AP Macroeconomics Chapter 1

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Command Economy
An economy in which the government makes all economic decisions about how the factors of production are used.
Market Economy
The forces of supply and demand determine how economic questions will be answered.
Traditional Economy
An economy in which economic decisions are made based on decisions.
Factors of Production
Land, labor, capital, entrepreneurial ability (resources).
Resources
Land, labor, capital, entrepreneurial ability (factors of production).
Scarcity
When there are not enough resources to satisfy our unlimited needs and wants.
Opportunity Cost
The value of our next best alternative.
Production Possibilities Curve/Frontier
A graphic representation of the production relationship between two goods.
Capital Goods
Those goods used in the production process.
Consumer Goods
Those goods used by people in their day to day lives.
Absolute Advantage
Able to produce a good or service more efficiently or using fewer resources.
Comparative Advantage
Able to produce a good or service at a lower opportunity cost than another nation.
Demand
How much of a good or service consumers are willing and able to purchase at every price level.
Quantity Demanded
How much of a good or service consumers are willing and able to purchase at one price level.
Law of Demand
There is an inverse relationship between price and quantity demanded.
Income Effect
The price of a good affects the amount of a good or service a consumer is willing and able to purchase.
Substitution Effect
A consumer will substitute a cheaper product for a more expensive one.
Supply
How much of a good or service producers are willing and able to supply at every price.
Quantity Supplied
How much of a good or service producers are willing and able to supply at one price level.
Law of Supply
There is a direct relationship between price and quantity supplied.
Equilibrium
The intersection of two economic lines such as supply and demand where quantity supplied and demanded are equal at a specific price.
Shortage
When quantity demanded is greater than quantity supplied.
Surplus
When quantity supplied is greater than quantity demanded.
Price Ceiling
When government sets a price below equilibrium.
Price Floor
When government sets a price above equilibrium.
Categories: Macroeconomics