AP Microeconomics Formula Chart Review

These flashcards cover formulas and key conceptual terms for AP Microeconomics Units 2 through 5, including supply and demand elasticity, production markets, costs, resource markets, and government externalities.

Total Revenue

$$\text{price} \times \text{quantity}$$

Coefficient of price elasticity of demand

$$\frac{\% \, \Delta \, \text{quantity demanded}}{\% \, \Delta \, \text{price}}$$

Elastic demand

\text{Coefficient} > 1; Price and Total Revenue move in opposite directions.

Inelastic demand

\text{Coefficient} < 1; Price and Total Revenue move in the same direction.

Unit elastic demand

$$\text{Coefficient} = 1$$

Perfectly elastic demand

$$\text{Coefficient} = \infty$$

Perfectly inelastic demand

$$\text{Coefficient} = 0$$

Cross elasticity of demand

$$\frac{\% \, \Delta \, \text{quantity of 1st item}}{\% \, \Delta \, \text{price of 2nd item}}$$

Substitute goods

Items for which the cross elasticity coefficient is positive.

Complementary goods

Items for which the cross elasticity coefficient is negative.

Income elasticity of demand

$$\frac{\% \, \Delta \, \text{quantity}}{\% \, \Delta \, \text{income}}$$

Normal good

A good with a positive income elasticity coefficient.

Inferior good

A good with a negative income elasticity coefficient.

Supply elasticity

$$\frac{\% \, \Delta \, \text{quantity supplied}}{\% \, \Delta \, \text{price}}$$

Tax Revenue

$$(\text{Price w/tax} – \text{price seller receives}) \times \text{Quantity}$$

Average Revenue

$$\frac{TR}{Q \text{ output}}$$

Marginal Revenue (MR)

$$\frac{\Delta TR}{\Delta Q \text{ output}}$$

Price Taker (Individual Seller)

In perfect competition, the individual seller's price equals the market price ($MR = \text{price (demand)}$).

Price Maker (Individual Seller)

In imperfect competition, the individual seller is the market (MR < \text{price (Demand)}).

Total Cost (TC)

$\text{Total fixed cost} + \text{Total average cost}$ or $\text{unit cost} \times \text{quantity output}$

Average Fixed Cost (AFC)

$$\frac{TFC}{Q \text{ output}}$$

Average Variable Cost (AVC)

$$\frac{TVC}{Q \text{ output}}$$

Average Total Cost (ATC)

$\frac{TC}{Q \text{ output}}$ or $AFC + AVC$

Marginal Cost (MC)

$$\frac{\Delta TC}{\Delta Q \text{ output}}$$

Average Product

$$\frac{\text{Total product}}{Q \text{ input}}$$

Marginal Product (MP)

$$\frac{\Delta TP}{\Delta Q \text{ input}}$$

Utility Maximization Rule

$$\frac{\text{Marginal Utility of Good A}}{\text{Unit cost of A}} = \frac{\text{Marginal Utility of Good B}}{\text{Unit cost of B}}$$

Profit Maximization Rule (All Markets)

$MR = MC$ (Marginal Revenue equals Marginal Cost)

Marginal Revenue Product (MRP)

$$\frac{\Delta TR}{\Delta Q \text{ of resource}}$$

Marginal Resource Cost (MRC)

$\frac{\Delta \text{T resource C}}{\Delta Q \text{ of resource}}$ (aka Marginal Factor Cost)

Monopsony

A wage maker situation where wage is determined by $MRP = MRC$ at the labor supply curve, and MRC lies above the S curve.

Negative Production Externality

Overallocation where Social cost > private cost; example: pollution; fix: taxes, regulations.

Positive Production Externality

Underallocation where Social cost < private cost; example: technology; fix: subsidies, regulations.

Negative Consumption Externality

Overallocation where Social benefit < private benefit; examples: cigarettes, alcohol; fix: taxes, regulations.

Positive Consumption Externality

Underallocation where Social benefit > private benefit; examples: education, vaccines; fix: taxes, subsidies or regulations.

Least Cost Rule

$$\frac{\text{Marginal product of labor}}{\text{Unit price of labor}} = \frac{\text{Marginal product of capital}}{\text{Unit price of capital}}$$

Profit Maximization Rule (Multiple Resources)

$$\frac{\text{Marginal product of labor}}{\text{Unit price of labor}} = \frac{\text{Marginal product of capital}}{\text{Unit price of capital}} = 1$$

Market Equilibrium

$MPC = MPB$ (Marginal Private Cost equals Marginal Private Benefit)

Costs

Use marginal cost to determine the quantity to produce. Use ATC to calculate profit

Perfect competition

In the product market, MR is horizontal because firms are price takers

Shut down rule

Firms should shut down if the price falls below the AVC

Monopolies

Price is higher and the output is lower than the competitive markets causing dead weight loss

Factor Markets

In competitive markets, marginal factor cost is horizontal because firms are wage takers

Government Regulation

Lump sum tax does not change the quantity because it only affects the fixed cost

Negative externalities

Too much output is made because the MSC is greater than the MPC

Positive externalities

Too little output is made because the MSB is greater than MPB