AP Microeconomics Units 1-5

study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice

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

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

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

Comparisons of marginal benefits and marginal costs, usually for decision making

a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions

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.

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.

what to produce, how to produce it, how much to produce, who gets what is produced

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

An economic system in which individuals, not the government control the production and distribution of goods and services; also called capitalism

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all

Needs, wants, opportunity, microeconomics, and macroeconomics

Anything other than price of the current item that influences consumer buying decisions, including income, tastes and preferences, price of related items (substitutes and complements), number of consumers in the market, and expected future price.

Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).

As a price increases the quantity of the good provided increases, as the price of a good decreases, the number provided decreases.

A maximum price that can be legally charged for a good or service

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

..., 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

Ed= (change in quantity/ sum of quantities/2) / (change in price/ sum of prices/2)

A demand relationship in which the percentage change in quantity demanded is larger than the percentage change in price in absolute value (a demand elasticity with an absolute value greater than 1).

A situation in which an increase or a decrease in price will not significantly affect demand for the product (less than 1); ex. milk

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.

The quantity demanded remains the same although the price changes, i.e. demand in completely unresponsive to a change in price, zero

A situation in which even the smallest change in price will cause consumers to change their consumption by a huge amount. Buyers will purchase as much of a product or resource as is available at a constant price.

the total amount of money a firm receives by selling goods or services price x quantity

a test to determine elasticity of demand between any two prices: demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes. quantity demanded (Qd) x Price(P

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. = (%dQs) / (%d Price)

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 period of insufficient time to alter all factors of production used in the productive process - at least one input is fixed (usually plant and equipment.)

A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.

A measure of the responsiveness in quantity demanded of one good to changes in the price of another good.
% Change in Qty Demanded of X / % Change Price of Y

A measure of how much the quantity demanded of a good responds to a change in consumers' income. %change in Qty d/ %change of income

a situation in which the market on its own fails to produce in an efficient allocation of resources

impossible to charge consumers what they are willing to pay for the product

occur when a firm does not pay the full cost of producing its output

Difference between what a consumer is willing to pay for a good and the amount actually paid

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

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

A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude non-payers from receiving the benefits.

Goods and services used by all people and that cannot be withheld from people who don't help to pay for them.

In the case of a public good, some members of the community know that they can consume the public good while others provide for it. This results in a lack of private funding and forces the government to provide it

A comparison of the marginal costs of a government project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent

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

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

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

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