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ap economics

ability to pay principle

principle of taxation in which those with higher incomes pay more taxes than those with lower incomes reguardless the service the use.

absolute advantage

the ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources.

accounting profit

total revenue minus explicit costs; not taking into consideration implicit costs

adverse selection

the parttern that occurs when, at any given cost of insurance, peole with a greater expectation of loss buy insurance while people with a lower expected value of claims choose not to buy insurance


a businessman who buys or sells for another in exchange for a commission

arrows impossibility theorem


average fixed cost

the total fixed costs (TFC) divided by the number of units produced. It is the only cost that decreases with production.

average revenue

Total revenue divided by the quantity of the product sold.

average tax rate

total taxes paid divided by total taxable income

average total cost

It is equal to total cost divided by the number of goods produced. It is also the Average Variable Cost plus Average Fixed Cost. It may be dependent on the time period considered (increasing production may be expensive or impossible in the short term, for example). Its affects the supply curve and are a fundamental component of supply and demand.

average variable cost

variable costs/ quantity of output

behavioral economics

this branch of economics examines consumer behavior in the face of psychological limitations to rational decision making

benefits principle

stating that those who benefit more from a product or service should pay more taxes on the product or service than those who benefit less

budget constraint

The combination of goods that can be purchased with a limited amount of income.

budget deficit

when the government spends more money than it collects in taxes

budget surplus

an excess of tax revenue over government spending

business cycle

Recurrent swings from economic hard times to recovery and growth, then back to hard times and a repetition of the sequence. (p. 615)


wealth in the form of money or property owned by a person or business and human resources of economic value


a consortium of independent organizations formed to limit competition by controlling the production and distribution of a product or service

circular flow diagram

an illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.

coase theorem

if at no cost, people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities


conspiring in a fraudulent scheme to cheat or deceive others; V. collude

common resources

Goods that are rival in consumption but not excludable

comparative advantage

the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.

compensating differential

a difference in wages that arises to offset the nonmonetary characteristics of different jobs

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price


two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other.

condorcet paradox

The failure of majority rule to produce transitive preferences for society

constant returns to scale

The property whereby long-run average total cost stays the same as the quantity of output changes (middle flat part of the long-run ATC)

consumer surplus

The difference between the maximum amount a person is willing to pay for a good and its current market price.

corrective tax

A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality


value measured by what must be given or done or undergone to obtain something

cost benefit analysis

when you compare the marginal costs and the marginal benefits of a decision

cost price elasticity of demand


deadweight loss

cause by a policy is the reduction in economic surplus that results from adoption of that policy

demand curve

a graph of the relationship between the price of a good and the quantity demanded

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

diminishing marginal product

The property Whereby the marginal product of an input declines as the quantity of the input increases


policy or attitude that denies equal rights to certain groups of people

diseconomies of scale

The property whereby long-run average total cost rises as the quantity of output increases (right-most upward sloping part of the long-run ATC)

dominant strategy

a strategy that is best for a firm, no matter what strategies other firms use

economic profit

Total revenue minus total cost, including both explicit and implicit costs


the branch of social science that deals with the production and distribution and consumption of goods and services and their management

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases


using resources in such a way as to maximize the production of goods and services

efficiency wages

Wage rates higher than market equilibrium wage rates - higher wages paid in expectation that such wages reduce employee turnover and increase labor productivity.

efficiency scale

the quantity of output that minimizes average total cost


measures how sensitive consumers are to price changes


the state or quality of being equal; correspondence in quantity, degree, value, rank, or ability.


the point at which quantity demanded and quantity supplied are equal

equilibrium price

the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy

equilibrium quantity

quantity at which there is no shortage or surplus. graphically, the intersection of supply and demand curves


the situation in which anyone who does not pay for a good cannot consume it.

explicit costs

Payments by a firm to purchase the services of productive resources.


Goods and Services sold to other countries


an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

factors of production

land, labor, capital, entrepreneurship

fixed costs

expenses that are the same no matter how many units of a good are produced

free rider

An individual who does not join a group representing his or her interests yet receives the benefit of the group's influence.

game theory

(economics) a theory of competition stated in terms of gains and losses among opposing players

giffen good

an inferior good accounting for a large share of a consumers budget that has a positively sloped demand curve because the income effect of a price change out weighs the substitution effect

horizontal equity

The idea that taxpayers with similar abilities to pay taxes should pay the same amount

human capital

The knowledge, skills, and abilities of employees that have economic value.

implicit costs

all the firm's opportunity costs of the resources supplied by the firm's owners for which the owners do not make an explicit charge


goods brought into a country


spur; motive; something which encourages one to greater activity

income effect

a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

indifference curve

a curve showing all combinations of two goods that the consumer is indifferent among

inferior good

a good that consumers demand less of when their incomes increase


a general and progressive increase in prices

in kind transfers


internalizing the externality

Altering incentives so that people take account of the external effects of their actions

law of demand

consumers buy more of a good when its price decreases and less when its price increases

law of supply

Tendency of suppliers to offer more of a good at a higher price

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance


an economic theory advocating free competition and a self-regulating market and the gold standard


an ideology that cherishes individual liberties, insists on minimal government, promoting a free market economy, noniterventionist in foreign policy and an absence in moral, economic, and social life

life cycle

succession of statuses and roles that people in a particular society experience in a fairly predictable pattern as they grow older

lump sum tax

a tax that is the same amount for every person


the branch of economics that studies the overall working of a national economy

marginal changes

small incremental adjustments to a plan of action

marginal cost

the increase or decrease in costs as a result of one more or one less unit of output

marginal product

the additional output that can be produced by adding one more unit of a specific input, ceteris paribus.

marginal product of labor

the change in output from hiring one additional unit of labor

marginal rate of substitution

The rate in which a consumer is willing to trade one good for another and stay on the same indifference curve

marginal revenue

the additional income from selling one more unit of a good; sometimes equal to price

marginal tax rate

tax rate that applies to the next dollar of taxable income, that increases as the amount of taxable income increases


the world of commercial activity where goods and services are bought and sold

market economy

an economy that relies chiefly on market forces to allocate goods and resources and to determine prices

market failure

a situation in which a market left on its own fails to allocate resources efficiently

market power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

maximum criterion

the government whould maximize the well being of the worst-off person in society

median voter theorem

a theorem stating that the median or middle of political preferences will be reflected in the government decisions. (15)


the branch of economics that studies the economy of consumers or households or individual firms

monopolistic competition

a market structure in which many companies sell products that are similar but not identical


(economics) a market in which there are many buyers but only one seller

moral hazard

the condition that exists when agents have superior information to principals and are able to make decisions that favor their own interests over those of the principals

nash equilibrium

(game theory) a stable state of a system that involves several interacting participants in which no participant can gain by a change of strategy as long as all the other participants remain unchanged

natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

negative income tax

proposed type of tax that would make cash payments to certain groups below the poverty line

normal good

a good that consumers demand more of when their incomes increase

normative statements

claims that attempt to prescribe how the world should be


(economics) a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors

opportunity cost

the most desirable alternative given up as the result of a decision

perfect complements

goods that a consumer is interested in consuming but only in fixed proportions; has L shaped indifference curves

perfect substitutes

STILL USING THE ONLINE ECONOMIC DICTIONARY, it is a kind of substitute goods. it is a perfect substitute if it can be used in exactly the same way, at exactly the same cost, and with exactly the same quality of outcome; that is, when there is no particular incentive for a customer to prefer one over the other. Needless to say, there are relatively few perfect substitutes except between two goods of the same kind.

permanent income

Income that individuals expect to receive annually.

political economy

the branch of social science that deals with the production and distribution and consumption of goods and services and their management

positive statements

claims that attempt to describe the world as it is

poverty line

a level of personal income defining the state of poverty

poverty rate

percentage of people whose income falls below the poverty line

price ceiling

a maximum price that can be legally charged for a good or service

price discrimination

Division of customers into groups based on how much they will pay for a good

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

price floor

floor below which prices are not allowed to fall


the original amount of a debt on which interest is calculated

prisoners dilemma

a game in which pursuing dominate strategies results in noncooperation that leaves everybody worse off

private goods

Goods that are both excludable and rival in consumption

producer surplus

the difference between the lowest price a firm would be willing to accept and the price it actually receives

production function

A concept that describes the relationship between changes in output to different amounts of a single input while other inputs are held constant.

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology


(economics) the ratio of the quantity and quality of units produced to the labor per unit of time


the excess of revenues over outlays in a given period of time (including depreciation and other non-cash expenses)

progressive tax

any tax in which the rate increases as the amount subject to taxation increases

property rights

the ability of an individual to own and exercise control over scarce resources

proportional tax

A tax in which the average tax rate is the same at all income levels.

public goods

Goods, such as clean air and clean water, that everyone must share

quantity demanded

the amount of a good that buyers are willing and able to purchase

quantity supplied

the amount of a good that sellers are willing and able to sell

rational people

people who systematically and purposefully do the best they can to achieve their objectives

regressive tax

a tax for which the percentage of income paid in taxes decreases as income increases

rivalry in consumption

The property of a good whereby one person's use diminishes other people's use


limited quantities of resources to meet unlimited wants


testing objects or persons in order to identify those with particular characteristics


a situation in which quantity demanded is greater than quantity supplied


Idea that dividend announcements tell of management's expectations about future earnings and CFs

social insurance

Social welfare programs based on the "insurance" concept, so that individuals must pay into the program to be eligible to receive funds from it


stop work in order to press demands


goods that can serve as replacements for one another, when the price of one increases, demand for the other goes up

substitution effect

when consumers react to an increase in a goods price by consuming less of that good and more of other goods

sunk cost

A cost that is beyond recovery at the moment a decision must be made.

total revenue (for firm)


total revenue (for market)


tragedy of the commons

Title of an Article written Garrett Harden, 1968, said there will always be a struggle because individuals will use up resources that are common even though that's not what they intend.

transaction costs

the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services


an organization of employees formed to bargain with the employer


The theory, proposed by Jeremy Bentham in the late 1700s, that government actions are useful only if they promote the greatest good for the greatest number of people.

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