50 AP Economics Terms You Need to Know

Knowing the vocabulary is half the battle on the AP Economics exams. The multiple-choice section tests whether you can distinguish between similar-sounding terms, and the FRQ graders look for precise language. This list covers 50 terms that appear most frequently across both AP Micro and AP Macro. Bookmark it and review it regularly.

Microeconomics Terms

1. Scarcity - The fundamental economic problem: unlimited wants but limited resources. Every economic model starts from this assumption.

2. Opportunity cost - The value of the next best alternative you give up when making a choice. If you spend an hour studying, the opportunity cost is whatever else you would have done with that hour.

3. Marginal analysis - Decision-making by comparing the additional benefit of an action to its additional cost. Rational actors do something as long as marginal benefit exceeds marginal cost.

4. Law of demand - As price rises, quantity demanded falls (and vice versa), holding all else constant. This is why demand curves slope downward.

5. Law of supply - As price rises, quantity supplied rises (and vice versa), holding all else constant. Supply curves slope upward.

6. Equilibrium - The price and quantity where supply equals demand. No tendency to change unless an external factor shifts one of the curves.

7. Consumer surplus - The difference between what consumers are willing to pay and what they actually pay. On a graph, it's the area below the demand curve and above the market price.

8. Producer surplus - The difference between the market price and the minimum price producers would accept. It's the area above the supply curve and below the market price.

9. Price elasticity of demand - A measure of how responsive quantity demanded is to a price change. Elastic means very responsive (greater than 1). Inelastic means not very responsive (less than 1).

10. Cross-price elasticity - Measures how the quantity demanded of one good responds to a price change in another good. Positive for substitutes, negative for complements.

11. Price ceiling - A legal maximum price set below equilibrium. Creates a shortage. Rent control is the classic example.

12. Price floor - A legal minimum price set above equilibrium. Creates a surplus. The minimum wage is the textbook example.

13. Marginal cost (MC) - The additional cost of producing one more unit. MC curves are U-shaped because of diminishing marginal returns.

14. Average total cost (ATC) - Total cost divided by quantity. Also U-shaped. MC crosses ATC at its minimum point.

15. Marginal revenue (MR) - The additional revenue from selling one more unit. In perfect competition, MR equals price. In monopoly, MR is less than price.

16. Profit maximization - Firms produce where MR = MC. This rule applies to every market structure.

17. Perfect competition - A market with many firms selling identical products. Firms are price takers. In the long run, economic profit is zero. Explore this in the [perfect competition module](/micro/perfect-competition).

18. Monopoly - A single seller with no close substitutes. The monopolist faces the entire market demand curve and produces less than the competitive quantity at a higher price. See the [monopoly module](/micro/monopoly) for interactive graphs.

19. Monopolistic competition - Many firms selling differentiated products. Like monopoly in the short run, but entry drives profit to zero in the long run.

20. Oligopoly - A market dominated by a few large firms. Strategic behavior (game theory) matters here because each firm's actions affect the others.

21. Game theory - The study of strategic decision-making. The prisoner's dilemma is the most tested example on AP exams.

22. Deadweight loss - The reduction in total surplus caused by a market inefficiency. Price controls, taxes, and monopoly power all create deadweight loss.

23. Externality - A cost or benefit that falls on someone other than the buyer or seller. Pollution is a negative externality. Education produces positive externalities.

24. Public good - A good that is non-rival (one person's use doesn't reduce availability) and non-excludable (you can't prevent people from using it). National defense is the standard example.

25. Marginal revenue product (MRP) - The additional revenue a firm earns from hiring one more unit of a resource. Firms hire until MRP = the wage (resource price).

Macroeconomics Terms

26. Gross Domestic Product (GDP) - The total market value of all final goods and services produced within a country in a year. The most common measure of economic output.

27. Nominal GDP - GDP measured in current-year prices. Doesn't account for inflation.

28. Real GDP - GDP adjusted for inflation using a base year's prices. This is the measure economists use to compare output across years.

29. GDP deflator - A price index that measures the overall price level. Calculated as (Nominal GDP / Real GDP) x 100.

30. Consumer Price Index (CPI) - Measures the average price change of a fixed basket of goods and services purchased by typical urban consumers. The most commonly reported inflation measure.

31. Inflation - A sustained increase in the general price level. Measured by the CPI or GDP deflator. Mild inflation (2-3% per year) is considered normal and is the Fed's target.

32. Unemployment rate - The percentage of the labor force that is actively looking for work but can't find it. Doesn't include discouraged workers who stopped looking.

33. Natural rate of unemployment - The unemployment rate when the economy is at full employment. Includes frictional and structural unemployment but not cyclical.

34. Frictional unemployment - Short-term unemployment that occurs when people are between jobs or entering the workforce for the first time. It exists even in a healthy economy.

35. Cyclical unemployment - Unemployment caused by economic downturns. When GDP falls below potential, cyclical unemployment rises.

36. Aggregate demand (AD) - The total demand for goods and services in an economy at each price level. AD slopes downward. Shifts are caused by changes in consumer spending, investment, government spending, or net exports.

37. Short-run aggregate supply (SRAS) - The total quantity of goods and services firms produce at each price level in the short run. Slopes upward because input prices (especially wages) are sticky.

38. Long-run aggregate supply (LRAS) - A vertical line at potential output. In the long run, output depends on resources and technology, not the price level.

39. Fiscal policy - Government use of spending and taxation to influence the economy. Expansionary fiscal policy means more spending or lower taxes. Contractionary means less spending or higher taxes.

40. Monetary policy - The Federal Reserve's use of tools to control the money supply and interest rates. The primary tool is open market operations (buying and selling government bonds).

41. Federal funds rate - The interest rate banks charge each other for overnight loans. The Fed targets this rate through open market operations. It's the benchmark for other interest rates in the economy.

42. Reserve requirement - The fraction of deposits banks must hold rather than lend out. Lowering it expands the money supply. The Fed rarely changes this tool.

43. Money multiplier - The maximum amount the money supply can expand from a new deposit. Calculated as 1 / reserve requirement. If the reserve ratio is 10%, the multiplier is 10.

44. Crowding out - When government borrowing pushes up interest rates, which reduces private investment. This limits the effectiveness of expansionary fiscal policy.

45. Phillips Curve - Shows the short-run trade-off between inflation and unemployment. In the short run, lower unemployment comes with higher inflation. In the long run, the Phillips Curve is vertical at the natural rate.

46. Stagflation - A combination of high inflation and high unemployment. Caused by a decrease in aggregate supply (like an oil price shock). Standard demand-side policies can't fix both problems at once.

47. Balance of payments - A record of all economic transactions between a country and the rest of the world. Includes the current account (trade in goods and services) and the capital/financial account (investment flows).

48. Exchange rate - The price of one currency in terms of another. Determined by supply and demand in the foreign exchange market. A stronger dollar makes imports cheaper and exports more expensive.

49. Comparative advantage - The ability to produce a good at a lower opportunity cost than another producer. The basis for international trade. Countries should specialize in goods where they have comparative (not absolute) advantage.

50. Loanable funds market - A model showing how the real interest rate is determined by the supply of saving and the demand for borrowing. Government budget deficits increase demand for loanable funds and push real interest rates up.

How to Study These Terms

Don't just read through this list once. Active recall beats passive review every time. Cover the definitions and try to explain each term in your own words. If you can't, that term needs more work.

Group related terms together. For example, practice explaining the chain from "Fed buys bonds" to "money supply increases" to "interest rate falls" to "investment rises" to "AD shifts right" to "real GDP increases and price level rises." That chain uses terms 40, 41, 36, and 38 from this list.

EconLearn's flashcard sets and quiz modules test these terms in context, not just as isolated definitions. Knowing that MR = MC is the profit maximization rule matters less than being able to apply it to a specific market structure graph on exam day.