AP Microeconomics Midterm Review

Substitute Product

A "substitute" or "substitute good" in economics and consumer theory is a product or service that a consumer sees as the same or similar to another product. In the formal language of economics, X and Y are substitutes if the demand for X increases when the price of Y increases, or if there is a positive cross elasticity of demand.

Budgetary Constraint

A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference map to analyze consumer choices.

Derived Demand

A demand for a commodity, service, etc., that is a consequence of the demand for something else.

Optimal Method of Production

A firm has at least one fixed factor of production. ... when the marginal product of the variable input declines when additional units are added to the production process. The optimal method of production is. the production method that minimizes cost for a given level of output.

Price Ceiling

A price ceiling is a government-imposed price control, or limit, on how high a price is charged for a product. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive.

Fixed Costs

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any business activity.

Efficient Markets

A market in which profit opportunities are eliminated almost instantaneously.

Operating Loss

A net operating loss (NOL) is a loss taken in a period where a company's allowable tax deductions are greater than its taxable income. When more expenses than revenues are incurred during the period, the net operating loss for the company can generally be used to recover past tax payments.

Shifts in Demand

A positive change in demand amid constant supply shifts the demand curve to the right, the result being increases in price and quantity. A negative change in demand shifts the curve left, and price and quantity both fall.

Price Floor

A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage--the minimum price that can be payed for labor. ... For a price floor to be effective, it must be set above the equilibrium price.

Operating Profit

A profit from business operations (gross profit less operating expenses) before deduction of interest and taxes.

Normal Rate of Return

A rate of return is the gain or loss on an investment over a specified time period, expressed as a percentage of the investment's cost. Gains on investments are defined as income received plus any capital gains realized on the sale of the investment.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Variable Costs

A variable cost is a corporate expense that changes in proportion with production output. Variable costs increase or decrease depending on a company's production volume; they rise as production increases and fall as production decreases.

Accounting Profit

Accounting Profit = Total Revenue - Total Explicit Cost

Perfectly Inelastic

An economic situation in which the price of a product will have no effect on the supply. In a perfectly inelastic situation regardless of the amount of a product on the market, the price of the product remains the same. Perfectly inelastic is the opposite of perfectly elastic.

Supply Determinants

Aside from prices, other determinants of supply are resource prices, technology, taxes and subsidies, prices of other goods, price expectations, and the number of sellers in the market. Supply determinants other than price can cause shifts in the supply curve.

Capital

Capital has a number of related meanings in economics, finance and accounting. In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business. In classical economics, capital is one of the three factors of production. The others are land and labor.

Sunk Costs

Costs that have already been incurred and cannot be recovered.

Deadweight Loss

Deadweight loss is the fall in total surplus that results from a market distortion, such as a tax. In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable.

Unit Elastic

Describes a supply or demand curve which is perfectly responsive to changes in price. That is, the quantity supplied or demanded changes according to the same percentage as the change in price. A curve with an elasticity of 1 is unit elastic.

Diseconomies of Scale

Diseconomies of scale is an economic concept referring to a situation in which economies of scale no longer functions for a firm. With this principle, rather than experiencing continued decreasing costs and increasing output, a firm sees an increase in marginal costs when output is increased.

Economic Profit

Economic Profit = Total Revenue - (Total Explicit + Total Implicit Cost) Implicit Costs mean Opportunity Costs.

Consumer Goods

Goods bought and used by consumers, rather than by manufacturers for producing other goods. Often contrasted with capital goods.

Marginal Product

In economics and in particular neoclassical economics, the marginal product or marginal physical product of an input (factor of production) is the change in output resulting from employing one more unit of a particular input (for instance, the change in output when a firm's labor is increased from five to six units), assuming that the quantities of other inputs are kept constant.

Complimentary Product

In economics, a complementary good or complement is a good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good's demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased.

Shutdown Point

In economics, a firm will choose to implement a shutdown of production when the revenue received from the sale of the goods or services produced cannot even cover the fixed costs of production.

Production Function

In economics, a production function relates quantities of physical output of a production process to quantities of physical inputs or factors of production.

Excess Demand

In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply.

Excess Supply

In economics, an excess supply or economic surplus is a situation in which the quantity of a good or service supplied is more than the quantity demanded, and the price is above the equilibrium level determined by supply and demand.

Marginal Curve

In economics, marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good.

Constant Returns to Scale

In economics, returns to scale and economies of scale are related but different terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable.

Marginal Product of Labor

In economics, the marginal product of labor (MPL) is the change in output that results from employing an added unit of labor.

Long Run

In the long run, firms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels.

Production Technology

In the simplest sense, production technology is the machinery that makes creating a tangible physical product possible for a business. To the small business, this means a workshop at the very least, with more elaborate operations making use of machines and assembly lines.

Factors of Production

Land, labor, and capital; the three groups of resources that are used to make all goods and services.

Marginal Revenue Product

Marginal revenue product (MRP), also known as the marginal value product, is the market value of one additional unit of output. The marginal revenue product is calculated by multiplying together the marginal physical product (MPP) by the marginal revenue.

Marginal Utility

Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important economic concept because economists use it to determine how much of an item a consumer will buy.

Marginalism

Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. The reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water. Thus, while the water has greater total utility, the diamond has greater marginal utility.

Normative Economics

Normative economics is a part of economics that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be. Economists commonly prefer to distinguish normative economics from positive economics. Many normative judgments, however, are held conditionally, to be given up if facts or knowledge of facts changes, so that a change of values may be purely scientific.

Positive Economics

Positive economics is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories. An earlier term was value-free economics.

Price Elasticity

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes.

Producer Surplus

Producer surplus is an economic measure of the difference between the amount a producer of a good receives and the minimum amount the producer is willing to accept for the good. The difference, or surplus amount, is the benefit the producer receives for selling the good in the market.

Productivity

Productivity is an economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in revenues and other gross domestic product (GDP) components such as business inventories.

Profit Maximizing Point

Profit Maximization. The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output.

Quantity Demanded

Quantity demanded is a term used in economics to describe the total amount of goods or services demanded at any given point in time. It depends on the price of a good or service in the marketplace, regardless of whether that market is in equilibrium.

Quantity Supplied

Quantity supplied is the quantity of a commodity that producers are willing to sell at a particular price at a particular point of time. Description: Different quantities can be supplied at different prices at a particular point of time.

Revenue

Revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover.

Production Possibilities Curve

Shows the maximum level of efficiency based on what resources are allocated where.

Elastic

That any change in price can result in changes in supply or demand. The inelastic product means that changes in price do not affect to a noticeable degree the supply or demand. ... At a price of $1.50, the quantity demanded is three units.

Long Run Average Cost Curve

The Long Run Average Cost, LRAC, curve of a firm shows the minimum or lowest average total cost at which a firm can produce any given level of output in the long run (when all inputs are variable).

Comparative Advantage

The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.

Absolute Advantage

The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.

Marginal Cost

The cost added by producing one additional unit of a product or service.

Demand Schedule

The demand schedule, in economics, is a table of the quantity demanded of a good at different price levels. Given the price level, it is easy to determine the expected quantity demanded. This demand schedule can be graphed as a continuous demand curve on a chart where the Y-axis represents price and the X-axis represents quantity.

Consumer Surplus

The difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).

Costs

The expenses involved with manufacturing, promoting, and distributing a product.

Law of Demand

The law of demand is a microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

Law of Diminishing Marginal Utility

The law of diminishing marginal utility is a law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

Law of Diminishing Returns

The law of diminishing returns, also referred to as the law of diminishing marginal returns, states that in a production process, as one input variable is increased, there will be a point at which the marginal per unit output will start to decrease, holding all other factors constant.

Law of Supply

The law of supply is a fundamental principle of economic theory which states that, all else equal, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes.

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen.

Profits

The monetary gain through business. The money made after paying expenses.

Diamond and Water Paradox

The paradox of value (also known as the diamond-water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.

Perfectly Elastic

The product, that means the demand is perfectly inelastic. ... And graphically this is a completely horizontal demand curve. And we call this a perfectly elastic demand curve. That's a situation where even a small change in price, causes an infinite change in quantity.

Consumer Sovereignty

The role of consumer as ruler of the market when determining the types of goods and services produced.

Short Run

The short run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short run does not refer to a specific duration of time but rather is unique to the firm, industry or economic variable being studied.

Perfect Competition

The situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers.

Average Product

The term average product refers to the average output (or products) produced by each input (factors of production like labor and land). It's a way for companies to measure total output produced with a particular combination of variable inputs. In our example, it's the average number of tents produced by each worker. Mike can calculate average production if he measures the company's total output of tents per each working employee it requires to make them.

Utility Maximizing Rule

To obtain the greatest utility the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.

Total Costs

Total cost refers to the total expense incurred in reaching a particular level of output; if such total cost is divided by the quantity produced, average or unit cost is obtained. A portion of the total cost known as fixed cost.

Total Utility

Total utility is the total satisfaction received from consuming a given total quantity of a good or service, while marginal utility is the satisfaction gained from consuming another quantity of a good or service. Sometimes, economists like to subdivide utility into individual units that they call utils.

Utility

Used to describe the measurement of "useful-ness" that a consumer obtains from any good. Utility may measure how much one enjoys a movie, or the sense of security one gets from buying a deadbolt. The utility of any object or circumstance can be considered.

Inelastic

Used to describe the situation in which the quantity demanded or supplied of a good or service is unaffected when the price of that good or service changes.

Economies of Scale

What is 'Economies Of Scale' Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are spread out over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies. Economies of scale can be classified into two main types: Internal - arising from within the company; and External - arising from extraneous factors such as industry size.

Market Equilibrium

When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.