AP Vocabulary Review

Economics: The study of scarcity

Scarcity: Limited natural resources with unlimited human wants
Choice: What someone must make when faced with two or more alternative uses of a resource.
Market: An institution or mechanism that brings together buyers (demanders) and sellers
(Suppliers) of particular goods, services, or resources
Opportunity cost: To get more of one thing, you forgo or sacrifice the opportunity of getting
something else.
Opportunity benefit: The benefit of the opportunity that is being presented.
Comparative advantage: The ability of a firm or individual to produce goods and/or services at
a lower opportunity cost than other firms or individuals. A comparative advantage gives a
company the ability to sell goods and services at a lower price than its competitors and realize
stronger sales margins.
Specialization: The production of one or just a few goods and services.
Production possibilities frontier: Guns v. butter, at every point 100% use of resources (full
production). Point A is an easily attainable point and Point F is not possible at this time. It almost
always expands. Things that impact PPF are: Resources, technology, and productive capacity
(shift to right- increase, shift to left- decrease).
Private property: Define the ability of individuals to own, buy, sell, and use capital goods and
other property in a market economy. The gathering of private property is the goal in a market
system.
Market system: (capitalism) The private ownership of resources and the use of markets and
prices to coordinate and direct economic activity
Command system: (socialism/communism) Government owns most property resources and
economic decision making occurs through a central economic plan
Mixed system: An economy that includes a variety of private and government control; reflecting
characteristics of both capitalism and socialism. There is a degree of private economic
freedom mixed with a degree of government regulation of markets.
3 basic questions: What, how, for whom?
Incentives: Something that motivates an individual to perform an action
Invisible hand: Belief that individuals seeking their economic self-interest actually benefit
society more than they would if they tried to benefit society directly
Circular flow diagram: Depicts how much money flows through the economy. See notes:
shows leakages, injections, and a product and factor market.

Leakage: Money comes out (savings) (import)

Injection: Money goes in (investment) (export)
Product market: The marketplace in which a final good or service is bought and sold
Factor market: A marketplace where factors of production such as labor, capital, and resources
are purchased and sold
5 factors of production: Labor, capital (durable goods used in production), land (raw materials),
entrepreneurship, technology
Correlation: Degree and type of relationship between any two or more quantities (variables) in
which they vary together over a period
Causation: Cause- and- effect; one thing causes another
Fiscal policy: The means by which a government adjusts its spending levels and tax rates to
monitor and influence a nation's economy
Tax: A sum of money demanded by a government for its support or for specific facilities or
services, levied upon incomes, property, sales, etc.
Types of taxes:
- Proportional: Flat tax
- Regressive: Those who earn less pay a higher percentage
- Progressive: Those who earn more pay a higher percentage
- Graduated: Steps
Government spending: The total amount of money that the government spends in a
particular period
Transfer payment: One-way payment of money for which no money, good, or service is
received in exchange.
Monetary policy: Measures employed by governments to influence economic activity,
specifically by manipulating the supplies of money and credit and by altering rates of interest.
Open market operations: The buying and selling of government securities in the open market
in order to expand or contract the amount of money in the banking system. Purchases inject
money into the banking system and stimulate growth while sales of securities do the opposite.
Buying and selling bonds: A bond is a promise to pay. It is a promise to pay something in the
future in exchange for receiving something today.
Discount rate: The interest rate charged to commercial banks and other depository institutions
for loans received from the Federal Reserve Banks discount window
Federal funds rate: "The interest rate" at which depository institutions actively trade balances
held at the Federal Reserve, called federal funds, with each other, usually overnight, on an
uncollateralized basis

Reserve requirement: A central bank regulation employed by most, but not all, of the world's
central banks, that sets the minimum fraction of customer deposits and notes that each
commercial bank must hold as reserves (rather than lend out)
GDP: Gross Domestic Product- the total market value of all final goods and services produced in
a given year within a nations borders
GNP: Gross National Product- the total market value of all final goods and services produced in
a given year by a nations companies
Real: (constant) GDP adjusted for inflation
Nominal: (current) GDP in todays dollars, unadjusted
Macroeconomics: Examines either the economy as a whole or its basic subdivisions or
aggregates, such as the government, household, and business sectors
Microeconomics: Looks at specific economic units
Positive economics: Focuses of facts and cause and effect relationships (what the economy is
like)
Normative economics: Incorporates value judgments about what the economy should be like
Supply: The quantity of a good or service that producers are willing and able to make at any
given price
Determinants of supply: (NOTIGER) Number of firms, other, technology, input cost (workers,
raw materials), government (taxes, subsidies, restrictions), expectations, related costs (ex. Tires
to go with new cars)
Affects producers- Demand determinant
Affects Consumers- Supply determinant
Demand: Quantity of a good or service that consumers are willing and able to buy at any given
price
Determinants of demand: (SINTOE) Substitutes/compliments, income, number of people,
taste/preferences, other (natural disasters, accidents, etc.), expectations
Aggregate supply: The total supply of goods and services that firms in a national economy plan
on selling during a specific time period
Determinants of aggregate supply: Producers: Resources, productive capacity, expectations
Aggregate demand: The total demand for final goods and services in an economy at a given
time
Determinants of aggregate demand: Consumers, government, investment, foreign sector
(fiscal policy, monetary policy)

Equilibrium: (market-clearing) The market clearing price at which the quantity demanded by
buyers equals the quantity supplied by sellers; doesnt change with shortage or surplus
Surplus: Excess supply
Shortage: Excess demand
Price ceiling: Sets the maximum legal price a seller may charge for a product or service
Price floor: A minimum price fixed by the government
Business cycle: The business cycle reflects the rise and fall of economic activity relative to long
term growth in the economy
Leading indicators: Certain events that foretell a turning point in the economy (consumer
confidence, housing market/auto sales, purchases of capital, PPI- Producer Price Index:
wholesale prices)
Lagging indicators: Measure what has already happened (interest rates, loans outstanding,
length of unemployment)
Coincident indicators: Measure what is going on in the economy right now (employment
percentage, personal income, GDP)
Recession: 2 consecutive quarters of GDP decline/ 6 months of declining GDP
Depression: A severe contraction which lasts more than 1 year/ A year of declining GDP
Peak: High point on the business cycle
Trough: Low point on the business cycle
Contraction: Economy as a whole declines
Expansion: Trough to a peak; an increase in the level of economic activity, and of the goods and
services available
Inflation: A sustained increase in the aggregate or general price level in an economy
Deflation: A decrease in the general price level
Real: Adjusted inflation/deflation
Nominal: Unadjusted inflation/deflation
Unemployment: A situation where someone of working age is not able to get a job but would
like to be in full time employment
Labor force participation rate: The percentage of the civilian noninstitutionalized population
16 and over working or looking for work. It is largely determined by demography, most notably
the share of the adult population of prime working age, typically 25 to 54.

GDP per capita: GDP/ Population

Expenditure approach to GDP: C+I+G+F or C+I+G+(x-m)
Consumption + Business Investment + Government + Foreign Sectors (exports-imports)
Calculates the value of all final goods or services
Income approach to GDP: W+I+R+P+Depreciation+Indirect Taxes-Subsidies
Wages + Interest + Rents + Profits + Depreciation (when an asset loses value) + Indirect Taxes
(sales tax, tariff) Subsidies (government helps you produce)
Debt: A liability or obligation to pay
- Internal: Debt owed to a countrys citizens
- External: Debt owed to foreign countries or citizens
Deficit: The practice of spending funds in excess of income in a given fiscal year
Consumption function: Shows the relationship between real disposable income and consumer
spending (Determinants: Wealth, expectations, real interest rates, household debt, taxation)
Investment: The purchase of goods that are not consumed today but are used in the future to
create wealth
Economic Systems: An economic system must attempt to solve the problem of scarcity
Economic Goals:
- Economic growth
- Full employment
- Economic efficiency
- Price-level stability
- Economic freedoms
- Equitable distribution of income
- Equitable distribution of income
- Economic security
- Balance of trade
Market Failures:
- Imperfect competition: Monopolies, oligopolies, buyers, or sellers can affect a goods price by
their individual actions. Prices are above costs or purchases are below efficient levels.
- Externalities: Costs or benefits outside of production
- Public goods: Commodities for which the cost of extending the service to an additional person
is 0 and which is impossible to exclude individuals from enjoying (market failure)
- Equity: Market failure because the rich vote more
- Stability: Inflation, unemployment, business cycles