AP Macroeconomics - Core Concepts & Models

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Opportunity Cost

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The value of the next-best alternative that is forgone when a choice is made. In the context of the Production Possibilities Curve (PPC), it is the amount of one good sacrificed to produce an additional unit of another good. It illustrates the fundamental economic problem of scarcity.

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Comparative Advantage

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The ability to produce a good or service at a lower opportunity cost than a rival. Unlike absolute advantage (producing more with the same resources), comparative advantage determines the potential for beneficial trade. Parties specialize based on comparative advantage to maximize total output.

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Law of Demand

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The principle that there is an inverse relationship between the price of a good and the quantity demanded, *ceteris paribus*. As price rises, quantity demanded falls, and vice versa. This is represented graphically by a downward-sloping demand curve due to the income and substitution effects.

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Law of Supply

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The principle that there is a direct, positive relationship between the price of a good and the quantity supplied, *ceteris paribus*. As price rises, quantity supplied increases because producers are incentivized by higher potential profits to increase output.

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Gross Domestic Product (GDP)

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The market value of all final goods and services produced within a country's borders during a specific time period (usually a year). It includes consumption, investment, government spending, and net exports (Exports minus Imports), but excludes intermediate goods to avoid double counting.