Microeconomics AP exam

business cycle

fluctuations in economic activity, such as employment and production

economics

the study of how society manages its scarce resources

efficiency

the property of society getting the most it can from its scarce resources

equality

the property of distributing economic prosperity uniformly among the members of society

externality

the impact of one person's actions on the well-being of a bystander

incentive

something that induces (a person to act

inflation

an increase in the overall level of prices in the economy

marginal changes

small incremental adjustments to a plan of action

market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

market failure

a situation in which a market left on its own fails to allocate resources efficiently

market power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

opportunity cost

whatever must be given up to obtain some item

productivity

the quantity of goods and services produced from each unit of labor input

property rights

the ability of an individual to own and exercise control over scarce resources

rational people

people who systematically and purposefully do the best they can to achieve their objectives

scarcity

the limited nature of society's resources

circular-flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

microeconomics

the study of how households and firms make decisions and how they interact in markets

normative statements

claims that attempt to prescribe how the world should be

positive statements

claims that attempt to describe the world as it is

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

absolute advantage

the ability to produce a good using fewer inputs than another producer

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

exports

goods produced domestically and sold abroad

imports

goods produced abroad and sold domestically

opportunity cost

whatever must be given up to obtain some item

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

demand curve

a graph of the relationship between the price of a good and the quantity demanded

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

equilibrium price

the price that balances quantity supplied and quantity demanded

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

inferior good

a good for which, other things equal, an increase in income leads to a decrease in demand

law of demand

the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises

law of supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

market

a group of buyers and sellers of a particular good or service

normal good

a good for which, other things equal, an increase in income leads to an increase in demand

quantity demanded

the amount of a good that buyers are willing and able to purchase

quantity supplied

the amount of a good that sellers are willing and able to sell

shortage

a situation in which quantity demanded is greater than quantity supplied

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

supply curve

a graph of the relationship between the price of a good and the quantity supplied

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

surplus

a situation in which quantity supplied is greater than quantity demanded

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

total revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

price ceiling

a legal maximum on the price at which a good can be sold

price floor

a legal minimum on the price at which a good can be sold

tax incidence

the manner in which the burden of a tax is shared among participants in a market

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

cost

the value of everything a seller must give up to produce a good

efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society

equality

the property of distributing economic prosperity uniformly among the members of society

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

welfare economics

the study of how the allocation of resources affects economic well-being

willingness to pay (WTP)

the maximum amount that a buyer will pay for a good

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

tariff

a tax on goods produced abroad and sold domestically

world price

the price of a good that prevails in the world market for that good

Coase theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

corrective tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

externality

the uncompensated impact of one person's actions on the well-being of a bystander

internalizing the externality

altering incentives so that people take account of the external effects of their actions

transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

common resources

goods that are rival in consumption but not excludable

cost-benefit analysis

a study that compares the costs and benefits to society of providing a public good

excludability

the property of a good whereby a person can be prevented from using it

free rider

a person who receives the benefit of a good but avoids paying for it

private goods

goods that are both excludable and rival in consumption

public goods

goods that are neither excludable nor rival in consumption

rivalry in consumption

the property of a good whereby one person's use diminishes other people's use

Tragedy of the Commons

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

ability-to-pay principle

the idea that taxes should be levied on a person according to how well that person can shoulder the burden

average tax rate

total taxes paid divided by total income

benefits principle

the idea that people should pay taxes based on the benefits they receive from government services

budget deficit

an excess of government spending over government receipts

budget surplus

an excess of government receipts over government spending

horizontal equity

the idea that taxpayers with similar abilities to pay taxes should pay the same amount

lump-sum tax

a tax that is the same amount for every person

marginal tax rate

the extra taxes paid on an additional dollar of income

progressive tax

a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

proportional tax

a tax for which high-income and low-income taxpayers pay the same fraction of income

regressive tax

a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

vertical equity

the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

accounting profit

total revenue minus total explicit cost

average fixed cost

fixed cost divided by the quantity of output

average total cost

total cost divided by the quantity of output

average variable cost

variable cost divided by the quantity of output

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

economic profit

total revenue minus total cost, including both explicit and implicit costs

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

efficient scale

the quantity of output that minimizes average total cost

explicit costs

input costs that require an outlay of money by the firm

fixed costs

costs that do not vary with the quantity of output produced

implicit costs

input costs that do not require an outlay of money by the firm

marginal cost

the increase in total cost that arises from an extra unit of production

marginal product

the increase in output that arises from an additional unit of input

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

profit

total revenue minus total cost

total cost

the market value of the inputs a firm uses in production

total revenue

the amount a firm receives for the sale of its output

variable costs

costs that vary with the quantity of output produced

average revenue

total revenue divided by the quantity sold

competitive market

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

marginal revenue

the change in total revenue from an additional unit sold

sunk cost

a cost that has already been committed and cannot be recovered

monopoly

a firm that is the sole seller of a product without close substitutes

natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

price discrimination

the business practice of selling the same good at different prices to different customers

monopolistic competition

a market structure in which many firms sell products that are similar but not identical

oligopoly

a market structure in which only a few sellers offer similar or identical products

cartel

a group of firms acting in unison

collusion

an agreement among firms in a market about quantities to produce or prices to charge

dominant strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

game theory

the study of how people behave in strategic situations

Nash equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

oligopoly

a market structure in which only a few sellers offer similar or identical products

prisoners' dilemma

a particular game between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

capital

the equipment and structures used to produce goods and services

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

factors of production

the inputs used to produce goods and services

marginal product of labor

the increase in the amount of output from an additional unit of labor

production function

the relationship between the quantity of inputs used to make a good and the quantity of output of that good

value of the marginal product

the marginal product of an input times the price of the output

compensating differential

a difference in wages that arises to offset the nonmonetary characteristics of different jobs

discrimination

the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics

efficiency wages

above-equilibrium wages paid by firms to increase worker productivity

human capital

the accumulation of investments in people, such as education and on-the-job training

strike

the organized withdrawal of labor from a firm by a union

union

a worker association that bargains with employers over wages and working conditions