading to limited competition and significant influence over prices; 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, spillover effect that impacts a third party not directly involved in the economic activity (e.g., education). On a graph, this is shown by the MSB curve being above the MPB curve, leading to market underproduction (below the socially optimal quantity).

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; how two individuals acting in their own self-interest can ultimately produce an outcome that is less than optimal for both parties.

Producer Surplus

The difference between the price a producer actually receives for a good or service and the minimum price they would have been willing to accept.

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.