AP Intermediate Economics (BIEAP) key terms

The value of the next best alternative given up when a choice is made. Because resources are scarce, choosing one use of a resource means sacrificing another, so every decision carries this hidden cost.

The condition where available resources are limited relative to unlimited human wants. It forces individuals and societies to choose among alternatives and is the central problem that economics studies.

A curve showing the maximum combinations of two goods an economy can produce with given resources and technology. Points on the curve are efficient, points inside show underuse, and its slope reflects opportunity cost.

The branch of economics that studies individual decision-making units such as households, firms and single markets. It examines how prices form and how resources are allocated among particular goods and services.

The branch of economics dealing with economy-wide aggregates such as national income, general price level, employment and growth. It studies overall performance rather than decisions of single households or firms.

The principle that, other things remaining equal, quantity demanded of a good falls as its price rises and rises as its price falls. This inverse relationship produces a downward-sloping demand curve.

A measure of how strongly quantity demanded responds to a change in price, calculated as percentage change in quantity divided by percentage change in price. Demand is elastic when this value exceeds one in absolute terms.

The responsiveness of quantity demanded to a change in consumer income, computed as percentage change in quantity divided by percentage change in income. Positive values indicate normal goods; negative values indicate inferior goods.

A curve showing all combinations of two goods that give a consumer the same level of satisfaction. Curves are downward-sloping, convex to the origin and never intersect one another.

The amount of one good a consumer will give up to obtain one more unit of another while keeping satisfaction unchanged. It equals the absolute slope of an indifference curve and diminishes along the curve.

A straight line showing all combinations of two goods a consumer can buy by spending a given income fully at given prices. Its slope equals the ratio of the two prices.

The observation that as a consumer takes more units of a good in a given period, the extra satisfaction from each additional unit falls. It underpins the downward-sloping demand curve.

In the short run, as more units of a variable input are added to fixed inputs, marginal product first rises, then falls, and eventually becomes negative. It explains the shape of short-run cost curves.

The behaviour of output when all inputs are increased in the same proportion in the long run. Output may rise more than proportionately (increasing), exactly proportionately (constant) or less than proportionately (decreasing).

The addition to total cost from producing one more unit of output. It typically falls, then rises, and cuts average variable cost and average total cost at their minimum points.

Cost that does not vary with the level of output in the short run, such as rent on a factory or salaries of permanent staff. It must be paid even when output is zero.

Cost advantages that arise as a firm expands its scale of production in the long run, lowering average cost per unit. Sources include specialisation, bulk buying and better machinery.

A market structure with many small sellers of a homogeneous product, free entry and exit, and perfect information, so each firm is a price taker facing a horizontal demand curve.

A market with a single seller of a product having no close substitutes and with strong barriers to entry. The firm is a price maker and faces the downward-sloping market demand curve.

A market with many sellers offering differentiated products that are close substitutes, with free entry and exit. Each firm has limited pricing power because of brand loyalty.

The change in total revenue from selling one additional unit of output. Under perfect competition it equals price, while a firm facing a downward-sloping demand curve receives less than price for extra units.

Charging different buyers different prices for the same product for reasons not related to differences in cost. It requires market power and the ability to separate buyers who cannot resell the good.

The extra revenue a firm earns by employing one more unit of a factor of production, equal to marginal product multiplied by marginal revenue. It determines the firm's demand for that factor.

The addition to a firm's total cost of hiring one more unit of a factor of production. A profit-maximising firm hires until marginal revenue product equals marginal factor cost.

The payment to a factor of production above the minimum needed to keep it in its current use. For land with perfectly inelastic supply, the entire payment is rent.

The minimum payment required to keep a factor of production in its present employment, equal to its next best alternative reward. Any payment above this amount is economic rent.

Negotiation between employers and workers' unions over wages, working conditions and benefits, usually resulting in a binding agreement. It can raise wages above the level set by market forces alone.

The total money value of all final goods and services produced by a country's residents in a year, measured by the income, expenditure or value-added method. It is a key indicator of economic performance.

The market value of all final goods and services produced within a country's borders during a given period, regardless of who owns the factors of production. It is the broadest measure of domestic output.

The market value of all final goods and services produced by a country's residents in a period, whether at home or abroad. It equals gross domestic product plus net factor income from abroad.

The difference between the value of a firm's output and the value of intermediate goods it buys from other firms. Summing value added across all firms avoids double counting in national income.

The ratio of the total money supply to the monetary base, showing how much deposit creation a given increase in reserves can support. It depends mainly on the reserve ratio and cash-holding habits.

The process by which commercial banks expand deposits, and hence the money supply, by lending out a fraction of the deposits they receive while keeping reserves. Its extent is limited by the reserve ratio.

The apex monetary institution that issues currency, manages the money supply, acts as banker to the government and commercial banks, and holds foreign exchange reserves. In India this is the Reserve Bank of India.

The interest rate at which the central bank lends short-term funds to commercial banks against securities. Raising it tightens liquidity and is used to control inflation.

The excess of total government expenditure over total revenue excluding borrowings, showing how much the government must borrow. It is a key indicator of the budget's borrowing requirement.

The excess of revenue expenditure over revenue receipts in a government budget. It signals that current spending is not covered by current income, so borrowing finances consumption rather than investment.

The accumulated borrowing of a government from domestic and external sources, including bonds and loans. It arises from past deficits and requires interest payments in future budgets.

A systematic record of all economic transactions between a country's residents and the rest of the world in a year, comprising the current account and the capital account, which must balance overall.

The part of the balance of payments recording trade in goods and services, plus primary income and transfers. A deficit means a country spends more abroad on these items than it earns.

The price of one currency expressed in terms of another, determined by demand and supply in the foreign exchange market or fixed by the authorities. It links domestic and world prices.

A composite measure of development combining life expectancy, education and per capita income, scaled between zero and one. It broadens the idea of development beyond income growth alone.

The minimum level of consumption expenditure needed to satisfy basic needs, used to count people as poor. In India it has been set separately for rural and urban areas.