Prepare for the AP Microeconomics exam with these practice questions and answers. This guide covers supply and demand, elasticity, consumer choice, production, and market structures.
Q: economics
Answer: social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants
Q: opportunity cost
Answer: the sacrifice of alternate goods and services made to produce something else (next best thing)
Q: marginal cost
Answer: added expense
Q: marginal benefit
Answer: added happiness
Q: the economic scientific method
Answer: theory –> law –> model
Q: theoretical economics
Answer: the process of deriving theories and principles (arranging facts, interpreting them, & making generalizations)
Q: principles
Answer: statements about economic behavior or the economy that enable prediction of the probable effects of certain actions
Q: generalizations
Answer: economic theories, principles, and laws relating to economic behavior or the economy itself
Q: ceterus paribus
Answer: assumption that all other variables except those under immediate consideration are held constant
Q: abstractions
Answer: simplifications that omit irrelevant facts
Q: policy economics
Answer: the idea that theories and data can be used to formulate courses of action intended to solve a specific economic problem or reach a goal
Q: three steps of economic policymaking
Answer: 1. state the goal specifically2. determine the rational policy options3. implement & evaluate selected policy
Q: tradeoffs
Answer: trying to achieve economic goals usually leads to ____________
Q: macroeconomics
Answer: examines the economy either as a whole or as its basic subdivisions
Q: aggregate
Answer: collection of specific economic units treated as if they were one unit
Q: microeconomics
Answer: observation of specific economic units
Q: positive economics
Answer: focuses on facts and cause-and-effect relationships (what IS)
Q: normative economics
Answer: incorporates value judgements about what the economy should be like or what to recommend to reach a certain goal (what OUGHT TO BE)
Q: capital good
Answer: tool used to produce something else
Q: consumer good
Answer: something bought directly for utility
Q: economizing problem
Answer: society’s economic wants are unlimited & insatiable, and economic resources are limited & scarce
Q: economic wants
Answer: desires of consumers to obtain goods that provide utility
Q: fulfill wants
Answer: the objective of all economic activity
Q: economic resources
Answer: all natural, human, and manufactured resources that go into the production of goods and services
Q: capital, labor, land, entrepreneurial ability
Answer: the four economic resources
Q: investment
Answer: process of producing and purchasing capital goods
Q: rental income
Answer: income received from supplying raw materials
Q: interest income
Answer: income received from supplying capital equipment
Q: full employment
Answer: use of all available resources
Q: productive efficiency
Answer: production of any particular mix of goods and services in the least costly way
Q: allocative efficiency
Answer: production of the particular mix of goods and services most wanted by society
Q: law of increasing opportunity costs
Answer: the more of a product that is produced, the greater its opportunity cost
Q: economic growth
Answer: the ability to produce a larger total output
Q: economic system
Answer: a particular set of institutional arrangements and a coordinating mechanism; differ as to who owns the production factors and the directional method
Q: market system (capitalism)
Answer: private ownership of resources and the use of markets and prices to coordinate and direct economic activity
Q: pure capitalism (laissez-faire)
Answer: government’s role is limited to protecting private property and establishing an environment appropriate to the operation of the market system
Q: command system (socialism)
Answer: system in which the government owns most property resources, and economic decision-making occurs through a central economic plan
Q: resource market
Answer: place where resources or the services of resource suppliers are bought and sold
Q: product market
Answer: place where goods and services produced by businesses are bought and sold
Q: private property
Answer: right enabling individuals and businesses to obtain, use, and dispose of property resources as they see fit
Q: freedom of enterprise
Answer: ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choose of goods and services and to sell them in their chosen markets
Q: freedom of choice
Answer: enables owners to employ or dispose of their property and money as they see fit
Q: self-interest
Answer: the motivating force of all the various economic units as they express their free choices
Q: roundabout production
Answer: the construction and use of capital to aid in the production of consumer goods
Q: barter
Answer: swapping goods for goods; requires a coincidence of wants between buyer and seller
Q: economic costs
Answer: payments that must be made to obtain and retain the services of a resource
Q: normal profit
Answer: payment for the cost of the entrepreneur’s contributions
Q: economic profit
Answer: the remaining reward awarded to the entrepreneur if the total revenue from the sale of a product exceeds all economic costs
Q: expanding industry
Answer: product that produces a profit so that new firms, attracted by the money, shift from less profitable industries
Q: declining industry
Answer: an industry in which economic profits are negative & losses are incurred
Q: consumer sovereignty
Answer: determination by consumers of the types and quantities of goods and services that the economy will produce
Q: dollar votes
Answer: the natural occurrence of consumers spending their income on the goods that they want to buy
Q: guiding function of prices
Answer: the ability of price changes to bring about changes in the quantities of products and resources demanded and supplied
Q: creative destruction
Answer: the creation of new products and production methods destroying the market positions of firms that are wedded to older business ways
Q: invisible hand
Answer: the tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interest of society
Q: efficiency, incentives, freedom
Answer: values of the market system