KEY TERMS
(Subunit in which the term is covered is in parentheses)
Absolute Advantage: When a country or firm has superior production capabilities than other countries or firms in a specific good. (2.10)
Accounting Profits: All the revenue a firm gets minus any costs it pays out. Accounting profits do not include opportunity costs. Accounting Profit = Total Revenue - Explicit Costs. (3.5)
Anti-Trust Law: Laws that ban the collusion (or other anti-competitive behavior) between firms in the same market. The law is designed to protect consumers. (6.6 Application)
Average Fixed Cost: Total fixed cost divided by the number of units produced. (3.3 Graphical)
Average Total Cost (or Average Cost): Total cost divided by the number of units produced. (3.3)
Average Variable Cost: Variable cost divided by the number of units produced. (3.3)
Barriers to Entry: Initial fixed costs that a new firm must face if they want to enter a market. (4.3)
Budget Constraint: Graph that displays all the goods a consumer can purchase given her total resources. (1.6)
Capital: Factor of production that a firm uses to create output which isn't labor, such as machinery or factories. (5.5)
Capital Market: Pool of money that firms can draw from in order to make investments, including bank loans, stocks, and bonds. (5.5)
Cartel: Group of producers with an agreement to work together to limit output and increase profit. (4.4 Application)
Causation vs. Correlation: Causation is when one thing causes another. Correlation is when as one thing increases, another thing also increases. Correlation does not imply causation. (Non-AP Topics)
Club Goods: Goods that are non-rival and excludable. (6.5)
Common Goods: Goods that are rival and non-excludable. (6.5)
Comparative Advantage: When a country or firm can produce a good at a lower opportunity cost than another country or firm. (2.9)
Consumption Externality (Demand-Side Externality): Externalities that arise from the process of consumption. (6.3 Graphical)
Constant Returns to Scale: When multiplying inputs by N causes output to be multiplied by N. Alternatively, when an increase in inputs does not change the average cost of production. (3.4)
Constrained Optimization: Making the best with what you have, or choosing to maximize something, such as utility or profit, given some constraint, such as a budget or costs and prices. (1.6)
Consumer Surplus: Amount by which the willingness to pay for a good exceeds the price paid for that good. (2.4)
Cross-Price Elasticity: Measures the responsiveness of the quantity demanded for one good to the change in price of another good. Mathematically: [% change in Q of good X] / [% change in P of good Y]. (2.1)
Dead-Weight Loss: Surplus that is lost when a mutually beneficial trade no longer occurs, but would have under perfect competition. (2.6)
Decreasing Returns to Scale (Diseconomies of Scale): When multiplying inputs by N causes output to be multiplied by less than N. Alternatively, when an increase in inputs increases the average cost of production. (3.4)
Demand Curve: Shows the relationship between the price of a good and the quantity demanded. (2.1)
Diminishing Marginal Product of Labor: With each additional worker hired, total output increases by less than it did when the previous worker was hired. (3.2)
Diminishing Marginal Utility: A common assumption in consumer theory, which holds that each additional unit of a good increases utility by less than the previous unit of the good. (1.5)
Dominant Strategy: In game theory, a strategy which is better than all other strategies -- no matter what the other players choose. (4.5)
Economic Profits: All the revenue a firm gets minus any costs it pays out, including opportunity costs. Economic Profit = Total Revenue - Explicit Costs - Implicit Costs. (3.5)
Elasticity: Measure of the responsiveness of one variable to changes in another. Mathematically: [% change in one variable] / [% change in another]. (2.1)
Exports: Value of goods a country sells to the rest of the world. (2.8)
Factor Endowments: A country's land and other resources that contribute to its production capacity and comparative advantage. (2.9)
Fixed Cost: Any costs the firm must pay that don't depend on the quantity of output produced. (3.3)
Free Rider Problem: When people can benefit from goods they don't produce or pay for. (6.5)
Free Trade: International trade without any restrictions, tariffs, or quotas. (2.8)
Giffen Good: Good which experiences a rise in demand when its price increases. (2.2 Graphical)
Imports: Value of goods a country buys from the rest of the world. (2.8)
Income Effect: Change in quantity demanded because of a change in income, holding prices constant. (2.2)
Income Elasticity of Demand: Measures how the quantity demanded responds to a change in income. Mathematically: [% change in Q demanded] / [% change in income]. (2.2)
Increasing Returns to Scale (Economies of Scale): When multiplying all inputs by N causes output to be multiplied by more than N. Alternatively, when an increase in inputs decreases the average cost of production. (3.4)
Indifference Curves: Graphical representation of a consumer's preferences of one good versus another. Each curve shows all the bundles of goods which keep utility constant. (1.4)
Individual Demand: Demand that one individual has for a particular good at different prices. (2.1)
Inferior Goods: Goods you consume more of when your income goes down (alternatively, goods you consume less of when your income goes up). (2.2)
Interest Rate: Price of capital in the capital market. (5.5)
Leisure: Free time for enjoyment. (5.1)
Long Run: Time frame in which both capital and labor is a variable input. (3.4)
Market Demand: Sum of individual demand curves to show the total demand of all the consumers in the market. (2.1)
Marginal Benefit: Increase in utility from an additional unit of a good. (1.7)
Marginal Cost: Cost of producing an additional unit of a good. (3.3)
Marginal Cost Curve: Increase in total cost for a firm of producing an additional unit of a good. (3.3 Graphical)
Marginal Product of Capital: Change in output resulting from an increase in capital, holding other inputs constant. (5.3)
Marginal Product of Labor: Change in output resulting from hiring one extra worker, holding other inputs constant. (5.3)
Marginal Revenue of Product of Labor: Change in revenue resulting from hiring one extra worker, holding other inputs constant. Marginal Revenue Product = Marginal Product * Price. (5.3)
Marginal Utility: Change in utility from consumption of an additional unit of a good. (1.5)
Market Failures: Occurs when the free market doesn't lead to the most efficient welfare-maximizing outcome. (6.3)
Market Power: Ability to price at a level higher than marginal cost. (4.1)
Minimum Wage: Lowest possible wage that workers can be legally paid; usually this is enforced by the government. (5.1)
Monopolistic Competition: Type of imperfect competition that is a mix between a monopoly and perfect competition. Like a monopoly, each firm is the only firm that can sell its good (and has market power), but other firms can make nearly identical goods to compete with the firm. (4.6)
Monopoly: Market with only one firm. (4.1)
Monopsony: Market with only one buyer. (5.6)
Nash Equilibrium: In game theory, a Nash Equilibrium occurs when each player has chosen a strategy that it will not want to change, given what the other players have chosen. (4.5)
Natural Monopoly: A type of monopoly that occurs when fixed costs are incredibly high, which means average total cost is always dropping as output increases. (4.3)
Negative Externality: In a mutually beneficial trade between two people (A and B), a negative externality occurs when a third party (person C) is negatively affected by the trade, but neither person A or B bear this cost. (6.3)
Non-Excludable: When a firm can't prevent people from consuming the good without paying for it. (6.5)
Non-Rival: When more than one person can consume the same unit of the good at same time. (6.5)
Normal Goods: Goods you consume less of when your income goes down (alternatively, goods you consume more of when your income goes up). (2.2)
Oligopoly: Market structure with only a few firms, each with some market power. (4.4)
Opportunity Cost: Cost of any action in terms of what you could have done instead. (1.1)
Patent: Legal exclusive right given to a firm to sell its product for a specified period of time; a way that the government can create a monopoly. (3.5 Application)
Perfect Competition: Market structure where there is a large number of firms in a market, where no single firm can affect the price, and when there are low (or no) barriers to entry. (3.5)
Poisoning Effect: When the sale of an additional good lowers the revenue that a monopoly can receive from its previous sales. (4.1)
Positive Externality: In a mutually beneficial trade between two people (A and B), a positive externality occurs when a third party (person C) is positively affected by the trade, but neither person A or B get any of this benefit. (6.3)
Price Discrimination: When a monopoly charges different consumers different prices based on each consumer's willingness to pay. (4.2)
Price Elasticity of Demand: Measure of how much quantity demanded changes when the price changes. Mathematically: [% change in Q] / [% change in P]. (2.1)
Private Goods: Goods that are rival and excludable. (6.5)
Producer Surplus: Amount by which the price of a good exceeds the firm's willingness to supply that good. (2.5)
Production Externality (Supply-Side Externality): Externalities that arise from the process of production. (6.3)
Production Function: Function that represents how a firm's inputs translate into output. (3.1)
Production Possibilities Frontier: Shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced. (2.9)
Profit: Total revenue minus total cost. (3.5)
Public Goods: Goods that are non-rival and non-excludable. (6.5)
Redistribution: In order to create economic equality, wealth from the rich is transferred to the poor, usually through tax systems and government spending programs. (6.2)
Regulation: When the economy is controlled, usually by the government, in order to achieve social optimal outcome. (6.4)
Returns to Scale: Change in production resulting from increasing (or decreasing) all inputs at the same rate. (3.4)
Short Run: Time frame in which capital is a fixed input but labor is a variable input. (3.2)
Shut-Down Price: The price below which it makes no sense for a firm to keep producing. In the short run, the shut-down price is average variable cost. In the long run, the shut-down price is average total cost. (3.7)
Specialization: When a firm or country concentrates their production on a certain good in order to increase efficiency in the economy. (3.4 Application)
Substitution Effect: Change in quantity demanded when a good's price changes, holding income constant. (2.2)
Sunk Costs: Costs that have already been incurred and cannot be recovered. (3.3)
Tax Incidence: Measure of who bears the economic burden of taxes. (2.7)
Total Cost: All of a firm's costs from producing a set units of output. Mathematically, it equals the sum of the firm's fixed and variable costs. (3.3)
Total Welfare: Total well-being of society, equal to consumer surplus + firm surplus, + government revenue (if any) minus any deadweight loss. (2.6)
Trade Deficit: When the imports of a country are greater than their exports. (2.8)
Utility Function: Mathematical expression that translates bundles of goods into a single valuation of utility. (1.5)
Variable Cost: All costs a firm pays that are not fixed costs. (3.3)
Wage: Price of hiring another unit of labor. (5.1)