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AP Microeconomics Key Terms

Supply and demand, costs, market structures, factor markets and market failure.

89 cardsGrades 9–12, College#ap#economics#micro

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  • Law of demandTerm
    As price rises, quantity demanded falls
  • Law of supplyTerm
    As price rises, quantity supplied rises
  • Equilibrium priceTerm
    Price where quantity demanded equals quantity supplied
  • ShortageTerm
    Quantity demanded exceeds quantity supplied
  • SurplusTerm
    Quantity supplied exceeds quantity demanded
  • Substitute goodsTerm
    Goods used in place of each other; price of one up raises demand for the other
  • Complementary goodsTerm
    Goods used together; price of one up lowers demand for the other
  • Normal goodTerm
    Demand rises as income rises
  • Inferior goodTerm
    Demand falls as income rises
  • Price elasticity of demandTerm
    How sensitive quantity demanded is to a price change
  • Elastic demandTerm
    Elasticity greater than 1
  • Inelastic demandTerm
    Elasticity less than 1
  • Total revenue testTerm
    If price and total revenue move opposite ways, demand is elastic
  • Cross-price elasticityTerm
    Response of demand for one good to another good's price
  • Income elasticityTerm
    Response of demand to a change in income
  • Consumer surplusTerm
    Difference between what buyers would pay and what they do pay
  • Producer surplusTerm
    Difference between price received and the minimum a seller would accept
  • Deadweight lossTerm
    Lost total surplus from inefficiency
  • Price ceilingTerm
    Legal maximum price
  • Price floorTerm
    Legal minimum price
  • Tax incidenceTerm
    Who actually bears a tax
  • Marginal utilityTerm
    Added satisfaction from one more unit
  • Diminishing marginal utilityTerm
    Each extra unit gives less added satisfaction
  • Utility-maximizing ruleTerm
    MU per dollar equal across goods
  • Budget constraintTerm
    The combinations of goods affordable with income
  • Explicit costTerm
    Out-of-pocket payment
  • Implicit costTerm
    Opportunity cost of using one's own resources
  • Accounting profitTerm
    Revenue minus explicit costs
  • Economic profitTerm
    Revenue minus explicit and implicit costs
  • Marginal productTerm
    Extra output from one more unit of input
  • Law of diminishing returnsTerm
    Adding more of a variable input eventually adds less output
  • Fixed costTerm
    Cost that does not change with output
  • Variable costTerm
    Cost that changes with output
  • Marginal costTerm
    Cost of producing one more unit
  • Average total costTerm
    Total cost divided by quantity
  • MC crosses ATCTerm
    Marginal cost meets average total cost at ATC's minimum
  • Economies of scaleTerm
    Falling long-run average cost as output grows
  • Diseconomies of scaleTerm
    Rising long-run average cost as output grows
  • Profit-maximizing ruleTerm
    Produce where marginal revenue equals marginal cost
  • Perfect competitionTerm
    Many sellers, identical products, price takers, free entry
  • Price takerTerm
    A firm that cannot affect market price
  • Shutdown ruleTerm
    Shut down if price falls below average variable cost
  • Long-run competitive equilibriumTerm
    Price equals minimum ATC; zero economic profit
  • MonopolyTerm
    A single seller with barriers to entry
  • Barriers to entryTerm
    Obstacles that prevent new firms from joining a market
  • Natural monopolyTerm
    One firm can supply the market at lower cost than several
  • Price discriminationTerm
    Charging different customers different prices for the same good
  • Monopolistic competitionTerm
    Many sellers with differentiated products and free entry
  • OligopolyTerm
    A few large interdependent firms
  • CollusionTerm
    Firms cooperating to restrict competition
  • CartelTerm
    A group of firms that agree to limit output and set prices
  • Game theoryTerm
    Study of strategic decision-making
  • Dominant strategyTerm
    Best choice regardless of what others do
  • Nash equilibriumTerm
    No player can gain by changing their own strategy alone
  • Prisoner's dilemmaTerm
    A game where individual incentives lead to a worse shared outcome
  • Kinked demand curveTerm
    Oligopoly model with sticky prices
  • Herfindahl-Hirschman IndexTerm
    Measure of market concentration
  • Derived demandTerm
    Demand for a resource that comes from demand for the product
  • Marginal revenue productTerm
    Extra revenue from one more unit of a resource
  • Hiring ruleTerm
    Hire until marginal revenue product equals the resource price
  • MonopsonyTerm
    A market with a single buyer
  • Minimum wageTerm
    A legal price floor for labor
  • Wage determinationTerm
    Set by labor supply and demand
  • ExternalityTerm
    A cost or benefit borne by a third party
  • Negative externalityTerm
    Pollution-type cost imposed on others
  • Positive externalityTerm
    Benefit to others, like vaccination
  • Pigouvian taxTerm
    A tax set to equal an external cost
  • SubsidyTerm
    Government payment to encourage a good
  • Public goodTerm
    Non-excludable and non-rival
  • Free-rider problemTerm
    Benefiting without paying
  • Common resourceTerm
    Rival but non-excludable good, prone to overuse
  • Tragedy of the commonsTerm
    Overuse of shared resources
  • Coase theoremTerm
    Parties can solve externalities by bargaining if costs are low and property rights are clear
  • Allocative efficiencyTerm
    Producing what society values most, P = MC
  • Productive efficiencyTerm
    Producing at minimum average total cost
  • Marginal social benefitTerm
    Total benefit to society of one more unit
  • Asymmetric informationTerm
    One party knows more than the other
  • Adverse selectionTerm
    Hidden characteristics lead to poor market outcomes
  • Moral hazardTerm
    Risky behavior because someone else bears the cost
  • Gini coefficientTerm
    Measure of income inequality from 0 to 1
  • Lorenz curveTerm
    Graph of cumulative share of income by population share
  • Antitrust lawTerm
    Rules promoting competition and limiting monopoly power
  • Circular flow modelTerm
    Shows flows between households and firms through markets
  • CapitalTerm
    Goods used to produce other goods
  • Short runTerm
    Period in which at least one input is fixed
  • Long runTerm
    Period in which all inputs are variable
  • Total surplusTerm
    Consumer surplus plus producer surplus
  • Elasticity of supplyTerm
    Responsiveness of quantity supplied to price
  • Rent seekingTerm
    Spending resources to gain favorable treatment

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