AP Microeconomics Exam

The study of how people seek to satisfy their needs and wants by making choices

a viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions

the most desirable alternative given up as the result of a decision

Ability or capacity of a good or service to be useful and give satisfaction to someone.

analysis that involves comparing marginal benefits and marginal costs

A series of steps followed to solve problems including collecting data, formulating a hypothesis, testing the hypothesis, and stating conclusions.

a widely accepted generalization about the economic behavior of individuals or institutions

all other relevant factors remain unchanged

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

gather; accumulate

Statements about the economy that are unbiased and factual. i.e. "The employment rate is 7%."

Statements about the economy that are opinionative, i.e. "We should focus more on the tech industry."

the need to make choices because economic wants exceed economic means

all natural resources used to produce goods and services

The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods

Human effort directed toward producing goods and services

Underallocations of resources that occur when private demand curve understate consumers' full willingness to pay for a good or service

the account used to summarize the owner's equity in a business

Overallocations of resources that occur when private supply curves understate the full cost of producing a good or service

spending on capital equipment, inventories, and structures, including household purchases of new housing

The difference between the maximum price a consumer is willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price

the imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss

The difference between the actual price a producer receives and the minimum acceptable price; the triangular area above the supply curve and below the market price

Land, labor, and capital; the three groups of resources that are used to make all goods and services

Reductions in combined consumer and producer surplus caused by an under-allocation or overallocation of resources to the production of a good or service

products and services that satisfy human wants directly

goods that are both excludable and rival in consumption

Buildings, machines, technology, and tools needed to produce goods and services.

competition for the same objective or for superiority in the same field.

a graph that shows alternative ways to use an economy's productive resources

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

to produce more of one good, a successively larger amount of the other good must be sacrificed

Goods, such as clean air and clean water, that everyone must share.

the ability of the economy to increase the production of goods and services

The idea that one person's benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good.

property owned by individuals or companies, not by the government or the people as a whole

Situation existing where individual consumers cannot be excluded from consumption

A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; command economy; communism

For a group, the problem of people not joining because they can benefit from the group's activities without joining.

All the product and resource markets of a market economy and the relationships among them; a method that allows the prices determined in those markets to allocate the economy's scarce resources and to communicate and coordinate the decisions made by consumers, firms, and resource suppliers.

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

The freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice.

A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.

The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.

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

an individual's own personal gain

When it is considered most efficient to allow 2 parties to privately negotiate without arbitration.

the struggle between organisms to survive in a habitat with limited resources

the reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal

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

A focus on a particular activity or area of study

Division of work into a number of separate tasks to be performed by different workers

anything that is used to determine value during the exchange of goods and services

(n.) an exchange in trade; (v.) to exchange goods

anything that serves as a medium of exchange, a unit of account, and a store of value

the power of consumers to decide what gets produced

The "votes" that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource markets.

the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies

term economists use to describe the self-regulating nature of the marketplace

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

the consuming units in an economy

Economic entities (firms) that purchase resources and provide goods and services to the economy.

A business owned by one person

A business in which two or more persons combine their assets and skills

Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest

the time period in which all inputs can be varied

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

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity

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

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero

a standard amount of pay given for work performed

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

the period of time during which at least one of a firm's inputs is fixed

A situation in which consumer demand is sensitive to changes in price

A situation in which an increase or a decrease in price will not significantly affect demand for the product

Price x Quantity

a situation in which a good or service is produced at the lowest possible cost

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

the dollar amount of the wage paid

Demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or supplied is equal to the percentage change in price.

when changes in the price of one product affect the demand for another item

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

a period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply

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

A situation in which quantity demanded is greater than quantity supplied

the wage rate divided by the price level

A situation in which quantity supplied is greater than quantity demanded

A resource market in which many firms compete with one another in hiring a specific kind of labor, numerous equally qualified workers supply that labor, and no one controls the market wage rate.

the quantity supplied and the quantity demanded at the equilibrium price

Market with only one buyer

the price that balances quantity supplied and quantity demanded

the practice of a labor union of restricting the supply of skilled union labor to increase the wages received by union members; the policies typically employed by a craft union

factors other than price that determine the quantities supplied of a good or service

the laws of state or local governments that require that a worker satisfy certain specified requirements and obtain a license from a licensing board before engaging in a particular occupation

Tendency of suppliers to offer more of a good at a higher price

the practice of a labor union of including as members all workers employed in an industry

a product often used with another product

a channel structure whereby a single manufacturer supplies a single retailer, offering a single supply and demand point throughout the chain

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

a minimum price that an employer can pay a worker for an hour of labor

Goods for which demand tends to fall when income rises.

the difference between the wage received by one worker or group of workers and that received by another worker or group of workers

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

The change in a firm's total revenue when it employs 1 additional unit of a resource (the quantity of all other resources employed remaining constant); equal to the change in total revenue divided by the change in the quantity of the resource employed.

Factors other than price that determine the quantities demanded of a good or service

collections of workers who do not compete with each other for employment because the skill and training of the workers in one group are substantially different from those of the workers in other groups

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

the skills and knowledge gained by a worker through education and experience

the change in consumption resulting from a change in real income

differences in the wages received by workers in different jobs to compensate for the nonmonetary differences between the jobs

Decreasing satisfaction or usefulness as additional units of a product are acquired

When the agent (worker or manager) doesn't act in the best interest of the principle (owner).

consumers buy more of a good when its price decreases and less when its price increases

a compensation structure that ties worker pay directly to performance. such plans include piece rates, bonuses, stock options, commissions, and profit sharing

a market in which households sell and firms buy resources or the services of resources

spending on goods and services by local, state, and federal governments

the market in which households purchase the goods and services that firms produce

Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as Social Security payments and retirement payments to former government employees, or in-kind transfers, such as food stamps and low-interest loans for college education.

A business owned by stockholders who share in its profits but are not personally responsible for its debts

a tax levied on the taxable income of individuals, households, and unincorporated firms

the total amount of satisfaction derived from the consumption of a single product or a combination of products

the extra taxes paid on an additional dollar of income

The extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed

total taxes paid divided by total income

human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility

Taxes based on the payroll of a business

The limit that the size of a consumer's income (and the prices that must be paid for goods and services) imposes on the ability of that consumer to obtain goods and services

a tax on the value of a company's profits

The principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility

taxes on commodities or on purchases

In marginal utility theory, the combination of goods purchased based on marginal utility (MU) and price that maximizes total utility; the combination for goods X and Y at which MU (of x) / P (of x) = MU (of y) / P (of y). In indifference curve analysis, the combination of goods purchased that maximize total utility by enabling the consumer to reach the highest indifference curve, given the consumer's budget line

Taxes paid by anyone who owns property such as land, a home or commercial real estate

The branch of economics that combines insights from economics, psychology, and neuroscience to give a better explanation of choice behavior than previous theories that incorrectly concluded that consumers were always rational, deliberate, and unemotional. Behavioral economics explains: framing effects, anchoring, mental accounting, the endowment effect, and how people are loss averse

system of taxation in which those who use a particular government service support it with taxes in proportion to the benefit they receive; those who do not use a service do not pay taxes for it

The existing state of affairs; in prospect theory, the current situation from which gains and losses are calculated

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

in prospect theory, the property of people's preferences that the pain generated by losses feels substantially more intense than the pleasure generated by gains

A tax for which the percentage of income paid in taxes increases as income increases

A behavioral economics theory of preferences having three main features: (1) people evaluate options on the basis of whether they generate gains or losses relative to the status quo; (2) gains are subject to diminishing marginal utility, while losses are subject to diminishing marginal disutility; and (3) people are loss averse

A tax for which the percentage of income paid in taxes decreases as income increases

In prospect theory, changes in people's decision making caused by new information that alters the context, or "frame of reference" that they use to judge whether options are viewed as gains or losses

A tax in which the average tax rate is the same at all income levels.

the tendency people have to unconsciously base, or "anchor," the valuation of an item they are currently thinking about on previously considered but logically irrelevant information

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

the tendency people have to create separate "mental boxes" (or "accounts") in which they deal with particular financial transactions in isolation rather than dealing with them as part of their overall decision-making process that considers how to best allocate their limited budgets using the utility-maximizing rule

The loss of net benefits to society because a tax reduces the production and consumption of a taxed good below the level of allocative efficiency. Also called the deadweight loss of the tax.

The tendency people have to place higher valuations on items they own than on identical items that they do not own. Perhaps caused by people being loss averse

the unequal distribution of income

the opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash

the curve that illustrates income distribution

the profit number that accountants calculate by subtracting total explicit costs from total sales revenue

A numerical measure of the overall dispersion of income among households, families, or individuals; found graphically by dividing the area between the diagonal line and the Lorenz curve by the entire area below the diagonal line.

the typical (or "normal") amount of accounting profit that you would most likely have earned in one of these other ventures

the extent to which income receivers move from one part of the income distribution to another over some period of time

The result of subtracting all of your economic costs from revenue (Revenue - explicit costs - implicit costs)

a government transfer payment in the form of goods and services rather than money, for example, food stamps, housing assistance, and job training; also called in-kind transfers

a period long enough for it to adjust the quantities of all the resources that it employs, including plant capacity

The decrease in economic efficiency that may accompany a decrease in income inequality; the presumption that some income inequality is required to achieve economic efficiency.

the total quantity, or total output, of a particular good or service produced

the percentage of people who live in households with income below the official poverty line

The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed. MP = change in total product / change in labor input

Government benefits that certain qualified individuals are entitled to by law, regardless of need.

output per unit of input

Programs to help the elderly, ill, and unemployed if the claimant has paid into them

the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

A system of government payments to people who are out of work and looking for a job.

Those costs that change with the level of output

government programs that make payments to citizens based on need

The sum of fixed and variable costs at each level of output (TC = TFC + TVC)

in classical conditioning, the learned ability to distinguish between a conditioned stimulus and stimuli that do not signal an unconditioned stimulus

Total variable cost / that amount of output

A theory that views discrimination as a preference for which an employer is willing to pay.

Total cost / that output (OR TFC/Q + TVC/Q)

a measure of the cost or disutility of prejudice; the monetary amount an employer is willing to pay to hire a preferred worker rather than a nonpreferred worker.

The extra, or additional, cost of producing one more unit of output

using information about group averages to make conclusions about individuals

Explain the downsloping part of the long-run ATC curve

the separation of men and women into different kinds of jobs

the property whereby long-run average total cost stays the same as the quantity of output changes (straight part of graph)

The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases

The lowest level of output at which a firm can minimize long-run average costs

The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services)

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

Involves a very large number of firms producing a standardized product

A market structure in which one firm is the sole seller of a product or service. Entry of additional firms is blocked, the one firm constitutes the entire industry

Characterized by a relatively large number of sellers producing differentiated products (e.g. clothing, furniture, books). Nonprice competition and product differentiation are common. Entry and exit is quite easy

Opposite of perfect competition

a buyer or seller that is unable to affect the market price

Price x Quantity

A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price

Change in total revenue that results from selling one more unit of output

A change in the quantity demanded of a consumer good that results form a change in its relative expensiveness caused by a change in the product's price. OR the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.

An output at which a firm makes a normal profit but not an economic profit

Profit-maximizing guide/rule

A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve

a schedule or curve showing the prices at which a purely competitive industry will make various quantities of the product available in the long run

An industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward

P = min ATC; requires that goods be produced in the least costly way (purely comp markets)

when the mix of goods being produced represents the mix that society most desires

Difference between the maximum prices that consumers are willing to pay for a product and the market price of the product

the payment that must be made to obtain and retain the services of a resource

the difference between the minimum prices that producers are willing to accept for a product and the market price of the product

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found

factors that prohibit firms from entering an industry

a product's ability to satisfy a large number of consumers at the same time

the value of a product or service for an individual user increases with the number of total users

A period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the plant's current capacity is used (some stuff is fixed)

occurs when a firm produces output at a higher cost than is necessary to produce it

Any activity designed to transfer income or wealth to a particular firm or resource supplier at someone else's, or even society's expense

the practice of selling a good at different prices to different consumers

the regulated price that achieves allocative efficiency

A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.

A strategy in which one firm's product is distinguished from competing products by means of its design, related services, quality, location, or other attributes

Those costs that do not vary with changes in output

emphasizing factors other than price to distinguish a product from competing brands

output of four largest firms / total output in the industry

Sum of squared percentage market shares of all firms in the industry. For a purely competitive industry, the index would approach zero since each firm's market share is extremely small. In the case of a single-firm industry, the index would be at its maximum of 10,000, indicating an industry with complete monopoly power

Total fixed costs / that amount of output

plant and equipment that are underused because firms are producing less than the minimum-ATC output

A market dominated by a few large producers of homogeneous or differentiated product

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal

self-interested economic actions that take into account the reactions of others

A situation in which each firm's profit depends not just on its own price and sales strategies but also on those of the other firms in its highly concentrated industry

The difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer

Competition between two products associated with different industries

the competition that domestic firms encounter from the products and services of foreign producers

the study of how people behave in strategic situations

cooperation between two or more people in an effort to thwart internal controls (illegal act by businesses)

The monetary payments a firm makes to those from whom it must purchase resources that it does not own (such as capital, labor)

the demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase

entails a type of implicit understanding by which oligopolists can coordinate prices without engaging in outright collusion based on formal agreements and secret meetings

the demand for a resource is derived from the demand for the products that the resource helps to produce

The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.

Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output

the change in total revenue resulting from the use of each additional unit of a resource

Amount that each additional unit of a resource adds to the firm's total cost

The principle that to maximize profit (or minimize losses), a firm should employ the quantity of a resource at which its marginal revenue product (MRP) is equal to its marginal resource cost (MRC), the latter being the wage rate in a purely competitive labor market

total revenue divided by the quantity sold

Indicates that a firm will purchase more of an input whose relative price has declined (and, conversely, use less of an input whose relative price has increased)

Change in input use when the firm adjusts the amount of output it produces, holding input prices fixed at their new values

Sensitivity of resource quantity to changes in resource prices along a fixed resource demand curve

The quantity of each resource a firm must employ in order to produce a particular output at the lowest total cost; the combination at which the the ratio of the marginal product of a resource to its marginal resource cost is the same for the last dollar spent on each of the resources employed. It is calculated by MProduct (Labor) /Price (labor) = MProduct (capital) / Price (capital)

when each resource is employed to the point at which its marginal revenue product equals its resource price. MRP (labor)/ Price (labor) = MRP (capital)/ Price (capital). Note it's not MProdcut by MRP

Firms experience lower costs as their industry expands

the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business

the price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it. P=ATC

an oligopoly in which the firms produce a standardized product

Successive and continued decreases in the prices charged by firms in an oligopolistic industry. Each firm lowers its price below rivals' prices, hoping to increase its sales and revenues at its rivals' expense.

A group of producers that typically creates a formal written agreement specifying how much each member will produce and charge

The contention that the distribution of income is equitable when each unit of each resource receives a money payment equal to its marginal contribution to the firm's revenue (its marginal revenue product)