AP Microeconomics Unit 1 – Basic Economic Concepts: Ultimate Study Notes

Basic Economic Concepts

Scarcity & Choice

Opportunity Cost

  • Definition: Value of the next-best alternative forgone

  • Formula: OC = what you give up/ what you gain

  • Example: Choosing to study instead of working → OC = wages lost

  • Tip: Always consider what is sacrificed, not just money

Trade-Offs

  • Every choice involves giving up something

  • Visualize with PPC or decision table

Production Possibilities Curve (PPC)

Key Concepts

  • Shows max combinations of two goods that can be produced

  • Points:

    • On curve → Efficient

    • Inside → Inefficient

    • Outside → Unattainable

Shape & Economic Growth

  • Bowed-out → increasing opportunity cost

  • Outward shift → economic growth (more resources or tech)

Tip & Trick

  • Axes: Good A horizontal, Good B vertical

  • Ask: “Can we produce more of one good without giving up another?”

Marginal Analysis

Key Idea

  • Decisions made at the margin: compare marginal benefit (MB) vs marginal cost (MC)

Example

  • Buying one more pizza slice only if MB > MC

Tip

  • Optimal choice = MB = MC

  • AP loves “one more unit” logic

Economic Systems & Incentives

Types of Economic Systems

  • Market: resources allocated by buyers/sellers (invisible hand)

  • Command: government decides allocation

  • Mixed: combination

Role of Incentives

  • People respond to incentives → affects supply and demand decisions

  • Examples: Taxes, subsidies, price signals

Supply, Demand & Market Equilibrium

Law of Demand & Law of Supply

Demand

  • Price ↑ → Quantity demanded ↓ (inverse)

  • Shifters (ITEN): Income, Tastes, Expectations, Number of buyers

Supply

  • Price ↑ → Quantity supplied ↑ (direct)

  • Shifters (ITTEN): Input prices, Technology, Taxes/Subsidies, Expectations, Number of sellers

Tips

  • Movement along curve = price change; shift = determinant changes

Market Equilibrium

Equilibrium

  • Qd = Qs → Equilibrium price & quantity

Surplus & Shortage

  • Surplus → Price > Equilibrium → downward pressure

  • Shortage → Price < Equilibrium → upward pressure

Tip

  • Always draw before and after shifts, label new equilibrium

Elasticity

Price Elasticity of Demand (PED)

  • PED = %ΔQd / %ΔP

  • Interpretation:

    • >1 → Elastic

    • <1 → Inelastic

    • =1 → Unit elastic

Other Elasticities

  • Cross-price: substitutes → positive, complements → negative

  • Income: normal goods → positive, inferior → negative

Tips

  • Elastic → luxury, many substitutes; Inelastic → necessity, few substitutes

  • Revenue test: Price ↑ → Revenue ↓ → Elastic

Government Intervention & Efficiency

Price Controls

Price Ceiling

  • Max price → shortage

  • Example: Rent control

Price Floor

  • Min price → surplus

  • Example: Minimum wage

Graph Tip

  • Highlight shortage/surplus triangles on graphs

Taxes & Subsidies

Taxes

  • Shift supply left → price ↑, quantity ↓

  • Creates deadweight loss (DWL)

Subsidies

  • Shift supply right → price ↓, quantity ↑

Graph Tip

  • Label tax wedge or subsidy on graph

Efficiency & Surplus

Consumer & Producer Surplus

  • CS = Willingness to pay – Price

  • PS = Price – Minimum acceptable price

Deadweight Loss (DWL)

  • Lost total surplus due to inefficient allocation

  • Appears as triangle on graphs

Tip

  • Always identify winners, losers, and DWL in AP policy questions

AP Exam Quick Tips for Unit 1

  1. Graph practice = points: PPC, supply/demand, DWL

  2. Label axes clearly: Price vertical, Quantity horizontal

  3. Distinguish shift vs movement

  4. Elasticity rules: luxury = elastic, necessity = inelastic

  5. Use MB = MC for marginal analysis

  6. Identify winners, losers, and DWL for policies