AP Microeconomics First Semester Review

1.Freedom
2. Equity
3. Efficiency
4.Growth
5. Security

freedom for consumers to decide how to spend or save their incomes, the freedom for workers to change jobs and join unions, and the freedom of individuals to establish new businesses or close old ones

the attempt to balance an economic policy so that everyone benefits fairly

how well productive resources are allocated with the costs and benefits of using those resources
-is improved only if the additional benefits exceed the additional costs

increasing the production of goods and services over time; measured in real gross domestic product

protection against economic risks such as work injuries, unemployment, inflation, business failures, and poverty

1. Traditional
2. Command
3. Market

Economic activity stems from customs, rituals and habits. Example is the Inuits (Eskimos)

Central authority makes decisions regarding resources and production; government ownership of resources. Example is communism.

Individual and firms act in own self interest; characterized by private ownership and voluntary exchange. Examples are the USA, Australia, and New Zealand.

In reality, most economies have some characteristics of each of the three main types of economies

1. What to produce?
2. How to produce?
3. For whom to produce?

A good model is useful for prediction, captures only the essential relationships of a particular problem, and is empirically tested.

the fact that people's needs and wants always exceed the available resources

the choices that must be made because of scarcity in which we give up some things to have others ("choosing is refusing")

the specific cost of a choice in terms of the "best alternative forgone"
-not usually in $
-subjective measure (varies from person to person)
-only the next best choice, not all other possible choices

the perceived benefits or rewards associated with choosing a particular course of action
-"people respond to incentives"

1. Land (natural resources)
2. Labor (people in the work force + their skills and abilities)
3. Capital (money [financial capital] or equipment [physical capital])
4. Entrepreneurship (the risk taking, organizational and managerial skills needed to produce goods and services)

the risk taking, organizational and managerial skills needed to produce goods and services

The assumption that nothing changes except the factor or factors being studied.

Doesn't mean that people always understand the rational for their actions, but that they don't intentionally make decision that would leave them worse off.

An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works. FACT

An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics. OPINION

Study of a single factor of an economy - such as individuals, households, businesses, & industries - rather than an economy as a whole.

Concentrates on the operation of a nation's economy as a whole

Goods or services that are scarce and have a cost

Goods, such as life, love, freedom, equality, health, beauty, whose value is such that it cannot be measured in economic terms

Societies pool of applied knowledge concerning the production of goods and services

one who can produce a good or service at a lower opportunity cost; whoever is sacrificing less per unit produced

The ability to produce a good using fewer inputs than another producer (whether it be time or resources)

the quantity of a product that people are willing and able to buy at various prices

As a price increases, quantity demanded decreases and vice versa.

The price of one good or service relative to other goods or services. Consumers respond to relative prices.

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

A graph of the relationship between the price of a good and the quantity demanded; a graphic representation of a demand schedule

1. Change in Consumer Tastes
2. Income Effect
3. Population Effect
4. Substitute Effect
5.Complement Effect
6. Expectations

-a change in consumer tastes in favor of the good or product
-if the good isn't inferior, an increase in income
-increase in the population
-the price of a substitute good increases
-the price of a complement good decreases
-expectations that in the near future the good will increase in price

-a change in consumer tastes at the expense of the good
-if the good isn't inferior, a decrease in income
-decrease in population
-the price of a substitute good decreases
-the price of a complement good increases
-expectation that in the near future the good will decrease in price

the demand curve will shift right (increase) or left (decrease)

sliding along the demand curve upward (decreasing) or downward (increasing)

the quantity of a product that people are willing and able to sell at various prices

As price increases, quantity supplied increases.

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

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

1. Technology
2. Productivity
3. Cost of Inputs (Resources)
4. # of Sellers
5. Taxes and Subsidies
6. Government Regulation
7. Expectations
8. Other Production/Profit Opportunities

-worsened technology
-decreased productivity
-more expensive resources
-decreased # of sellers
-a tax
-setting a government regulation
-expectations that a good can be sold for a higher price in the future

-improved technology
-higher or improved productivity
-cheaper resources
-increased # of sellers
-a subsidy
-lifting a government regulation
-expectations that a good can be sold for a lower price in the future

the supply curve moves to the left (decreases) or right (increases)

moves along the supply curve upward (increases) and downward (decreases)

Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price, a situation in which quantity demanded equals quantity supplied

when the quantity supplied exceeds the quantity demanded

when the quantity demanded exceeds the quantity supplied

Increase in Supply: Price falls, quantity demanded rises
Decrease in Supply: Price rises, quantity demanded falls
Increase in Demand: Price rises, quantity demanded rises
Decrease in Demand:Price falls, quantity demanded falls

↑ in supply and ↓ in demand: price ↓, QD is indeterminate
↑ in supply and ↑ in demand:price is indeterminate, QD ↑
↓ in supply and ↓ in demand: price is indeterminate, QD ↓
↓ in supply and ↑ in demand: price ↑ and QD is indeterminate

occurs when there is a legal maximum price that can be charged for goods or services
-leads to prolonged shortages if the ceiling is set below the market equilibrium
-leads to non-price rationing devices such as long lines, "queuing," lotteries, bribery, discrimination
-often leads to a black market
-examples are rent control or concert tickets

occurs when there is a legal minimum price that can be charged for goods or services
-leads to prolonged surpluses if floor set above equilibrium
-examples are agricultural price supports, minimum wage

"the want-satisfying power of a good or service," satisfaction or benefit (of consuming a good)

The total amount of satisfaction obtained from consumption of a good or service.

Satisfaction or usefulness obtained from acquiring one or more unit of a product

as more units of a good or service are consumed, the satisfaction derived from each additional unit decreases
-a reason why the demand curve slopes downward

A choice of a set of goods and services that maximizes the level of satisfaction for each consumer, subject to limited income (consumer surplus is maximized)
-MUᴀ/Pᴀ = MUᴃ/Pᴃ must equal to achieve this

the difference between total utility and total expenditure

when the price of a good drops, it increases the MU/P, causing the consumer to substitute the good for other goods

when the price of a good drops, it increases the purchasing power of those who buy the good. The consumer is now likely to buy more of the good, and may increase their purchase of the other goods as well.
-A ↓ in price could ↑ real income.

how much quantity demanded changes in response to a price change
% change in QD/% change in price (%ΔQD/Δ%P)

when given ranges instead of percentages, we must use this method.
ΔQD/AvgQD divided by ΔP/AvgP

if a price change causes a larger change in quantity demanded
-people are highly responsive to the price change of the good
-elasticity is greater than one
-example is airline tickets for vacationers

if a price change causes similar change in quantity demanded
-people are not very responsive to the price change of the good
-elasticity is less than one
-examples are water, gas, toothpaste, toiletries, drugs, airlines for business people

Change in price causes the exact opposite change in quantity demanded.

demand in which quantity drops to zero at the slightest increase in price (infinitely responsive to price).
-elasticity is infinity
-curve is perfectly horizontal
-example good is money

The case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.
-example goods are heroine, cancer treatment, retro-viral drugs, medical care, electricity

A measure of the responsiveness in quantity demanded of one good to changes in the price of another good.
-% change in QD of good B/% change in price of good A (%ΔQDᴃ/Δ%Pᴀ)

Measures how the quantity demanded changes as consumer income changes
-% change in QD/% change in income (%ΔQD/Δ%Income)

how much quantity supplied changes in response to a price change
% change in QS/% change in price (%ΔQS/Δ%P)

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-high level of efficiency
-security and certainty
-everyone knows their role
-stable and predicatable

-very little innovation
-stunted growth or progress

-can make dynamic changes quickly

-wants and needs of consumers often unmet
-little individual incentive or individualism
-large bureacracy

-incredible variety of goods and services
-high degree of innovation
-high consumer satisfaction
-individual freedom

-rewards only most productive (the sick and old are victimized)
-market failures occur because perfect competition is very rare

an illegal market in which goods or currencies are bought and sold in violation of rationing or controls

All methods used to ration scarce goods that are price-controlled.
-examples are long lines, "queuing," discrimination, lotteries, bribery

Price ↑ total revenue unchanged
Price ↓ total revenue unchanged

Price ↑ total revenue ↓
Price ↓ total revenue ↑

Price ↑ total revenue ↑
Price ↓ total revenue ↓

-availability of substitutes
-necessity v luxury
-share or percentage of budget
-time for adjustment

1. It's everywhere and the key to know the world around you
2. Personal success and financial security
3. Good citizenship

the fact that opportunity cost of additional units of a good generally increases as we try to produce more of that good. This accounts for the bowed-out shape of the production possibilities curve; lower per-unit returns for every additional unit

-improvement in technology
-increase in capital goods
-acquisition of new resources

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good