AP Microeconomics: Key Concepts

What is the Law of Demand?

The principle that there is an inverse relationship between the price of a good and the quantity demanded, ceteris paribus.

Define Market Equilibrium.

The point where the quantity supplied by producers equals the quantity demanded by consumers.

What is the difference between Fixed Costs and Variable Costs?

Fixed costs do not change with the level of output, while variable costs change as the quantity of output changes.

What are the two primary characteristics of a Public Good?

Public goods are non-excludable (people cannot be prevented from using them) and non-rivalrous (one person's use doesn't reduce availability for others).

Define an Inferior Good.

A good for which demand decreases as consumer income increases.

What is Marginal Utility?

The additional satisfaction or benefit a consumer gains from consuming one more unit of a good or service.

What is a Price Ceiling and where must it be placed to be binding?

A government-mandated maximum price that must be set below the equilibrium price to be effective.

What is the defining characteristic of a Monopoly?

A market structure where a single firm is the sole seller of a product with no close substitutes and high barriers to entry.

How is the Price Elasticity of Demand calculated?

The percentage change in quantity demanded divided by the percentage change in price.

If the Cross-Price Elasticity of Demand between two goods is positive, what is their relationship?

The two goods are substitutes; as the price of one rises, the demand for the other increases.