AP Microeconomics: Core Concepts Cheat Sheet (Concise)

Gains from trade

Extra benefit when individuals/firms/countries specialize in low opportunity-cost production and trade for the rest.

Absolute advantage

Entity that can produce a good with fewer resources or more of a good with given resources.

Comparative advantage

Ability to produce a good at a lower opportunity cost than another entity.

Opportunity Cost (OC) of X in terms of Y

OC\_X = \frac{\Delta Y}{\Delta X}

Production Possibilities Curve (PPC)

Shows maximum feasible combinations of two goods given resources and technology.

Productive efficiency

Produce at any point on the PPC (full use of resources).

Allocative efficiency

Produce the mix that maximizes social welfare; in a perfectly competitive market, achieved where P = MC.

Demand

Consumers
D5 willingness to buy at different prices; Law of Demand: price up
E2
86
92 quantity demanded down (inverse relationship).

Law of Demand

Price up
E2
86
92 quantity demanded down (inverse relationship).

Substitution effect

Higher price for Good A
E2
86
92 consumers substitute toward Good B.

Income effect (demand)

Higher income increases purchasing power, shifting demand.

Diminishing marginal utility

Additional units provide less satisfaction, helps explain downward-sloping demand.

Supply

Quantities producers are willing to offer at different prices; Law of Supply: price up
E2
86
92 quantity supplied up.

Law of Supply

Price up
E2
86
92 quantity supplied up.

Economic system

The way a society organizes production, distribution, and consumption.

Traditional economy

Customs/practices shape production; subsistence focus; barter; limited technology.

Market economy

Prices and private property guide resource allocation; competition; limited government intervention; consumer sovereignty; profit motive.

Command economy

Centralized planning; government owns major resources; price controls; limited consumer choice; potential for inefficiency/less innovation.

Mixed economy

Combines market and command elements; private ownership with government regulation and public goods; aim to balance efficiency with equity.

Property rights

Secure ownership encourages investment, innovation, and voluntary exchange; supports capital formation and financial access.

Marginal analysis

Decisions based on comparing marginal benefits (MB) with marginal costs (MC).

Cost-benefit analysis

Compares benefits and costs of a decision.

Explicit costs

Monetary outlays (rent, materials, wages).

Implicit costs

Non-monetary opportunity costs (what you give up by using resources elsewhere).

Opportunity cost (total)

Explicit costs + implicit costs.

Total utility

Overall satisfaction from consuming a quantity of a good.

Marginal utility (MU)

Extra satisfaction from consuming one more unit.

Law of diminishing marginal utility

MU decreases as more of a good is consumed.

Utility maximization condition (two goods)

Consumers allocate spending to maximize total utility; in a two-good case, optimality when \frac{MU\_A}{P\_A} = \frac{MU\_B}{P\_B}

Price elasticity of demand (PED)

PED = \frac{\%\Delta Q\_d}{\%\Delta P}

Price elasticity of supply (PES)

PES = \frac{\%\Delta Q\_s}{\%\Delta P}

Cross-price elasticity of demand

For substitutes/complements \frac{\%\Delta Q\_X}{\%\Delta P\_Y}

Income elasticity of demand

E\_Y = \frac{\%\Delta Q}{\%\Delta I}

Positive statements

Testable, objective claims about how the economy works.

Normative statements

Value judgments about how