AP Microeconomics key terms

The condition in which human wants exceed the limited resources available to satisfy them, forcing individuals and societies to make choices about how resources are used.

The value of the next-best alternative given up when a choice is made, measured by what must be forgone rather than by money spent.

A situation in which gaining more of one good or goal requires giving up some amount of another, so every decision involves balancing competing benefits.

A graph showing the maximum combinations of two goods an economy can produce with its current resources and technology, illustrating scarcity, trade-offs, and opportunity cost.

The ability to produce a good at a lower opportunity cost than another producer, which is the basis for gains from specialization and trade.

The ability to produce more of a good with the same resources, or to produce a given amount using fewer resources, compared with another producer.

The rate at which one good is exchanged for another between trading partners, which must fall between each partner's opportunity costs for mutual gain.

The relationship showing the various quantities of a good buyers are willing and able to purchase at different prices during a given period, other things held constant.

The principle that, all else equal, quantity demanded falls as price rises and rises as price falls, producing a downward-sloping demand curve.

The relationship showing the various quantities of a good sellers are willing and able to offer at different prices during a given period, other things held constant.

The price at which quantity demanded equals quantity supplied, so the market clears with no tendency for price to change.

A condition in which quantity supplied exceeds quantity demanded at a price above equilibrium, creating downward pressure on price.

A condition in which quantity demanded exceeds quantity supplied at a price below equilibrium, creating upward pressure on price.

A measure of how responsive quantity demanded is to a change in price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

A method of judging elasticity: if price and total revenue move in opposite directions, demand is elastic; if they move together, demand is inelastic.

A measure of how responsive quantity demanded is to a change in consumer income, calculated as the percentage change in quantity demanded divided by the percentage change in income.

A measure of how responsive quantity demanded of one good is to a change in the price of another good, revealing whether the goods are substitutes or complements.

Goods that can be used in place of one another, so a rise in the price of one increases demand for the other.

Goods typically consumed together, so a rise in the price of one reduces demand for the other.

A good for which demand rises when consumer income rises, giving it a positive income elasticity of demand.

A good for which demand falls when consumer income rises, giving it a negative income elasticity of demand.

A legally imposed maximum price, set below equilibrium to be binding, which typically creates a shortage.

A legally imposed minimum price, set above equilibrium to be binding, which typically creates a surplus.

The loss of total surplus that occurs when a market produces a quantity different from the efficient quantity, as with taxes, price controls, or monopoly.

The difference between what consumers are willing to pay for a good and what they actually pay, represented by the area below demand and above price.

The difference between the price sellers receive and the minimum they would accept, represented by the area above supply and below price.

A cost or benefit from production or consumption that falls on third parties not directly involved in the market transaction, causing private and social outcomes to diverge.

A good that is both nonrival in consumption and nonexcludable, so private markets typically underprovide it and government provision is often used.

The tendency of people to enjoy a good without paying for it when the good is nonexcludable, making voluntary private provision difficult.

The additional cost of producing one more unit of output, equal to the change in total cost divided by the change in quantity.

The additional revenue earned from selling one more unit of output, equal to the change in total revenue divided by the change in quantity.

The rule that a firm maximizes profit by producing the quantity where marginal revenue equals marginal cost, provided price covers average variable cost.

The principle that adding more of a variable input to a fixed input eventually yields smaller and smaller increases in output.

The condition in which long-run average total cost falls as output increases, often because fixed costs are spread over more units.

A market structure with many small firms selling an identical product, free entry and exit, and no individual firm able to influence price.

A market with a single seller of a product with no close substitutes and high barriers to entry, giving the firm price-setting power.

Charging different prices to different buyers for the same good when resale is difficult, which can raise a firm's profit and output.

A market dominated by a few large firms whose decisions are interdependent, often leading to strategic behavior such as price competition or collusion.

A framework for analyzing strategic situations in which each player's best choice depends on the choices of others, often illustrated with payoff matrices.

An outcome in which each player chooses the best strategy given the strategies of the others, so no player gains by changing unilaterally.

The market in which households supply labor, capital, and land while firms demand these inputs to produce goods and services.

Demand for an input that arises from the demand for the final good or service the input helps produce.

The extra revenue a firm earns from hiring one additional unit of an input, equal to marginal product times marginal revenue; it is the firm's labor demand curve.

A market with a single buyer of an input, such as a town's only employer, which can pay a wage below the competitive level.

A policy such as a tax on a negative externality or a subsidy for a positive externality that aligns private incentives with socially efficient outcomes.

A tax set equal to the marginal external cost of a negative externality, intended to reduce output toward the socially efficient level.

The idea that when property rights are clearly defined and bargaining costs are low, private parties can negotiate to resolve externalities regardless of who holds the rights.

A graph showing the cumulative share of income received by cumulative shares of the population, used to illustrate income inequality.

A number between zero and one measuring income inequality, derived from the Lorenz curve, where higher values indicate greater inequality.

A tax for which the average tax rate rises as income rises, placing a larger relative burden on higher-income earners.

A tax for which the average tax rate falls as income rises, placing a larger relative burden on lower-income earners.