AP Economics

Unit I: Basic Economic Concepts – Key Terms

Absolute Advantage: Absolute advantage refers to the ability of a country, individual, or firm to produce a good or service more efficiently than another country, individual, or firm. It is based on comparing the productivity levels and resource allocation between two entities.

Allocative Efficiency: Allocative efficiency refers to an optimal allocation of resources where society's welfare is maximized, meaning that resources are allocated in such a way that no one can be made better off without making someone else worse off.

Capital: Capital represents all man-made goods that are used in production to create other goods and services. It includes physical assets such as machinery, equipment, tools, buildings, technology, and infrastructure.

Capital goods: Goods created for indirect consumption. Used to create consumer goods.

Command Economy: A command economy is an economic system in which the government has complete control over the production and distribution of goods and services.

Comparative Advantage: Comparative advantage refers to a country's ability to produce a good or service at a lower opportunity cost compared to other countries. It is the basis for international trade and specialization.

Consumer goods: Goods created for direct consumption.

Cost: The amount the seller pays to produce a good.

Economic Systems: Economic systems refer to the way societies organize their production, distribution, and consumption of goods and services.

Entrepreneurship: Entrepreneurship refers to the process of starting and managing a business venture, taking on financial risks in order to make a profit.

Explicit Costs: Explicit costs are monetary expenses incurred by a firm in its production process. These include payments for wages, rent, raw materials, utilities, etc.

Factors of Production: Factors of production are resources used in the production process, including labor (human effort), capital (physical tools/machinery), land (natural resources), and entrepreneurship (organizing/combining other factors).

Free-Market: A free-market refers to an economic system where prices for goods and services are determined by supply and demand without any government intervention or regulation.

Implicit Costs: Implicit costs are non-monetary opportunity costs that arise from using resources in one way instead of their next best alternative. They represent the value of what is given up when choosing one option over another.

Investment: The money spent by businesses to improve their production, such as purchasing capital goods.

Labor: Labor refers to the human effort, both physical and mental, that is used in the production process. It includes all types of work performed by individuals, from manual laborers to skilled professionals.

Land: Land refers to all natural resources used in the production of goods and services. This includes not only the physical land itself, but also any resources that come from it such as minerals, water, and timber.

Marginal Benefit (MB): Marginal Benefit refers to the additional satisfaction or utility that a consumer derives from consuming one more unit of a good or service.

Marginal Cost (MC): Marginal cost refers to the additional cost incurred by a firm when producing one more unit of a good or service. It takes into account the change in total cost divided by the change in quantity produced.

Microeconomics: The study of small economic units, such as individuals, firms, and industries.

Macroeconomics: The study of the large economy as a whole or economic aggregates.

Mixed Economy: A mixed economy is an economic system that combines elements of both market and command economies. It allows for private ownership of property and individual decision-making while also having some government intervention.

Opportunity Cost: Opportunity cost refers to the value of the next best alternative that is forgone when making a choice. It represents the trade-off between different options.

Price: Amount buyer/consumer pays.

Production Possibilities Curve (PPC): The production possibilities curve represents the maximum combination of goods or services that can be produced given limited resources and technology.

Production Possibilities Frontier (PPF): The production possibilities frontier is an economic model that shows the different combinations of two goods that an economy can produce efficiently at full employment.

Production possibilities graph (PPG): A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources.

Productive Efficiency: Productive efficiency refers to producing goods or services using the least amount of resources possible while maintaining quality standards. It occurs when a firm operates on the production possibility frontier, maximizing output for a given level of inputs.

Resource Allocation: Resource allocation refers to the process of distributing scarce resources among competing uses or individuals in an economy.

Services: Actions or activities that one person performs for another. (Teaching, cooking, cleaning…)

Scarcity: Scarcity refers to the limited availability of resources in relation to unlimited wants and needs. It means that there are not enough resources to satisfy all the desires and demands of individuals or society.

Trade-off: A trade-off is the sacrifice made when choosing one option over another. It involves giving up something in order to gain something else.

Utility: Utility refers to the satisfaction or happiness that individuals derive from consuming goods and services.