AP Micro/Macro Unit 1 Terms

Economics

the study of how individuals and societies choose to allocate scarce resources.

Scarcity

the fact that there is a limited amount of resources to satisfy unlimited wants.

Economic Resources/Factors of Production

these are the land (natural resources such as minerals and oil), labor (work contributed by humans), capital (tools, equipment, and facilities), and entrepreneurship (the capacity to organize, develop, and manage a business) that individuals and businesses use in the production of goods and services.

Models

graphical and mathematical tools created by economists to better understand complicated processes in economics.

ceteris paribus

“all else equal”

Agent

some entity making a decision; this can be an individual, a household, a business, a city, or even the government of a country.

Incentives

rewards or punishments associated with a possible action; agents make decisions based on incentives.

Rational Decision Making

an agent is "rational" if they use all available information to choose an action that makes them as well off as possible; economic models assume that agents are rational.

Positive Analysis

analytical thinking about objective facts and cause-and-effect relationships that are testable, such as how much of a good will be sold when a price changes.

Normative Analysis

unlike positive analysis, normative analysis is subjective thinking about what we should value or a course of action that should be taken, such as the importance of environmental factors and the approach to managing them.

Microeconomics

the study of the interactions of buyers and sellers in the markets for particular goods and services

Macroeconomics

the study of aggregates and the overall commercial output and health of nations; includes the analysis of factors such as unemployment, inflation, economic growth and interest rates.

Economic Aggregates

measures such as the unemployment rate, rate of inflation, and national output that summarize all markets in an economy, rather than individual markets; economic aggregates are frequently used as measures of the economic performance of an economy.

production possibilities curve (PPC)

(also called a production possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.

Opportunity Cost

the value of the next best alternative to any decision you make; for example, if Abby can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the hour of studying she gives up to do that.

Efficiency

the full employment of resources in production; efficient combinations of output will always be on the PPC.

inefficient use (under-utilization) of resources

the underemployment of any of the four economic resources (land, labor, capital, and entrepreneurial ability); inefficient combinations of production are represented using a PPC as points on the interior of the PPC.

Growth

an increase in an economy's ability to produce goods and services over time; economic growth in the PPC model is illustrated by a shift out of the PPC.

Contraction

a decrease in output that occurs due to the under-utilization of resources; in a graphical model of the PPC, a contraction is represented by moving to a point that is further away from, and on the interior of, the PPC.

constant opportunity costs

when the opportunity cost of a good remains constant as output of the good increases, which is represented as a PPC curve that is a straight line; for example, if Colin always gives up producing 2 fidget spinners every time he produces a Pokemon card, he has constant opportunity costs.

increasing opportunity costs

when the opportunity cost of a good increases as output of the good increases, which is represented in a graph as a PPC that is bowed out from the origin; for example Julissa gives up \[2\] fidget spinners when she produces the first Pokemon card, and \[4\] fidget spinners for the second Pokemon card, so she has increasing opportunity costs.

productivity

(also called technology) the ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed, which would be represented by a shift out of the PPC.

Absolute Advantage

the ability to produce more of a good than another entity, given the same resources. For example, in a single day, Owen can embroider 10 pillows and Penny can embroider 15 pillows, so Penny has absolute advantage in embroidering pillows.

Comparative Advantage

the ability to produce a good at a lower opportunity cost than another entity. For example, for every pillow Owen embroiders his opportunity cost is \[2\] scarves knitted, while Penny must forego \[3\] scarves for every pillow she embroiders, so Owen has comparative advantage in embroidering pillows.

Specialization

when an individual or a country allocates most or all of its resources towards the production of a particular good or service. For example, Sal (an individual) specializes in producing educational videos, and Bangladesh (the country) specializes in producing textiles.

terms of trade (also called “trading price”)

the exchange of goods, services or resources between one economic agent and another

Demand

all of the quantities of a good or service that buyers would be willing and able to buy at all possible prices; demand is represented graphically as the entire demand curve.

demand schedule

a table describing all of the quantities of a good or service; the demand schedule is the data on price and quantities demanded that can be used to create a demand curve.

demand curve

a graph that plots out the demand schedule, which shows the relationship between price and quantity demanded

law of demand

all other factors being equal, there is an inverse relationship between a good’s price and the quantity consumers demand; in other words, the law of demand is why the demand curve is downward sloping; when price goes down, people respond by buying a larger quantity.

quantity demanded

the specific amount that buyers are willing to purchase at a given price; each point on a demand curve is associated with a specific quantity demanded.

change in quantity demanded

a movement along a demand curve caused by a change in price; a change in quantity demanded is a movement along the same curve

change in demand

when buyers are willing to buy a different quantity at all possible prices, which is represented graphically by a shift of the entire demand curve; this occurs due to a change in one of the determinants of demand.

determinants of demand

changes in conditions that cause the demand curve to shift; the mnemonic TONIE can help you remember the changes that can shift demand (T-tastes, O-other goods, N-number of buyers, I-income, E-expectations)

normal good

a good for which demand will increase when buyers’ incomes increase

inferior good

a good for which demand will decrease when buyers’ incomes increase

substitute good

goods that can replace each other; when the price of a good increases, the demand for its substitute will increase

complement goods

goods that tend to be consumed together; when the price of a good increases the demand for its complement will decrease

supply

a schedule or a curve describing all the possible quantities that sellers are willing and able to produce, at all possible prices they might encounter in a particular period of time; supply is represented in a graphical model as the entire supply curve.

law of supply

all other factors being equal, there is a direct relationship between a good’s price and the quantity supplied; as the price of a good increases, the quantity supplied increases; similarly, as price decreases, the quantity supplied decreases, leading to a supply curve that is always upward sloping

quantity supplied

the amount of a good or service that sellers are willing to sell at a specific price; quantity supplied is represented in a graphical model as a single point on a supply curve

change in quantity supplied

a movement along a supply curve resulting from a change in a good’s price

change in supply

a movement or shift in an entire supply curve resulting from a change in one of the non-price determinants of supply

determinants of supply

changes in non-price factors that will cause an entire supply curve to shift (increasing or decreasing market supply); these include 1) the number of sellers in a market, 2) the level of technology used in a good’s production, 3) the prices of inputs used to produce a good, 4) the amount of government regulation, subsidies or taxes in a market, 5) the price of other goods sellers could produce, and 6) the expectations among producers of future prices.

market

an interaction of buyers and sellers where goods, services, or resources are exchanged

shortage

when the quantity demanded of a good, service, or resource is greater than the quantity supplied

surplus

when the quantity supplied of a good, service, or resource is greater than the quantity demanded

equilibrium

in a market setting, an equilibrium occurs when price has adjusted until quantity supplied is equal to quantity demanded

disequilibrium

ithe price in a market at which the quantity demanded and the quantity supplied of a good are equal to one another; this is also called the “market clearing price.”n a market setting, disequilibrium occurs when quantity supplied is not equal to the quantity demanded; when a market is experiencing a disequilibrium, there will be either a shortage or a surplus.

equilibrium price

the price in a market at which the quantity demanded and the quantity supplied of a good are equal to one another; this is also called the “market clearing price.”

equilibrium quantity

the quantity that will be sold and purchased at the equilibrium price