AP Microeconomics Ultimate Guide

Scarcity

Scarcity

The concept of unlimited wants and limited resources, leading to the need for society to make choices on how to allocate resources efficiently.

Microeconomics vs Macroeconomics

Microeconomics focuses on individuals and firms, while Macroeconomics looks at the economy as a whole.

Factors of Production

Resources categorized into land, labor, capital, and entrepreneurship used in the production of goods and services.

Opportunity Costs and Trade-offs

Trade-offs involve giving up one choice for another, while opportunity costs refer to the next best alternative when the first choice is not available.

Positive vs Normative Economics

Positive economics relies on facts and figures, while normative economics is based on assumptions.

Resource Allocation and Economic Systems

Economic systems like centrally-planned, market, and mixed systems determine what, how, and for whom goods and services are produced.

Production Possibilities Curve

Illustrates the trade-offs an economy faces, showing the best possible combinations of goods given limited resources.

Comparative Advantage and Trade

Absolute advantage refers to producing more goods efficiently, while comparative advantage focuses on producing goods at the lowest opportunity cost.

Cost-Benefit Analysis

Compares implicit (opportunity) and explicit (out-of-pocket) costs to determine the benefits of a decision.

Marginal Analysis and Consumer Choice

Examines utility, marginal utility, and the principle of diminishing marginal utility to optimize consumer choices.

Supply

The quantities of goods/services sellers are willing to produce at different prices, following the law of supply.

Price Elasticity of Demand

Measures how quantity demanded changes in response to price changes, with elastic demand being sensitive to price changes.

Price Elasticity of Supply

Measures how quantity supplied changes in response to price changes, with elastic supply being responsive to price changes.

Market Equilibrium, Consumer and Producer Surplus

Equilibrium occurs when supply equals demand, with consumer surplus and producer surplus representing benefits to buyers and sellers.

Government Intervention in Markets

Involves price floors, price ceilings, quotas, and licenses to regulate markets and address shortages or surpluses.

Quota rent

The difference between demand price and supply price

Tariffs

Taxes placed on goods that are imported or exported

Import quota

Restriction on the quantity of a good that can be imported

Production function

Relation between the quantity of inputs a firm uses and the quantity of output it produces

Fixed input

An input whose quantity doesn’t change

Variable input

An input whose quantity can change

Long run

Time period in which all inputs can be variable

Short run

Time period in which at least 1 input is fixed

Marginal product

Change in overall output when input changes

Marginal product of labor (MPL)

∆Q / ∆L

Diminishing marginal returns

As input increases, the output of each input will be less than the previous input

Output

Quantity produced

Rental rate

Price of capital

Capital

Goods used to produce goods/services

Fixed cost

Cost that doesn’t change with the amount of output produced

Variable cost

Cost that changes with the amount of output produced

Total cost

Fixed cost + variable cost

Marginal cost

Cost difference of one additional unit of output (∆TC / ∆Q)

Average fixed cost (AFC)

FC / Q

Average variable cost (AVC)

VC / Q

Average total cost (ATC)

TC / Q

Long run average total cost (LRATC)

Same as short run ATC, but bigger

Economies of scale

LRATC declines as output increases

Diseconomies of scale

LRATC increases as output increases

Constant returns to scale

Output increases directly in proportion to an increase in all inputs

Economic profit

Revenue - (explicit cost + implicit cost)

Accounting profit

Revenue - explicit cost

Implicit cost

A cost that could have been earned

Marginal Revenue

Additional revenue gained by producing one more unit

Shutdown rule

As long as P > AVC, continue to produce

Exit rule

If P < ATC, exit the market

Perfect competition

Many identical firms competing at a constant market price

Monopolistic competition

Many firms offering competing products that are similar but not perfect substitutes

Monopoly

Market structure with only one firm producing a product

Oligopoly

Market structure with a few firms producing a product

Externalities

External costs/benefits placed on society

Public goods

Goods underproduced due to freeloader problem

Monopsonistic Markets

Many sellers, one buyer

Factor markets

Resources for companies to buy what they need to produce goods and services

Derived demand

Demand from a resource derived by product demand

Marginal revenue product (MRP)

Additional revenue generated by an additional resource/worker

Marginal factor cost (MFC)

Additional cost of an additional resource/worker

Least cost rule

MPL / PL = MPK / PK, buy more of the one with a higher sum

Perfect equality

A system where everyone receives equal shares of income.

Income

Includes wages, rent, interest, and profit.

Lorenz curve

A tool to measure the distribution of income equality, aiming to be close to the perfect equality line.

Gini coefficient

A measure represented by A/(A+B) where closer to 0 indicates more equality and closer to 1 indicates more inequality.

Causes of income inequality

Factors like supply and demand in the labor market, human capital, discrimination, inheritance, and bargaining power.

Policies to address inequality

Include taxes and transfers, minimum wage laws, anti-poverty programs, income protection programs, and scholarships.

Taxes

Can be proportional (same percentage for everyone), progressive (higher percentage for higher incomes reducing inequality), or regressive (lower percentage for higher incomes increasing inequality).