AP Economics Glossary

Absolute advantage is the ability of a party to produce a greater amount of a good or service than other parties using the same amount of resources.

Allocative efficiency is an economic state where no resources are wasted and the best possible resource allocation has been achieved.

Ceteris paribus is a Latin phrase meaning 'all else being equal' or 'holding all else constant'.

The circular flow model represents the flow of goods, services, and payments between households and firms in a simplified economy.

Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer.

Factors of production are the resources used in the production of goods and services, including land, labor, capital, and entrepreneurship.

Marginal analysis is the process of analyzing the additional benefits and costs arising from a change in an activity, used to make optimal decisions.

Marginal benefit is the additional satisfaction or utility a consumer enjoys from consuming one more unit of a good or service.

Microeconomics focuses on individual economic units like households and firms, while macroeconomics studies the economy as a whole.

Opportunity cost is the value of the next-best alternative you give up when you make a choice.

Positive economics is the study of what is, while normative economics is the study of what ought to be.

The Production Possibilities Curve (PPC) is a graphical representation showing the maximum combination of two goods or services that can be produced in an economy with a given set of resources and technology, assuming full and efficient use of those resources.

Productive efficiency is an economic state where a firm produces a given level of output at the lowest possible cost.

Rational self-interest is the assumption that individuals make decisions by comparing the expected marginal benefits and marginal costs of an action.

Scarcity is the fundamental economic problem of having limited resources but unlimited wants and needs.

Specialization is the concentration of an individual, firm, or country on the production of a limited scope of goods and services.

Terms of trade refers to the relative price of imports in terms of exports and is defined as the ratio of export prices to import prices.

A trade-off is the exchange of one thing for another, reflecting the reality that choosing more of one thing means having less of something else.

Change in demand is a shift of the demand curve, while change in quantity demanded is a movement along the demand curve.

Complementary goods are goods that are typically used or consumed together.

Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they pay.

Deadweight loss is the loss of total surplus that occurs when a market is not at its efficient competitive equilibrium.

Demand is the willingness and ability of consumers to buy different quantities of a good at different prices, holding all else constant.

Determinants of demand are factors that shift the demand curve, changing the quantity demanded at each price.

Determinants of supply are factors that shift the supply curve, changing the quantity supplied at each price.

The equilibrium price is the price at which quantity demanded equals quantity supplied.

An excise tax is a tax levied on the production or sale of a specific good or service.

An inferior good is a good for which demand decreases as consumers' income rises and increases as income falls.

The law of demand states that quantity demanded falls when price rises, holding all else constant.

The law of supply states that quantity supplied rises when price rises, holding all else constant.

Market equilibrium occurs when quantity demanded equals quantity supplied at a given price.

A normal good is a good for which demand increases when consumer income rises and falls when income decreases.

A price ceiling is a government-imposed maximum price that can be charged for a good or service.

A price control is a government-imposed limit on how high or low a price can be for a particular good or service.

A price floor is a government-imposed minimum price that must be paid for a good or service.

Producer surplus is the difference between the minimum price a producer is willing to accept and the actual price they receive.

Quantity demanded is the amount of a good or service consumers are willing and able to purchase at a given price.

Quantity supplied is the amount of a good or service producers are willing and able to offer for sale at a given price.

A shortage occurs when quantity demanded exceeds quantity supplied at a given price.

A subsidy is a government payment to producers to lower production costs and encourage output.

Substitute goods are goods that can be used in place of each other to satisfy a particular need or want.

Supply is the willingness and ability of producers to sell different quantities of a good at different prices, holding all else constant.

A surplus occurs when quantity supplied exceeds quantity demanded at a given price.

Tax incidence refers to the distribution of the tax burden between buyers and sellers.

Total surplus is the sum of consumer surplus and producer surplus.

Cross-price elasticity of demand measures how responsive the quantity demanded of one good is to a change in the price of another good.

Elastic demand is when the quantity demanded changes more than the price changes.

Income elasticity of demand measures how responsive the quantity demanded is to a change in consumers' income.

Inelastic demand is when the quantity demanded changes less than the price changes.

Perfectly elastic demand is when any change in price leads to an infinite change in quantity demanded.

Perfectly inelastic demand is when any change in price leads to no change in quantity demanded.

Price elasticity of demand measures how responsive quantity demanded is to a change in the good's price.

Price elasticity of supply measures how responsive the quantity supplied is to a change in price.

Unit elastic is when the percentage change in quantity demanded equals the percentage change in price.

Accounting profit is total revenue minus explicit costs, as recorded on a firm's financial statements.

Average Fixed Cost is the fixed cost per unit of output produced.

Average Product is the total output produced per unit of a variable input, typically labor.

Average Total Cost is the total cost per unit of output produced.

Average Variable Cost is the variable cost per unit of output produced.

Diseconomies of scale occur when long-run average total cost increases as output increases.

Economic profit is total revenue minus both explicit and implicit costs, including opportunity costs.

Economies of scale occur when long-run average total cost decreases as output increases.

Explicit Costs are direct, out-of-pocket payments made by a firm for inputs purchased from others.

Fixed Costs are costs that do not change with the level of output in the short run.

Implicit Costs are non-monetary opportunity costs of using the firm’s own resources.

Marginal Cost is the additional cost incurred by producing one more unit of output.

Marginal Product is the additional output produced by adding one more unit of a variable input, holding all other inputs constant.

Normal profit is the minimum return needed to keep a firm in business, equal to the opportunity cost of the owner's resources.

The short run is a period when at least one input is fixed, while the long run is a period when all inputs are variable.

A sunk cost is a cost that has already been incurred and cannot be recovered.

Total Cost is the sum of all fixed and variable costs incurred by a firm in producing a given level of output.

Total Product is the total quantity of output produced by a firm using a given amount of inputs in a specific time period.

Variable Costs are costs that change directly with the level of output in the short run.

Barriers to entry are obstacles that make it difficult for new firms to enter a market and compete with existing firms.

The break-even point is the output level where total revenue equals total cost, resulting in zero economic profit.

A cartel is a group of firms that collude to restrict competition and increase profits by acting as a single monopolist.

Collusion is an agreement between firms in a market to cooperate rather than compete, in order to limit competition and increase profits.

A dominant strategy is a strategy that results in the highest payoff for a player regardless of the strategies chosen by other players.

Excess capacity occurs when a firm produces less than the quantity that minimizes average total cost.

Game theory is a framework for analyzing strategic interactions where the outcome for each participant depends on the actions of others.

Long-run equilibrium in perfect competition occurs when firms earn zero economic profit, with price equal to minimum average total cost.

Marginal revenue is the additional revenue a firm earns from selling one more unit of output.

Monopolistic competition is a market structure with many firms selling differentiated products and facing low barriers to entry.

A monopoly is a market structure with a single seller producing a unique product with no close substitutes and significant barriers to entry.

Nash Equilibrium is a stable state of a game where no player can improve their payoff by unilaterally changing their strategy.

A natural monopoly occurs when a single firm can produce the entire market output at a lower average total cost than multiple firms could.

An oligopoly is a market structure dominated by a small number of large interdependent firms.

Perfect competition is a market structure with many small firms, identical products, free entry and exit, and perfect information.

Price discrimination is the practice of charging different prices to different consumers for the same product based on their willingness to pay.

A price maker is a firm that has the ability to set its own price rather than accept the market price as given.

A price taker is a firm that must accept the market price as given and cannot influence it through its own output decisions.

The prisoner's dilemma is a game theory scenario where two rational individuals acting in their own self-interest do not produce the optimal outcome for either.

Product differentiation is the process by which firms make their products distinct from those of competitors through features, branding, or quality.

Profit is maximized when marginal revenue equals marginal cost.

The shutdown point is the output level where price equals minimum average variable cost.

Derived demand is the demand for a factor of production that results from the demand for the goods and services it helps produce.

Economic rent is the payment to a factor of production above the minimum necessary to keep it in its current use.

A factor market is a market where firms buy the factors of production (land, labor, capital, entrepreneurship) from households.

Marginal Resource Cost (MRC) is the additional cost a firm incurs by employing one more unit of a factor of production.

Marginal Revenue Product (MRP) is the additional revenue a firm earns by employing one more unit of a factor of production.

A monopsony is a market structure with a single buyer and many sellers, giving the buyer market power.

An externality is a cost or benefit imposed on a third party who is not directly involved in the production or consumption of a good or service.

The Gini coefficient is a numerical measure of income or wealth inequality ranging from 0 (perfect equality) to 1 (perfect inequality).

The Lorenz curve is a graphical representation of income or wealth distribution within a population, comparing actual distribution to perfect equality.

Market failure is a situation where a market does not efficiently allocate resources, leading to a loss of economic efficiency.

Moral hazard occurs when one party takes greater risks because they do not bear the full consequences of those risks, often due to insurance or government protection.

A progressive tax is a tax system in which the tax rate increases as the taxpayer's income increases.

A proportional tax is a tax system in which the tax rate remains constant regardless of the taxpayer's income level.

A regressive tax is a tax system in which the tax rate decreases as the taxpayer's income increases, placing a higher relative burden on lower-income individuals.

CPI is a measure of inflation.

The expenditure approach calculates GDP by summing all final spending on goods and services produced within a country.

Final goods are finished products.

The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy.

Gross Domestic Product is the total market value of all final goods and services produced within a country in a given period of time.

Intermediate goods are unfinished products.

Nominal GDP is the value of all final goods and services produced in a given year, evaluated at current-year prices.

Nominal values are not adjusted for inflation.

Per capita GDP is the total GDP of a country divided by its population, measuring average economic output per person.

Real GDP is the value of all final goods and services produced in a given year, evaluated at base-year prices to remove the effects of inflation.

Value added is the value of output minus inputs.

Cost-push inflation is caused by increased costs.

Cyclical unemployment is unemployment that occurs due to a decline in economic activity during a recession.

Deflation is a sustained price decrease.

Demand-pull inflation is caused by excess demand.

Discouraged workers are people who have given up looking for work because they believe no jobs are available for them.

Disinflation is a decrease in inflation rate.

Frictional unemployment is short-term unemployment that occurs when people are between jobs or looking for their first job.

Full employment is the level of employment where there is no cyclical unemployment.

Inflation is a sustained price increase.

Inflation rate is the percentage change in CPI.

The labor force is the total number of people aged 16 and over who are employed or actively seeking employment.

The labor force participation rate is the percentage of the civilian non-institutional population that is in the labor force.

The natural rate of unemployment is the lowest level of unemployment that can be sustained without causing inflation to rise.

Real wages are wages adjusted for inflation, while nominal wages are the actual dollar amount of wages received.

Structural unemployment is long-term unemployment that occurs when workers' skills do not match the jobs available.

Unemployment rate is the percentage of unemployed workers.

The business cycle is the fluctuation in economic activity over time, characterized by periods of expansion and contraction.

An expansion is a period of increasing economic activity, characterized by rising output, employment, and income.

An inflationary gap is the difference between actual real GDP and full-employment real GDP when actual exceeds full employment.

The output gap is the difference between actual real GDP and potential real GDP.

The peak is the highest point of economic activity in a business cycle.

A recession is a significant decline in economic activity lasting more than a few months.

A recessionary gap is the difference between full-employment real GDP and actual real GDP when actual is less than full employment.

The trough is the lowest point of economic activity in a business cycle.

The AD-AS model explains real output and the price level as the intersection of aggregate demand and aggregate supply.

Aggregate demand is the total demand for final goods and services in an economy at a given time.

Aggregate supply is the total supply of final goods and services in an economy at a given time.

The interest rate effect is the change in investment that results from a change in the interest rate due to a change in the price level.

Long-run aggregate supply is the total supply of goods and services when all factors of production are fully employed.

The marginal propensity to consume is the fraction of each additional dollar of disposable income that households spend.

The net export effect is the change in net exports that results from a change in the price level.

Short-run aggregate supply is the total supply of goods and services at different price levels, holding factor costs and resource prices constant.

The wealth effect is the change in consumption that results from a change in the real value of wealth.

Crowding out is the fall in private investment that happens when government borrowing pushes up real interest rates.

Fiscal policy is the government's use of spending and taxation to influence aggregate demand and the economy.

Fiscal and monetary policy both steer aggregate demand, but fiscal policy uses spending and taxes while monetary policy uses the money supply and interest rates.

The interest rate the Federal Reserve charges commercial banks for short-term loans.

The interest rate at which banks lend their excess reserves to other banks overnight.

Monetary policy is the central bank's use of the money supply and interest rates to influence the economy.

A theory stating that the general price level of goods and services is directly proportional to the amount of money in circulation.

The percentage of deposits that banks are legally required to hold as reserves rather than lend out.

The average frequency with which a unit of money is spent in a given period.

The inverse relationship between bond prices and market interest rates.

The relationship between the nominal interest rate, real interest rate, and expected inflation.

The market where savers supply funds and borrowers demand funds for investment, determining the real interest rate.

The stated interest rate on a loan or investment without adjusting for inflation.

The Phillips curve shows the short-run inverse relationship between the inflation rate and the unemployment rate.

The portion of disposable income that households and businesses do not spend on consumption.

The nominal interest rate adjusted for inflation, reflecting the true cost of borrowing or return to saving.

A curve showing the inverse relationship between inflation and unemployment in the short run.