AP Microeconomics Exam Review

Questions and Answers

What is Economics?

The study of how people manage their time

The study of how firms maximize profits

The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited wants (correct)

The study of consumer behavior

Which of the following are considered Factors of Production?

Entrepreneurial ability (correct)

Labor (correct)

Capital (correct)

Land (correct)

What is Physical capital?

Manmade equipment such as machinery, buildings, roads, vehicles, and computers.

Define Entrepreneurial Ability.

The effort and know-how to combine other resources into a productive venture. Signup and view all the answers

What is Scarcity?

The difference between unlimited wants and limited economic resources. Signup and view all the answers

What are Trade-offs?

The concept that individuals, firms, and governments must make choices due to scarce resources. Signup and view all the answers

What is Opportunity Cost?

The value of the next best alternative that is given up when making a choice. Signup and view all the answers

Explain Marginal Analysis.

The process of weighing additional benefits against additional costs. Signup and view all the answers

What does 'Marginal' mean?

'The next one' or 'additional' or 'incremental'. Signup and view all the answers

Define Marginal Cost.

The additional cost incurred from the consumption of the next unit of a good or service. Signup and view all the answers

What is Marginal Benefit?

The additional benefit received from the consumption of the next unit of a good or service. Signup and view all the answers

What is a Production Possibilities Curve?

A model that shows how an individual or nation allocates scarce resources between two goods or services under conditions of efficiency. Signup and view all the answers

What does a point outside of the Production Possibilities Curve represent?

Any point outside the frontier is currently unattainable. Signup and view all the answers

What does the slope of the PPF measure?

The opportunity cost of the good on the x-axis. Signup and view all the answers

What is the shape of a realistic PPF?

Concave or bowed outward. Signup and view all the answers

What is Comparative Advantage?

The ability to produce goods at a lower opportunity cost than another individual/firm/nation. Signup and view all the answers

Define Specialization.

The process where individuals/firms/nations produce the goods in which they have a comparative advantage. Signup and view all the answers

What is Productive Efficiency?

The economy is producing the maximum output for a given level of technology and resources. Signup and view all the answers

What is Allocative Efficiency?

The economy is producing the optimal mix of goods and services. Signup and view all the answers

What is the Substitution Effect?

The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods. Signup and view all the answers

What is the Income Effect?

The change in quantity demanded resulting from a change in consumer purchasing power. Signup and view all the answers

Which of the following are Determinants of Demand?

The price of a complimentary good Signup and view all the answers

What is a Normal Good?

A good for which higher income increases demand. Signup and view all the answers

Define Inferior Good.

A good for which higher income decreases demand. Signup and view all the answers

What are Substitute Goods?

Two goods that can be used interchangeably to satisfy similar needs, providing similar utility. Signup and view all the answers

Explain the Price of Complementary Goods.

If the price of good X falls, consumer demand for the complement good Y increases. Signup and view all the answers

What are Determinants of Supply?

Taxes and subsidies on a good Signup and view all the answers

Study Notes

Economics Fundamentals

Economics examines how individuals and societies allocate limited resources to meet unlimited wants.

Factors of Production

Comprises Labor, Land, Capital, and Entrepreneurial Ability, crucial for production processes.

Capital and Resources

Physical capital includes manmade assets such as machinery, buildings, roads, vehicles, and computers essential for production.

Entrepreneurial Ability

Involves the skills and efforts required to combine other factors of production efficiently.

Scarcity

Represents the fundamental economic problem arising from the gap between limited resources and unlimited wants.

Trade-offs

Scarcity forces choices, leading individuals, firms, and governments to constantly make trade-offs.

Opportunity Cost

Defined as the value of the next best alternative foregone when a choice is made.

Marginal Analysis

Decision-making process where additional benefits and costs of an action are considered to determine optimal choices.

Marginal Concepts

Marginal refers to "the next one" and incorporates Marginal Cost and Marginal Benefit as key decision-making tools.

Production Possibilities Curve (PPC)

A graphical representation showing the trade-offs in production between two goods, assuming full and efficient resource employment.

Production Possibilities Frontier (PPF)

Points beyond this frontier represent unattainable production levels with current resources.

Opportunity Cost in PPC

The slope indicates the opportunity cost of increasing the quantity of one good while decreasing the other.

PPF Shape

Realistic PPFs are typically concave or bowed outward, reflecting increasing opportunity costs.

Comparative Advantage

The ability to produce goods with a lower opportunity cost than others, encouraging trade and specialization.

Specialization Benefits

Leads to efficiency as individuals, firms, or nations focus on producing goods where they have a comparative advantage.

Efficiency Concepts

Productive efficiency occurs at all points on the PPC, while Allocative efficiency represents the optimal goods and services mix for maximum societal benefit.

Demand Influencers

Factors affecting demand include consumer income, the price of substitutes and complementary goods, consumer preferences, future expectations, and the market size.

Types of Goods

Normal goods see increased demand with higher income, while inferior goods see decreased demand.

Substitute vs. Complement Goods

Substitute goods fulfill the same needs, while complementary goods have interdependent demand; price changes in one affect the other.

Supply Determinants

Key factors include input costs, technology, taxes and subsidies, producer expectations, alternative goods pricing, and the number of suppliers.

Taxes and Subsidies Impact

Taxes add to production costs, while subsidies lower them, affecting supply decisions and market equilibrium dynamics.

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Description

This quiz offers a comprehensive review of key concepts in AP Microeconomics. Topics include definitions of economics, factors of production, and physical capital. Use these flashcards to reinforce your understanding and prepare for the exam.