AP Microeconomics Exam Review
Economics - Answer-The study of how people, firms, and societies use their scarce productive resources
to best satisfy their unlimited wants
Factors of Production - Answer-Labor, Land, Capital, Entrepreneurial ability
Physical capital - Answer-Manmade equipment like machinery, but also buildings, roads, vehicles, and
computers
Entrepreneurial Ability - Answer-The effort and know how to put the other resources (Factors of
Production) together in a productive venture
Scarcity - Answer-The difference between unlimited wants and limited economic resources
Trade-offs - Answer-The fact that we are faced with scarce resources implies that individuals, firms, and
governments are constantly faced with trade-offs
Opportunity Cost - Answer-The opportunity cost of doing something is what you sacrifice to do it (i.e. if
you use a scarce resource to pursue activity X, the opportunity cost of activity X is activity Y, the next
best use of that resource)
Marginal Analysis - Answer-Rational individuals and firms weigh the additional benefits against the
additional costs (They think at the margin)
Marginal - Answer-"the next one" or "additional" or "incremental"
,Marginal Cost - Answer-The additional cost incurred from the consumption of the next unit of a good or
service
Marginal Benefit - Answer-The additional benefit received from the consumption of the next unit of a
good or service
Production Possibilities Curve - Answer-A model of an individual or a nation that can choose to allocate
its scarce resources between the production of two goods or services, it is assumed that those resources
are being fully employed and used efficiently
Points outside of the Production Possibilities Curve - Answer-Any point outside the frontier is currently
unattainable
The slope of the PPF - Answer-The slope of the curve measures the opportunity cost of the good on the
x axis
The inverse of the slope measures the opportunity cost of the good on the y axis
Shape of a realistic PPF - Answer-Concave or bowed outward
Comparative Advantage - Answer-The ability to produce goods at a lower opportunity cost that another
individual/firm/nation
Specialization - Answer-Individuals/firms/nations produce the goods in which they have a comparative
advantage
Productive efficiency - Answer-The economy is producing the maximum output for a given level of
technology and resources (all points on the PPF are productively efficient)
, Allocative efficiency - Answer-The economy is producing the optimal mix of goods and services (the
combination of goods and services that provides the most net benefit to society; the best point on the
PPF)
Substitution effect - Answer-The change in quantity demanded resulting from a change in the price of
one good relative to the price of other goods
Income effect - Answer-The change in quantity demanded resulting from a change in the consumer
purchasing power (real income)
Determinants of Demand - Answer--Consumer income
-The price of a substitute good
-The price of a complimentary good
-Consumer tastes and preferences for the good
-Consumer expectations about the future price of the good
-The number of buyers in the market for that specific good
Normal Good - Answer-A good for which higher income increases demand
Inferior Good - Answer-A good for which higher income decreases demand
Substitute Goods - Answer-Two goods are substitute goods if the consumer can use either to satisfy the
same essential function, therefore experiencing the same degree of happiness (utility)
Price of Complementary Goods - Answer-If any two goods are compliments and the price of one good X
falls (rises), the consumer demand for the complement good Y increases (decreases)
Determinants of Supply - Answer--The cost of an input
Economics - Answer-The study of how people, firms, and societies use their scarce productive resources
to best satisfy their unlimited wants
Factors of Production - Answer-Labor, Land, Capital, Entrepreneurial ability
Physical capital - Answer-Manmade equipment like machinery, but also buildings, roads, vehicles, and
computers
Entrepreneurial Ability - Answer-The effort and know how to put the other resources (Factors of
Production) together in a productive venture
Scarcity - Answer-The difference between unlimited wants and limited economic resources
Trade-offs - Answer-The fact that we are faced with scarce resources implies that individuals, firms, and
governments are constantly faced with trade-offs
Opportunity Cost - Answer-The opportunity cost of doing something is what you sacrifice to do it (i.e. if
you use a scarce resource to pursue activity X, the opportunity cost of activity X is activity Y, the next
best use of that resource)
Marginal Analysis - Answer-Rational individuals and firms weigh the additional benefits against the
additional costs (They think at the margin)
Marginal - Answer-"the next one" or "additional" or "incremental"
,Marginal Cost - Answer-The additional cost incurred from the consumption of the next unit of a good or
service
Marginal Benefit - Answer-The additional benefit received from the consumption of the next unit of a
good or service
Production Possibilities Curve - Answer-A model of an individual or a nation that can choose to allocate
its scarce resources between the production of two goods or services, it is assumed that those resources
are being fully employed and used efficiently
Points outside of the Production Possibilities Curve - Answer-Any point outside the frontier is currently
unattainable
The slope of the PPF - Answer-The slope of the curve measures the opportunity cost of the good on the
x axis
The inverse of the slope measures the opportunity cost of the good on the y axis
Shape of a realistic PPF - Answer-Concave or bowed outward
Comparative Advantage - Answer-The ability to produce goods at a lower opportunity cost that another
individual/firm/nation
Specialization - Answer-Individuals/firms/nations produce the goods in which they have a comparative
advantage
Productive efficiency - Answer-The economy is producing the maximum output for a given level of
technology and resources (all points on the PPF are productively efficient)
, Allocative efficiency - Answer-The economy is producing the optimal mix of goods and services (the
combination of goods and services that provides the most net benefit to society; the best point on the
PPF)
Substitution effect - Answer-The change in quantity demanded resulting from a change in the price of
one good relative to the price of other goods
Income effect - Answer-The change in quantity demanded resulting from a change in the consumer
purchasing power (real income)
Determinants of Demand - Answer--Consumer income
-The price of a substitute good
-The price of a complimentary good
-Consumer tastes and preferences for the good
-Consumer expectations about the future price of the good
-The number of buyers in the market for that specific good
Normal Good - Answer-A good for which higher income increases demand
Inferior Good - Answer-A good for which higher income decreases demand
Substitute Goods - Answer-Two goods are substitute goods if the consumer can use either to satisfy the
same essential function, therefore experiencing the same degree of happiness (utility)
Price of Complementary Goods - Answer-If any two goods are compliments and the price of one good X
falls (rises), the consumer demand for the complement good Y increases (decreases)
Determinants of Supply - Answer--The cost of an input
