AP Microeconomics Study Guide

Economic profits

are the difference between total revenue and total costs, including both explicit and implicit costs. They represent the actual financial gain of a business or entrepreneur.

Accounting profits

are the difference between total revenue and explicit costs only. They do not account for implicit costs and typically represent the profit reported on financial statements.

Marginal Revenue

is the additional revenue that is generated from selling one more unit of a good or service. It is a key concept in determining optimal production levels and pricing.

Marginal Utility

is the additional satisfaction or benefit gained from consuming one more unit of a good or service, often diminishing as more units are consumed.

Economics

Social science that analyzes the most efficient ways to use our scarce resources

Scarcity

We have unlimited wants but limited resources

Opportunity Cost

Most desirable alternative given up when you make a choice

Factors of production

Land, Labor, Capital, and Entrepreneurship

PPC

A graphical representation of the production possibilities of an economy, illustrating the trade-offs between two goods. (any point on the curve is efficient, any point inside the curve is inefficient, and any point outside the curve is impossible/unattainable)

When PPC is linear

Constant OC

When PPC is concave down

OC is increasing

What can shift the PPC?

Technology, Trade, policy changes

Absolute advantage

The producer that can produce the most output or requires the least amount of inputs (resources)

Comparative advantage

The producer with the lowest OC

When should countries trade?

If they have relatively lower OC “Specialize in that good that is cheaper to produce”

Private Sector

Part of the economy that is run by individuals and businesses

Public Sector

Part of the economy that is controlled by the government

Factor Payments

Payment for the factors of production, namely rent, wages, interest, and profit

Transfer payments

When the government redistributes income

Subsidies

Government payments to businesses

Law of Demand

There is an inverse relationship between price and quantity demanded

Why is demand downward sloping?

1. The substitution effect

2. The income effect

3. The law of diminishing marginal utility

The law of supply

There is a direct relationship between price and quantity supplied

Single shift

Either demand or supply will shift left or right but not at the same time

Double shift rule

If two curves shift at the same time, either price or quantity will be indeterminate (ambiguous)

Substitutes

Increase in price on one good, increase demand for the other good

Complements

Increase in price on one good, decreases demand for the other good

Normal Goods

As income increases, demand increases

Inferior Goods

As income increase, demand decreases

Elastic Demand

Quantity is sensitive to change in price

• If price increase, quantity demanded will fall a lot

• If price decreases, quantity demanded increases a lot

Characteristics of Elastic goods

Many substitutes, luxuries, elasticity coefficient more than 1

Inelastic demand

Quantity is INsensitive to a change in price

• If price increase, quantity demanded will fall a little

• If price decreases, quantity demanded increases a little

Characteristics of Inelastic goods

Few substitutes, necessities, elasticity coefficient less than 1

Elasticity of demand coefficient

percent change in quantity over percent change in price

Perfectly inelastic

0

Relatively inelastic

<1

Unit elastic

1

Relatively elastic

>1

Perfectly elastic

infinity

Cross price elasticity of demand

percent change of product b over percent change in price of product a (+ means substitutes -means complements)

Income elasticity of demand

percent change in quantity over percent change in income (+normal good, -inferior good)