AP Microeconomics Exam Vocabulary (5 Steps to a 5)

The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited wants

Labor, Land, Capital, Entrepreneurial ability

Human effort and talent, physical and mental. This can be augmented by education and training (human capital)

Any resource created by nature. This may be arable land, mineral deposits, oil and gas reserves, or water

Manmade equipment like machinery, but also buildings, roads, vehicles, and computers

The effort and know how to put the other resources (Factors of Production) together in a productive venture

The difference between unlimited wants and limited economic resources

The fact that we are faced with scarce resources implies that individuals, firms, and governments are constantly faced with trade-offs

The opportunity cost of doing something is what you sacrifice to do it (i.e. if you use a scarce resource to pursue activity X, the opportunity cost of activity X is activity Y, the next best use of that resource)

Rational individuals and firms weigh the additional benefits against the additional costs (They think at the margin)

"the next one" or "additional" or "incremental"

The additional cost incurred from the consumption of the next unit of a good or service

The additional benefit received from the consumption of the next unit of a good or service

Do something if the marginal benefit is greater than or equal to the marginal cost of doing it
Stop doing something when the marginal benefit is equal to the marginal cost of doing it
Never do something when the marginal benefits are less than the marginal cost of doing it

A model of an individual or a nation that can choose to allocate its scarce resources between the production of two goods or services, it is assumed that those resources are being fully employed and used efficiently

Each point on the curve represents some maximum output combination of the two products

Any point outside the frontier is currently unattainable

Any point inside the frontier fails to use all of the individual/nations available resources in an efficient way

Over the course of time the PPF is believed to expand

The slope of the curve measures the opportunity cost of the good on the x axis
The inverse of the slope measures the opportunity cost of the good on the y axis

Because resources used to produce good X are not necessarily suitable for the production of good Y the PPF is bow shaped (it is unrealistic for it to be linear)

The more goods that are produced, the greater its opportunity cost

Concave or bowed outward

The ability to produce more of a certain good than another individual/firm/nation

The ability to produce goods at a lower opportunity cost that another individual/firm/nation

Individuals/firms/nations produce the goods in which they have a comparative advantage

Goods are produced at a lower cost
Individuals/firms/nations attain greater profits
Consumers benefit from lower prices

The economy is producing the maximum output for a given level of technology and resources (all points on the PPF are productively efficient)

The economy is producing the optimal mix of goods and services (the combination of goods and services that provides the most net benefit to society; the best point on the PPF)

The point on the PPF were the economy is allocatively efficient is were the marginal benefit of consuming a goods is equal to the marginal cost of producing it

The ability to produce a larger total output over time, can occur ia one or all of the following occur
-An increase in the quantity of resources
-An increase in the quality of existing resources
-Technological advancements in production

Private Property
Freedom
Self-interest and incentives
Competition
Prices

Individuals, not governments, own most economic resources. This private ownership encourages innovation, investment, growth, and trade

Individuals are free to acquire resources to produce goods and services, and free to chose which of their resources to sell to others so that they may buy their own goods and services

Individuals are motivated by their own self-interest in their use of resources. Entrepreneurs seek to maximize profit while consumers seek to maximize happiness; with these incentives, goods are sold an bought

Buyers and sellers, acting independently, and motivated by self-interest, freely move in and out of individual markets. Again, the issue of incentives is powerful. A new firm, eager to compete in a market, only enters that market if profits are available

Prices send signals to buyers and sellers, and resources allocation decisions are mad based upon this information. Prices also serve to ration goods to those consumers who are most able to pay those prices

Holding all else equal (ceteris paribus), when the price of a good rises, consumers decrease their quantity demanded for that good (there is an inverse relationship between the price and the quantity demand of a good)

Nominal prices measure the price of a good in units of currency while real prices measure prices in terms of another good one must give up to buy that good (The number of units of any good Y that must be sacrificed to acquire the first good X) ONLY RELATIVE PRICES MATTER

The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods

The change in quantity demanded resulting from a change in the consumer purchasing power (real income)

A table showing quantity demanded for a good at various prices

A graphical representation of the demand schedule; the demand curve is downward sloping, reflecting the law of demand

If the price of a good changes and all other factors remain constant, the demand curve is held constant and we simply observe the consumer moving along the fixed demand curve. If one of the external factors change, the entire demand curve shifts left or right

-Consumer income
-The price of a substitute good
-The price of a complimentary good
-Consumer tastes and preferences for the good
-Consumer expectations about the future price of the good
-The number of buyers in the market for that specific good

For normal goods increased income results in a rightward shift in the demand curve (increased demand) and decreased income results in a leftward shift in the demand curve
*Inferior goods act the opposite way*

A good for which higher income increases demand

A good for which higher income decreases demand

If two goods are substitutes, and the price of good x falls (rises), the consumer demand for good Y decreases (increases)

Two goods are substitute goods if the consumer can use either to satisfy the same essential function, therefore experiencing the same degree of happiness (utility)

If any two goods are compliments and the price of one good X falls (rises), the consumer demand for the complement good Y increases (decreases)

A stronger (lower) preference for a good is an increase (decrease) in the willingness to pay for the good, which increases (decreases) demand

The future expectation of a price change or an income change can cause demand to shift today. Demand can also respond to an expectation of the future availability of a good

An increase in the number of buyers, holding all factors constant, increases the demand for a good

Holding all else equal, when the price of a good rises, suppliers increase their quantity supplied for that good (there is a direct relationship between the price and the quantity supplied of a good

As more of a good is produced, the greater its marginal cost
-As suppliers increase the quantity supplied of a good, they face rising marginal cost
-Suppliers only increase the quantity supplied of a good if the price received is high enough to at least cover the higher marginal cost

A table showing quantity supplied for a good at various prices

A graphical representation of the supply schedule. The supply is upward sloping, reflecting the law of supply

When the price of a good changes, and all other factors are held constant, the supply curve is held constant; we simply observe the producer moving along the fixed supply curve. If one of the external factors change, the entire supply curve shifts to the left or right

-The cost of an input
-Technology and productivity
-Taxes and subsidies on a good
-Producer expectations about future prices
-The price of other goods that could be produced
-The number of producers in the industry

If the cost of inputs fall (rises) producers will increase (decrease) supple thereby shifting the supply curve to the right (left)

A technological improvement (reduction) usually decreases (increases) the marginal cost of producing a good, thus allowing the producer to supply more (less) units, which is reflected by a rightward (leftward) shift in the supply curve

A per unit tax is treated by firms as an additional cost of production and would therefore decrease the supply cure, or shift it leftward
A per unit subsidy lowers the per unit cost of production and therefore shifts the supply curve rightward

A producers willingness to supply today might be affected by an expectation of tomorrows price

Firms can use the same resources to produce different goods. If the price of good X were rising and profit opportunities were improving for good X producers, the supply of good Y would decrease as the supply of good x increased

When more supplier enter a market, we expect the supply curve to shift right. If suppliers left the market the supply curve would shift left

The market is in a state of equilibrium when the quantity supplied equals the quantity demanded at a given price

A shortage exists at a market price when the quantity demanded exceeds the quantity supplied

A surplus exists at a market price when the quantity supplied exceeds the quantity demanded

When demand increases, equilibrium price and quantity both increase
When demand decrease, equilibrium price and quantity both decrease

When supply increases, equilibrium price decreases and quantity increases
When supply decreases, equilibrium price increases and quantity decreases

When both demand and supply are changing, one of the equilibrium outcomes (price or quantity) is predictable and one is ambiguous

The sum of consumer and producer surplus

The difference between your willingness to pay and the price you actually pay

The difference between the price received and the marginal cost of producing the good

The area under the demand curve and above the market price is equal to total consumer surplus

The area above the supply curve and below the market price is equal to total producer surplus

Measures the sensitivity, or responsiveness, of a choice to a change in an external factor

Measures the sensitivity of consumer quantity demanded for good X when the price of good X changes

Ed= (%change in quantity demanded of good X)/(%change in the price of good X)

If Ed > 1

If Ed = 1

If Ed < 1

Above the midpoint demand is price elastic
At the midpoint demand is unit elastic
Below the midpoint the demand is price inelastic

Delta Percentage = [final cost - initial cost]/initial cost

Any increase in the price results in no decrease in the quantity demanded

A decrease in the price causes the quantity demanded to increase without limits

The price elasticity falls and consumers become more price inelastic

The price elasticity increases and consumers become more price elastic

-Number of Good Substitutes
-Proportion of Income
-Time

If the price of good X increase, and many (few) substitutes exist, the decrease in quantity demanded can be quite elastic (inelastic)

If the price of a good increases, the consumer loses purchasing power. If that good takes up a large (small) portion of the consumers income his responsiveness will be significant (insignificant), or elastic (inelastic)

it is expected that price elasticity increases (decreases) as more (less) time passes after the initial increase in price

TR = Price * Quantity Demanded

If demand is inelastic TR increases with a price increase
If demand is elastic TR decreases with a price increases
If demand is unit elastic TR stays the same

A measure of how sensitive consumption of good X is to a change in a consumer's income

Ei = (%change Qd good X) / (%change income)

If Ei > 1, the good is normal and income elastic (luxury)
If 1 > Ei > 0, the good is normal but income inelastic (a necessity)
If Ei < 0, the good is inferior

The sensitivity of consumption of good X to a change in the price of good Y

Ex,y = (%change Qd good X) / (%change Price good Y)

A cross-price elasticity of demand less than zero identifies a complementary good
A cross-price elasticity of demand greater than zero identifies a substitute good

Measures the sensitivity of quantity supplied for good X when the price of good X changes

Es = (%change in quantity supplied of good X) / (%change in the price of good X)

Because suppliers, once the price of a good has changed, usually cannot quickly change the quantity supplied, economists predict that the price elasticity of supply increase as time passes

A per-unit tax on production results in a vertical shift in the supply curve by the amount of the tax

The proportion of the tax paid by consumers in the form of a higher price for the taxed good is greater if demand for the good is inelastic and supply is elastic

Government revenue is the least, decrease in consumption is the most, incidence of tax paid by consumers is 0%, and the incidence of tax paid by producers is 100%

Government revenue is falling, decrease in consumption is sizeable, incidence of tax paid by consumers is less than 50%, and the incidence of tax paid by producers is more than 50%

Government revenue is rising, decrease in consumption is minimal, incidence of tax paid by consumers is more than 50%, and the incidence of tax paid by producers is less than 50%

Government revenue is the most, decrease in consumption is 0, incidence of tax paid by consumers is 100%, and the incidence of tax paid by producers is 0%

Government revenue is the least, decrease in consumption is the most, incidence of tax paid by consumers is 100%, and the incidence of tax paid by producers is 0%

Government revenue is falling, decrease in consumption is sizeable, incidence of tax paid by consumers is more than 50%, and the incidence of tax paid by producers is less than 50%

Government revenue is rising, decrease in consumption is minimal, incidence of tax paid by consumers is less than 50%, and the incidence of tax paid by producers is more than 50%

Government revenue is the most, decrease in consumption is the least, incidence of tax paid by consumers is 0%, and the incidence of tax paid by producers is 100%

The lost net benefit to society caused by a movement away from the competitive market equilibrium. Policies like excise taxes create lost welfare to society

Deadweight loss increases as the demand or supply curves become more elastic

Has the opposite effect of an excise tax, as it lowers the marginal cost of production, resulting in a downward vertical shift in the supply curve for good X

A legal minimum price below which the product cannot be sold. If a floor is installed at some level above the equilibrium, it creates a permanent surplus

A legal maximum price above which the product cannot be sold. If a ceiling is installed at a level below the equilibrium price, it creates a permanent shortage

Happiness, benefit, satisfaction, or enjoyment gained from consumption

The total amount of happiness received from the consumption od a certain amount of a good

The additional utility received (or sometimes lost) from the consumption of the next unit of a good

Mu = (%change Total Utility) / (%change Quantity)

A unit of measurement often used to quantify utility

Even if the monetary price of good X is zero, the rational consumer stops consuming good X at the pint where total utility is maximized

States that in a given time period, the marginal utility from consumption of one more of that item falls

For a one-good case. Constrained by prices and income, a consumer stops consuming a good when the price paid for the next unit is equal to the marginal benefit received

The consumer maximizes utility when they choose amounts of goods X and Y, with their limited income, so that the marginal utility per dollar spent is equal for both goods

MUx/Px = MUy/Py or MUx/MUy = Px/Py

Utility maximizing behavior of individuals creates individual demand curves
Summing the quantity demanded by individuals at each price creates market demand curves

An organization that employs factors of production to produce a good or service that it hopes to profitably sell

direct, purchased, out-of-pocket costs paid to resource suppliers outside the firm (Also called accounting costs)

Indirect, non purchased, or opportunity costs of resources provided by the entrepreneur (Also called economic costs)

The difference between total revenue and total explicit costs

The difference between total revenue and total explicit and implicit costs

A period of time too short to change the size of the plant, but many other, more variable resources can be adjusted to meet demand

A period of time long enough to alter the plant size. New firms can enter the industry and existing firms can liquidate and exit

Plant size: Fixed
Fixed Cost: Some
Variable Costs: Some
Entry/Exit of Firms: None

Plant size: Variable
Fixed Cost: None
Variable Costs: All
Entry/Exit of Firms: Yes

The mechanism for combining production resources, with existing technology, into finished goods and services, Inputs are turned into outputs

Production inputs cannot be changed in the short run. Usually this is the plant size or capital

Production inputs that the firm can adjust in the short run to meet changes in demand for their output. Often this is labor and/or raw materials

The total quantity, or total output, of a good produced at each quantity of labor employed

The change in the total product resulting from a change in the labor input. MP = change in TP / change in Labor. If labor is changing one unit at a time, MP = change in TP

Total product divided by the amount of labor employed. AP = TP / L

As successive units of a variable resource are added to a fixed resource, beyond some point marginal product falls

MP is increasing as Labor increases

MP decreases as Labor increases

MP becomes negative as Labor increases

AP is rising

AP is falling

AP is at the peak; MP intersects AP at its graphical maximum

Those costs that do not vary with the changes in short-run output. They must be paid even when output is zero. These include rent on a building or equipment, insurance or licenses

Those costs that change with the level of output. If output is zero, so are total variable cost. They include payments for materials, fuel, power, transportation services, most labor, and similar costs

The sum of total fixed and total variable costs at each level of output

the additional cost of producing one more unit of output MC = change in TC / change in Quantity (Output). Since TVC are the only costs that change with the level of output, marginal cost is also calculated as MC = change in TVC / change in Quantity (Output)

Total fixed costs divided by output. AFC = TFC/Q. It continuously falls as output rises

Total variable costs divided by output. AVC = TVC/Q

Total costs divided by output ATC = TC/Q also ATC = AFC + AVC

Rising

Falling

Lowest

Rising

Falling

Lowest

Advantages of increased plant size and are seen on the downward part of the LRAC curve. LRAC falls as plant size rises

a. Labor and managerial specialization
b. Ability to purchase and use more efficient capital goods

This can occur when LRAC is constant over a variety of plant sizes

The upward part of the LRAC curve where LRAC rises as plant size increases. This is usually the result of the increased difficulty of managing larger firms which results in lost efficiency and rising per unit costs

-Many small independent producers and consumers
-Firms produce a standardized product
-No barriers to entry/exit
-Firms are "price takers"

Horizontal (perfectly elastic)

Normal; in other words as the market price goes up quantity demanded falls and vice versa

They are not going to settle for anything less than the highest possible difference between total revenue and total economic cost

Total revenue - Total Economic Cost

MR = MC

Marginal Revenue (=ΔTR/ΔQ= PΔQ/ΔQ=P) and Average Revenue (=TR/Q=PQ/Q=P)

Total Profit (pi)=qe*(P-ATC)

Profits > 0 (Positive Economic Profit)

Profits < 0 (Negative Economic Losses)

Profits = 0 (Zero Economic Profits or Normal Profits)

If TR ≥ TVC, the firm produces at a quantity where MR = MC
If TR ≤ TVC, the firm shuts down and quantity = 0
or
If P ≥ AVC, the firm produces at a quantity where MR=MC
If P ≤ AVC, the firm shuts down and quantity = 0

The supply curve for each perfectly competitive firm

The sum of all of the MC curves

The period of time too brief for firms to change the size of their plants

A period during which inputs can change

New firms will enter the market

Market supply will shift outward thereby lowering the market price so that all firms are earning zero profits

The long run equilibrium

Existing firms will exit the market

Market supply will shift inward thereby raising the market price so that all firms are now earning zero economic profits at the break even point

The firm produces at the quantity where MR = MC therefore short run economic profits are positive and in the long run firms enter the market

The firm produces at the quantity where MR = MC therefore short run economic profits are zero (Break-even point) and in the long run there is no net movement of firms (Firms neither enter or exit the market)

The firm produces at the quantity where MR = MC therefore short run economic profits are negative and in the long run firms exit the market

The firm produces at the quantity of zero (shut down) therefore short run economic profits are negative and in the long run firms exit the market

The output where ATC is minimized and economic profit is zero

The output where AVC is minimized. If price falls below this point, the firm chooses to shut down or produce zero units in the short run

Occurs when there is no more incentive for firms to enter or exit P=MR=MC=ATC and Profits=0

Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources

Entry (or exit) of firms does not shift the cost curves of firms in the industry

Entry of new firms shifts the cost curves for all firms upward

Entry of new firms shifts the cost curves for all firms downward

The least competitive market structure, it is characterized by a single producer, with no close substitutes, barriers to entry, and price making power

-A single producer
-No close substitutes
-Barriers to entry
-Market power

-Legal Barriers
-Economics of scale
-Control of key resources

There are patents, trademarks, and copyright laws to protect inventions and intellectual property. These legal protections do not [necessarily] provide for absolute monopoly for there are often viable substitutes available to consumers

As a firm grows larger in the long run, average total costs fall, providing the larger firm a cost advantage over smaller firms. If extensive economies of scale exist, an industry could evolve into one with only one enormous producer

A case where economies of scale are so extensive that it is less costly for one firm to supply the entire range of demand

If a firm controlled most of the available resources in the production of a good, it would be very difficult for a competitor to enter the market

The ability to set the price above the perfectly competitive level

The monopolist is the only provider of a good, therefore the demand for the product is the market demand for the product

Going to avoid the inelastic portion of the demand curve and operate at some point to the left of the midpoint

Downward; > (Greater than)

MR=MC; Demand curve

Economic losses or shutdown

Pm>MR=MC, which is not allocatively efficient and dead weight loss exist. Pm>ATC, which is not productively efficient. Profit>0 so consumer surplus is transferred to the monopolist as profit

The selling of the same good at different prices to different consumers

1. The firm must have monopoly pricing power
2. The firm must be able to identify and separate groups of consumers
3. The firm must be able to prevent resale between consumers

A market structure characterized by a few small firms producing a differentiated product with easy entry in the market

-Relatively large number of firms
-Differentiated products
-Easy entry and exit

Downward; Differentiated Product

Elastic, because there are many similar substitutes available to consumers

MC=MR; Demand Curve

New firms enter this industry and the market share of all existing firms begins to fall (graphically this is a leftward shift in the demand curve

Zero and P=ATC, or when the demand curve is just tangent to ATC

P>MR=MC; Allocative efficiency is not achieved

The minimum of ATC; productive efficiency is not achieved

The difference between the monopolistic competitors output Qmc and the output at minimum ATC (Qatc-Qmc)

Deadweight loss

A very diverse market structure characterized by a small number of interdependent large firms, producing a standardized or differentiated product in a market with a barrier to entry

Many radically different

-A few large firms
-Differentiated or standardized products
-Entry barriers
-Mutual interdependace

A measure of industry market power. (Sum the market share of the four largest firms and a ratio above 40% is a good indicator of oligopoly)

Increases

A game where the two rivals achieve a less desirable outcome because they are unable to coordinate their strategies

A strategy that is always the best to pursue, regardless of what a rival is doing

Illegal

Models where firms agree to mutually improve their situation

A group of firms that agree not to compete with each other on the basic of price, production, or other competitive dimensions. Cartel members operate as a monopolist to maximize their joint profits

Rather than act independently to maximize individual profits, they collectively operate as a monopolist to maximize their joint profits

1. Difficulty in arriving at a mutually acceptable agreement to restrict output
2. Punishment mechanism. If the cartel can restrict output and increase the price above the current competitive level, cartel members have an incentive to cheat by producing more that their allotment. There must be some kind of deterrent to cheating
3.Entry of new firms. If the cartel members are successful in creating monopoly profits, they are faced with new firm eager to enter. If entry occurs, the cartel loses monopoly power and profit

firms are price takers in both the product and factor markets; firms cannot impact the price of their product or price paid to employ more input; they will employ as much labor as necessary at the competitive wage.

a measure of what the next unit of a resource (labor) will bring to a firm; equal to the demand of labor in a competitive factor market
MRPL= P* MPL

MB> MC employ more workers
MB< MC employ less workers
MB= MC do not change employment rate

measure of how much cost the firm incurs from using an additional unit of input
Labor Market: MRC= wage

MRPL= firms labor demand curve
Wage= firms labor supply curve (elastic)

product demand, productivity , prices of other resources (complimentary and substitution)