AP Econ Final

 STUDY GUIDE 


  1. What is shortage in economics? 

Shortage - when the quantity of a good or service demanded exceeds the quantity supplied; occurs when the price is below its equilibrium level and is also known as excess demand.

  1. What are the factors of production?

  • Land 

  • Labor

  • Capital

  • Entrepreneurship 

  1. What is the production possibilities curve?

Production possibilities curve - illustrates the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced. 

  1. What is opportunity cost? 

Opportunity cost - the real cost of an item: what you must give up in order to get it

  1. What is scarcity?

Scarce -in short supply; when a resource is not available in sufficient quantities to satisfy all the various ways a society wants to use it.

  1. What are trade-offs? 

Trade-off- when you give up something in order to have something else. 

  1. What is physical capital? 

Physical capital - often referred to simply as “capital”—consists of manufactured productive resources such as equipment, buildings, tools, and machines.

  1. What is a centrally planned economy? 

Centrally planned economy - An economic system where the government makes all decisions about the production and distribution of goods and services.

  1. What is a free market? 

Free market - An economic system based on supply and demand with little government intervention. 

  1. What is socialism? 

Socialism - An economic system where the means of production are owned and controlled collectively, often by the government.

  1. What is specialization?

Specialization - each person specializes in the task that he or she is good at performing.

  1. What is a mixed economy? 

Mixed economy - An economy that incorporates elements of both free markets (capitalism) and government intervention (socialism).

  1. Who is Karl Marx? 

Karl Marx - A philosopher and economist who co-authored The Communist Manifesto and is known for his theories about socialism and communism.

  1. Who is Adam Smith?

Adam Smith - The father of modern economics, known for The Wealth of Nations and the concept of the invisible hand.

  1. Who is Vladmir Lenin?

Vladimir Lenin - A revolutionary leader who applied Marxist theory to create the Soviet Union's communist state.

  1. What is a traditional economy?

Traditional economy - An economy where customs, traditions, and beliefs shape the production and distribution of goods and services.

  1. What is a product market?

Product market - where goods and services are bought and sold.

  1. What is laissez faire in an economic perspective? 

Laissez faire - The idea that economies function best when there is minimal government interference.

  1. How does new technology help the economy? 

  • efficient production process → lower costs + increases productivity

  • more variety of goods and services available

    • Without increasing input costs

  • long-run aggregate supply curve shift rightward

  1. What is standard of living? 

Standard of living - The level of wealth, comfort, and access to goods and services available to a population

  • In other words: the material well being of the average person in a given population

  • Measured by GDP per capita

    • GDP per capita - GDP divided by the size of the population; it is equivalent to the average GDP per person

  1. What is gross domestic product? 

Gross domestic product (GDP) - the total value of all final goods and services produced in the economy during a given year.

  1. What is Social Security? 

A government program providing financial assistance to retirees, disabled individuals, and survivors of deceased workers.

  1. What are the benefits of Social Security? 

Ensures a safety net for retirees, disabled persons, and families facing loss of income due to death or incapacity.

  1. What is elasticity? 

A measure of how much the quantity demanded or supplied changes in response to a change in price.

  1. What is inelasticity? A situation where the quantity demanded or supplied changes little with a change in price.

  2. What are inferior goods?

Inferior Goods - When a rise in income decreases the demand for a good; usually considered less desirable than more expensive alternatives

  1. What are complements? 

Complements - two goods (often consumed together) for which a rise in the price of one of the goods leads to a decrease in the demand for the other good

  1. What are substitutes? 

Substitutes - two goods for which a rise in the price of one of the goods leads to an increase in the demand for the other good

  1. Who are the baby boomers? The generation born between 1946 and 1964, following World War II.

  2. How does the baby boomers impact the economy? Their aging affects healthcare costs, retirement systems, and workforce demographics.

  3. What is the law of demand?

Law of Demand - the “law” that a higher price for a good or service, other things being equal, leads people to demand a smaller quantity of that good or service

  1. What is the law of supply? 

Law of Supply - the “law” that, other things being equal, the price and quantity of a good are positively related

  1. What is fixed cost?

Fixed Cost - A cost that does not depend on the quantity of output produced; the cost of the fixed input.

  1. What is the equilibrium level? The point where supply equals demand in a market.

  2. What are price ceilings? Government-imposed maximum prices for goods (e.g., rent controls). 

Price ceiling- a maximum price that sellers are allowed to charge for a good or service. 

  1. What are price floors? Government-imposed minimum prices (e.g., minimum wage).

Price floors- a minimum price that buyers are required to pay for a good or service.

  1. What is rationing? Distributing goods and services based on criteria other than price, often in times of scarcity.

  2. What is quantity demanded? The amount of a good consumers are willing to buy at a specific price.

Quantity demanded- the actual amount of a good or service consumers are willing and able to buy at some specific price. 

  1. What is quantity supplied? The amount of a good producers are willing to sell at a specific price.

Quantity supplied- the actual amount of a good or service people are willing to sell at some specific price. 

  1. What is minimum wage? The lowest legal hourly wage that employers can pay their workers.

Minimum wage- a legal floor on the hourly wage rate paid for a worker’s labor. 

  1. What is rent control? Government-imposed limits on the amount landlords can charge for rent.

  2. What is rent abatement? A reduction or suspension of rent payments, often granted during economic hardship or when a property is uninhabitable.

  3. What is collective bargaining? The process by which employers and employees negotiate wages, working conditions, and other employment terms.

  4. What is inflation? The general increase in prices and decrease in the purchasing power of money over time.

Inflation- a rising overall price level.

  1. What is deflation? The general decrease in prices and increase in the purchasing power of money.

Deflation- a falling overall price level. 

  1. What is a barter system? An economic system where goods and services are exchanged directly without using money.

  2. What is the FDIC? The Federal Deposit Insurance Corporation, which insures bank deposits to protect consumers in case of bank failures.

  3. What are bank runs? When many people withdraw their money from a bank simultaneously due to fears that the bank might fail.

Bank runs- a phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure.

  1. What is M1? A measure of the money supply that includes physical currency, demand deposits, and other liquid assets.

  2. What is M2? A broader measure of the money supply that includes M1 along with savings accounts, time deposits, and money market funds.

  3. What is excess demand? When the quantity demanded of a good exceeds the quantity supplied at a given price.

  4. What is the invisible hand? Adam Smith's concept that individual self-interest in a free market leads to economic efficiency and benefits society as a whole.

  5. Why is there competition in the economy? Competition arises because resources are scarce, and individuals or firms strive to maximize their benefits.

  6. What is capital? Physical assets like machinery, buildings, and tools used to produce goods and services.

Capital- manufactured goods used to make other goods and services. 

  1. What is an entrepreneur? An individual who organizes and operates a business, taking on financial risks to do so.

  2. What is a business cycle? The periodic fluctuations in economic activity, including expansion, peak, contraction, and trough.

Business cycle- the alternation between economic downturns, known as recessions, and economic upturns, known as expansions.

  1. What are expansions? Periods of economic growth, rising GDP, and increased employment.

Expansion- a period of economic upturn in which output and employment are rising; also referred to as recovery.

  1. What is a recession? A period of economic decline characterized by reduced GDP and higher unemployment, lasting at least six months.

Recession- a period of economic downturn when output and employment are falling.

  1. What are property rights? Legal rights that allow individuals to own, use, and transfer resources and property.

Property rights- establish ownership and grant individuals the right to trade goods and services with each other. 

  1. What is wasted resources? Resources that are not used efficiently, leading to lower productivity. 

Wasted Resources- a form of inefficiency in which people expend money, effort, and time to cope with the shortages caused by the price ceiling or surpluses caused by the price floor. 

  1. What are black markets? Illegal markets where goods or services are traded outside of government regulations.

Black market-a market in which goods or services are bought and sold illegally—either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling. 

  1. What is real GDP? GDP adjusted for inflation, reflecting the true value of goods and services produced.

Real GDP- the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year in order to remove the effects of price changes.

  1. What is nominal GDP? GDP measured in current prices, without adjusting for inflation.

Nominal GDP-the total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced.

  1. What is a discouraged worker? Someone who has stopped looking for work because they believe there are no jobs available.

Discouraged worker- nonworking people who are capable of working but have given up looking for a job due to the state of the job market

  1. What is structural unemployment? Unemployment caused by a mismatch between workers' skills and job requirements.

Structural unemployment-unemployment that results when workers lack the skills required for the available jobs, or there are more people seeking jobs in a labor market than there are jobs available at the current wage rat

  1. What is frictional unemployment? Short-term unemployment caused by workers transitioning between jobs or entering the workforce.

frictional unemployment-unemployment due to the time workers spend in job search

  1. What is cyclical unemployment? Unemployment caused by economic downturns in the business cycle.

Cyclical unemployment- the deviation of the actual rate of unemployment from the natural rate.

  1. What is the consumer price index? A measure that tracks changes in the price level of a basket of consumer goods and services over time.

Consumer price index- measures the cost of the market basket of a typical urban American family.

  1. What is fiscal policy?

Fiscal policy- the use of government purchases of goods and services, government transfers, or tax policy to stabilize the economy

  1. What is monetary policy?

Monetary Policy-the central bank’s use of changes in the quantity of money or the interest rate to stabilize the economy

  1. What are sticky wages?

Sticky wages-nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

  1. What is equilibrium price?

Equilibrium price- the price of a good at which the quantity demanded of that good equals the quantity supplied of that good

  1. What is stagflation?

Stagflation- the combination of inflation and stagnating (or falling) aggregate output.