AP Microeconomics Unit 1 – Basic Economic Concepts: Ultimate Study Notes (CED aligned)

Scarcity and Choice (Heading 1)

Scarcity (Heading 2)

Definition (Heading 3)

• Scarcity: unlimited wants vs limited resources

• Forces individuals, firms, and governments to make choices

Opportunity Cost (Heading 3)

• Opportunity cost: value of the next best alternative forgone

• Helps measure trade-offs when choosing among scarce resources

• Cause → Effect

  • Scarcity → choice → opportunity cost

• Tips

  • Always identify what is given up as opportunity cost

Trade-offs and Decision Making (Heading 2)

Making Choices (Heading 3)

• Rational decisions weigh marginal benefits vs marginal costs

• Optimal choice occurs when MB = MC

• Cause → Effect

  • MB > MC → benefit of additional unit exceeds cost → consume/produce more

  • MB < MC → cost exceeds benefit → consume/produce less

• Tips

  • Think “marginal = one more unit” for FRQs and graphs

Production Possibilities (Heading 1)

Production Possibilities Curve (PPC) (Heading 2)

Concepts (Heading 3)

• Shows maximum output combinations of two goods given resources and technology

• Points on PPC:

  • On curve = efficient

  • Inside curve = inefficient

  • Outside curve = unattainable

Shifts and Economic Growth (Heading 3)

• Outward shift → economic growth (more resources/technology)

• Inward shift → resource loss or disaster

• Cause → Effect

  • Economic growth → PPC shifts outward → more potential output

• Tips

  • Remember: scarcity = curve, growth = shift

  • Use opportunity cost triangles on PPC to calculate trade-offs

Comparative & Absolute Advantage (Heading 2)

Definitions (Heading 3)

• Absolute advantage: ability to produce more of a good with same resources

• Comparative advantage: ability to produce at lower opportunity cost

• Cause → Effect

  • Comparative advantage → basis for trade → gains for all

• Tips

  • Use opportunity cost table to find comparative advantage

Economic Systems (Heading 1)

Types of Economies (Heading 2)

Market, Command, and Mixed (Heading 3)

• Market economy: decisions by individuals/firms → prices coordinate resources

• Command economy: government makes all decisions → allocates resources

• Mixed economy: combination of market & government decisions

• Cause → Effect

  • Type of economy → method of allocating scarce resources

• Tips

  • Market = “invisible hand”, Command = government control, Mixed = somewhere in between

Role of Incentives (Heading 2)

How People Respond (Heading 3)

• Positive incentives → encourage behavior

• Negative incentives → discourage behavior

• Cause → Effect

  • Incentives influence choice → determine outcomes in economy

• Tips

  • Always link incentives → decision → effect on market

Supply, Demand, and Markets (Heading 1)

Voluntary Exchange (Heading 2)

Gains from Trade (Heading 3)

• Trade allows specialization → higher total output

• Consumers and producers benefit

• Cause → Effect

  • Specialization + trade → mutual gains → higher standard of living

Market Interaction (Heading 2)

Law of Demand (Heading 3)

• Price ↑ → Quantity demanded ↓ (inverse relationship)

• Determinants: income, tastes, substitutes, complements

Law of Supply (Heading 3)

• Price ↑ → Quantity supplied ↑ (direct relationship)

• Determinants: input costs, technology, number of sellers

• Cause → Effect

  • Supply & demand → determine equilibrium price & quantity

• Tips

  • Remember shifts vs movements along curves

  • Use graphs for FRQs

Equilibrium (Heading 2)

Market Clearing (Heading 3)

• Equilibrium occurs where QD = QS

• Surplus → downward pressure on price

• Shortage → upward pressure on price

• Cause → Effect

  • Shifts in supply/demand → new equilibrium price & quantity

• Tips

  • Always label initial vs new equilibrium in diagrams

Government Intervention (Heading 1)

Price Controls (Heading 2)

Ceilings & Floors (Heading 3)

• Price ceiling → maximum price → shortage if below equilibrium

• Price floor → minimum price → surplus if above equilibrium

• Cause → Effect

  • Controls → distort market outcomes → shortages or surpluses

Taxes & Subsidies (Heading 2)

Impact on Market (Heading 3)

• Tax → increases cost → shifts supply left → higher price, lower quantity

• Subsidy → decreases cost → shifts supply right → lower price, higher quantity

• Tips

  • Always show shift in supply curve and new equilibrium