AP Microeconomics flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Price elasticity of demand
- The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one and inelastic when it is less than one.
- Total revenue test
- A method for inferring elasticity: when price rises and total revenue falls, demand is elastic; when price rises and total revenue rises, demand is inelastic.
- Income elasticity of demand
- The percentage change in quantity demanded divided by the percentage change in income. Positive values indicate normal goods; negative values indicate inferior goods.
- Cross-price elasticity
- The percentage change in quantity demanded of one good divided by the percentage change in the price of another. Positive values indicate substitutes; negative values indicate complements.
- Consumer surplus
- The difference between what consumers are willing to pay and what they actually pay, equal to the area below the demand curve and above the market price.
- Producer surplus
- The difference between the price sellers receive and the minimum price they would accept, equal to the area above the supply curve and below the market price.
- Binding price ceiling
- A legal maximum price set below the equilibrium price. It creates a shortage because quantity demanded exceeds quantity supplied at that price.
- Binding price floor
- A legal minimum price set above the equilibrium price. It creates a surplus because quantity supplied exceeds quantity demanded at that price.
- Tax incidence
- The division of a per-unit tax burden between buyers and sellers. The side of the market that is less elastic bears the larger share of the tax.
- Deadweight loss
- The loss of total surplus that occurs when quantity traded differs from the efficient quantity where marginal social benefit equals marginal social cost.
- Profit-maximizing rule
- A firm maximizes profit by producing the quantity where marginal revenue equals marginal cost, provided price covers average variable cost in the short run.
- Economic profit
- Total revenue minus explicit costs and implicit costs, including the opportunity cost of the owner's resources. It is smaller than accounting profit by the implicit costs.
- Accounting profit
- Total revenue minus explicit costs only. It ignores implicit costs such as forgone wages or forgone interest on the owner's own funds.
- Normal profit
- The situation in which economic profit equals zero, meaning total revenue exactly covers all explicit and implicit costs including opportunity cost.
- Perfect competition
- A market with many small firms, identical products, easy entry and exit, and no individual firm able to influence price. Firms earn zero economic profit in long-run equilibrium.
- Monopoly
- A market with a single seller, a unique product, and high barriers to entry. The firm faces the market demand curve and produces where marginal revenue equals marginal cost.
- Price discrimination
- Charging different prices to different buyers for the same product based on differing willingness to pay. It requires market power and the ability to prevent resale.
- Monopolistic competition
- A market with many firms selling differentiated products and easy entry. Short-run profits attract entry, shifting demand for existing firms until economic profit is zero.
- Oligopoly
- A market dominated by a few large firms whose decisions are interdependent. Entry barriers are high, and firms may collude or compete strategically.
- Negative externality
- A cost imposed on third parties not involved in a transaction, such as pollution. Marginal social cost exceeds marginal private cost, so the market overproduces relative to the efficient quantity.
- Positive externality
- A benefit received by third parties not involved in a transaction, such as education or vaccination. Marginal social benefit exceeds marginal private benefit, so the market underproduces.
- Coase theorem
- The proposition that with clearly defined property rights and low transaction costs, private bargaining can resolve externalities and reach an efficient outcome regardless of who holds the rights.
- Public good
- A good that is both nonrival in consumption and nonexcludable, such as national defense. These traits cause free riding and market underprovision.
- Marginal revenue product
- The additional revenue a firm earns from hiring one more unit of labor, equal to marginal product of labor multiplied by the product price. Firms hire until it equals the wage.
- Derived demand
- Demand for a factor of production that exists because of demand for the final good the factor helps produce. It shifts when the product's price or the factor's productivity changes.
- Lorenz curve
- A graph showing the cumulative share of income received by cumulative shares of the population. The farther it bows from the diagonal equality line, the greater the income inequality.
- Gini coefficient
- A measure of income inequality equal to the area between the Lorenz curve and the line of perfect equality divided by the total area under the equality line.
- Marginal social cost
- The total cost to society of producing one additional unit, equal to marginal private cost plus marginal external cost. It is the relevant curve for finding the socially efficient quantity.
- Allocative efficiency
- The condition in which resources are distributed so that marginal social benefit equals marginal social cost, maximizing total surplus. Competitive markets achieve this absent externalities.
- Productive efficiency
- The condition in which goods are produced at the lowest possible average total cost, occurring where price equals minimum average total cost in long-run competitive equilibrium.
- Excise tax graph
- A per-unit tax shifts the supply curve upward by the tax amount, raising the price buyers pay, lowering the price sellers keep, and creating tax revenue plus deadweight loss.
- Subsidy effect
- A per-unit payment to producers shifts supply downward by the subsidy amount, lowering the price buyers pay and raising the quantity traded above the unregulated equilibrium.