Unit 1 AP Micro Test(Chapter 1-4)
Scarcity: The situation in which unlimited wants exceed the limited resources available to fulfill those wants
Economics: The study of Choices people make to attain their goals, given their scarce resources
Economic Model: A simplified version of reality used to analyze real-world economic situations
Market: A group of buyers and sellers in a market of a good or service and the institution or arrangement by which they come together to trade
Marginal Analysis: Analysis that involves comparing marginal benefit and marginal cost
Trade-Off: The idea that because of scarcity, producing more of one good or service means producing less of another good or service
Opportunity Cost: The highest valued alternative that must be given up to engage in an activity
Trade-offs force society to make choices, particularly when answering the following three fundamental questions:
What goods and services will be produced
How will the goods and services be produced
Who will receive the goods and services produced?
Centrally Planned Economy: An economy in which the government decides how economic resources will be allocated
Market Economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources
Mixed Economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
Productive Efficiency: The situation in which a good or service is produced at the lowest possible cost
Allocative Efficiency: A state of the economy in which production is in accordance with consumers preferences; in particular, every good or service is produced up to point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Voluntary Exchange: The situation that occurs only in markets when both the buyers and sellers are better off by the transaction
Equity: The fair distribution of economic benefits
Economic variable: Something measurable that can have different values; such as the wages of software programmers
Positive Analysis: Analysis concerned with what is using facts numbers and data
Normative Analysis: Analysis concerned with what ought to be using opinion questions such as could, would, and should.
Microeconomics: The study of how households and firms make choices, interact in markets, and how the government attempts to influence their choices
Macroeconomics: The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
Production possibilities frontier (PPF): A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
Economic Growth: The ability of the economy to produce increasing quantities of goods and services
Trade: The act of buying and selling
Absolute Advantage: The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
Comparative advantage: The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
Product Markets: Markets for goods— such as consumers— and services— such as medical treatment
Factor Markets: Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability
Factors of Production: The inputs used to make goods and services
Circular Flow Diagram: A model that illustrates how participants in markets are linked
Free Market: A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed
Entrepreneur: Someone who operates a business, bringing together the factors of production— labor, capital, and natural resources— to produce goods and services
Property Rights: The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
Demand schedule: A table showing the relationship between the price of a product and the quantity of the product demanded
Quantity Demanded: The amount of a good or service that a consumer is willing and able to purchase at a given price
Demand curve: A curve that shows the relationship between the price of the product and the quantity of the product demanded
Market demand: The demand by all the consumers of a given good or service
Law of Demand: The rule that, holding everything constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.
Substitution effect: The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes
Income effect: The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power
Ceteris Paribus: The requirement that when analyzing the relationship between two variables— such as price and quantity demanded— other variables must be held constant
Normal Good: A good for which the demand increases as income rises and decreases as income falls
inferior Good: A good for which the demand increases as income falls and decreases as income rises
Substitutes: Goods or services that can be used for the same purpose
Complements: Goods or services that are used together
Demographics: The characteristics of a population with respect with age, race, and gender
Quantity supplied: The amount of goods or services that a firm is willing and able to supply at a given price
Supply schedule: A table that shows the relationship between the price of the product and the quantity of the product supplied
Supply Curve: A curve that shows the relationship between the price of the product and the quantity of the product supplied
Law of Supply: The rule that, holding everything constant, increases in price cause increases in quantity supplied, and decreases cause decrease in quantity supplied
Technological change: A positive or negative change in the ability of a firm to produce a given level of outputs with a given quantity of inputs
Market equilibrium: A situation in which quantity supplied equals quantity demanded
Competitive market equilibrium: A market with many buyers and sellers
Surplus: A situation in which the quantity supplied is greater than the quantity demanded
Shortage: A situation in which the quantity demanded is greater than the quantity supplied
Price Ceiling: A legally determined maximum price that sellers may charge
Price floor: A legally determined minimum price that sellers may receive
Consumer Surplus: The difference between the highest price a consumer is willing to pay and the price the consumer actually pays
Marginal Benefit: The additional benefit to a consumer from consuming one more unit of a good or service
Marginal Cost: The additional cost to a firm of producing one more unit of a good or service
Producer Surplus: The difference between the lowest price a firm would be willing to accept and the price it actually receives
Economic Surplus: The sum of consumer surplus and producer surplus
Deadweight Loss: The reduction in economic surplus resulting from a market not being in competitive equilibrium
Economic Efficiency: A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum
Black Markets: A market in which buying and selling take place at prices that violate government price regulations
Tax Incidence: The actual division of the burden of a tax between buyers and sellers in a market