AP Microeconomics: Core Concepts Cheat Sheet (Concise)

Gains from trade

  • Trade allows specialization: each party focuses on what they do best and exchanges the rest.

  • With specialization and exchange, total output and total utility rise; everyone can be better off vs. no trade.

  • Gains from trade (definition): extra benefit when individuals/c firms/ countries specialize in low opportunity-cost production and trade for the rest.

  • Questions: what determines who should produce, and how do opportunity cost and comparative advantage guide efficient trade?

Absolute vs Comparative advantage

  • Absolute advantage: entity that can produce a good with fewer resources or more of a good with given resources.

  • Comparative advantage: ability to produce a good at a lower opportunity cost than another entity.

  • OC concept (example): OC of X in terms of Y =
    OC_X = \frac{\Delta Y}{\Delta X}

  • Conclusion: even if one party has an absolute advantage in all goods, trade can be beneficial if each specializes where they have a comparative advantage.

Opportunity Cost & Production Possibilities Curve (PPC)

  • PPC basics: shows maximum feasible combinations of two goods given resources and technology.

  • Scarcity, efficiency, and trade-offs: more of one good means less of the other on a fixed PPC.

  • Opportunity cost on the PPC: moving along the curve involves giving up some of one good to produce more of the other; the slope equals the marginal opportunity cost.

  • Shape: bowed-out PPC implies increasing opportunity cost as production of one good expands.

  • Economic growth: outward shifts of the PPC due to better technology or more resources; inward shifts due to disasters or resource depletion.

  • Efficiency concepts:

    • Productive efficiency: produce at any point on the PPC (full use of resources).

    • Allocative efficiency: produce the mix that maximizes social welfare; in a perfectly competitive market, achieved where P = MC.

  • Opportunity cost formula (summary):
    OC_{X} = \frac{\Delta Y}{\Delta X} when moving from one point on the PPC to another.

Demand

  • Demand: Consumers’ willingness to buy at different prices; Law of Demand: price up → quantity demanded down (inverse relationship).

  • Shifts vs movements:

    • Movement along demand curve: price change only; quantity demanded changes.

    • Shift of demand curve: non-price factors change demand at every price (income, preferences, prices of related goods, expectations, number of buyers, seasonal/external factors).

  • Factors that affect demand (shift factors):

    • Income (normal vs inferior goods)

    • Consumer preferences

    • Prices of related goods (substitutes/complements)

    • Expectations for future prices

    • Number of buyers

    • Seasonal and external factors

  • Substitution effect: higher price for Good A → consumers substitute toward Good B.

  • Income effect: higher income increases purchasing power, shifting demand.

  • Diminishing marginal utility: additional units provide less satisfaction, helps explain downward-sloping demand.

Supply

  • Supply: quantities producers are willing to offer at different prices; Law of Supply: price up → quantity supplied up.

  • Movement vs shift:

    • Movement along supply curve: price change only.

    • Shift of supply curve: non-price factors change supply (input costs, technology, number of producers, expectations, government policy, natural conditions).

  • Key determinants of supply:

    • Input costs

    • Technology

    • Number of producers

    • Expectations about future prices/costs

    • Government policies (taxes, subsidies, regulations)

    • Natural conditions

Economic systems & incentives

  • Economic system: the way a society organizes production, distribution, and consumption.

  • Traditional economy: customs/practices shape production; subsistence focus; barter; limited technology.

  • Market economy: prices and private property guide resource allocation; competition; limited government intervention; consumer sovereignty; profit motive.

  • Command economy: centralized planning; government owns major resources; price controls; limited consumer choice; potential for inefficiency/less innovation.

  • Mixed economy: combines market and command elements; private ownership with government regulation and public goods; aim to balance efficiency with equity.

  • Why mixed economies: scarcity requires some government involvement to address market failures and provide public goods.

Incentives & property rights

  • Incentives matter: profit motive drives innovation, efficiency, and growth.

  • Property rights: secure ownership encourages investment, innovation, and voluntary exchange; supports capital formation and financial access.

  • Consequences:

    • Encourages investment and specialization

    • Enables voluntary exchange and markets

    • Reduces transaction costs

    • Provides basis for taxation and public finance

Marginal analysis & costs

  • Marginal analysis: decisions based on comparing marginal benefits (MB) with marginal costs (MC).

    • If MB > MC, increase the activity.

    • If MB < MC, decrease the activity.

    • Optimal where MB = MC (or as close as possible).

  • Sunk costs: should be ignored in future decisions; decisions should be based on marginal future costs/benefits.

  • Marginal benefit and marginal cost can vary; the optimal point occurs near MB = MC, not necessarily exactly equal.

Cost-benefit analysis & costs

  • Cost-benefit analysis compares benefits and costs of a decision.

  • Explicit costs: monetary outlays (rent, materials, wages).

  • Implicit costs: non-monetary opportunity costs (what you give up by using resources elsewhere).

  • Opportunity cost = explicit costs + implicit costs.

  • Net benefit = benefits − opportunity costs.

Utility & consumer choice

  • Total utility: overall satisfaction from consuming a quantity of a good.

  • Marginal utility (MU): extra satisfaction from consuming one more unit.

  • Law of diminishing marginal utility: MU decreases as more of a good is consumed.

  • Budget constraint and utility maximization: consumers allocate spending to maximize total utility; in a two-good case, optimality when
    \frac{MUA}{PA} = \frac{MUB}{PB}

  • Rational choice: consumers maximize utility given constraints; consider both explicit and implicit costs (opportunity costs).

Elasticity (Unit 2 concepts)

  • Price elasticity of demand (PED): PED = \frac{\%\Delta Q_d}{\%\Delta P}

    • Categories: elastic (>1), inelastic (<1), unit elastic (=1); perfectly inelastic (PED = 0); perfectly elastic (PED = infinite).

  • Price elasticity of supply (PES):
    PES = \frac{\%\Delta Q_s}{\%\Delta P}

  • Cross-price elasticity of demand: for substitutes/complements
    E{XY} = \frac{\%\Delta QX}{\%\Delta P_Y}

  • Income elasticity of demand:
    E_Y = \frac{\%\Delta Q}{\%\Delta I}

  • Implications: elasticity informs how much quantity responds to price changes, income changes, or the price of other goods.

Positive vs normative economics

  • Positive statements: testable, objective claims about how the economy works.

  • Normative statements: value judgments about how the economy should be.

  • In policy, both are used; positive analysis provides the factual basis, normative analysis sets policy goals.

Quick formula recap

  • Comparative advantage OC: OC_X = \frac{\Delta Y}{\Delta X}

  • MB vs MC: choose where MB ≈ MC

  • Allocative efficiency in perfect competition: P = MC

  • Utility optimization: \frac{MUA}{PA} = \frac{MUB}{PB}

  • PPC opportunity cost: slope (OC) = \frac{\Delta Y}{\Delta X}

  • Elasticities: PED, PES, cross-price, income as defined above

Key takeaway for quick recall

  • Gains from trade come from comparative advantage, not just absolute efficiency.

  • Demand and supply models explain how prices coordinate behavior; non-price factors shift curves.

  • PPC illustrates scarcity, trade-offs, and growth; efficiency and allocative efficiency determine welfare.

  • Mixed economies use incentives and property rights to balance efficiency with equity, plus government action to correct market failures.

  • Marginal analysis and cost-benefit analysis guide rational decisions by weighing marginal benefits against marginal costs, while sunk costs are ignored.

  • Utility maximization under budget constraints governs consumer choice; elasticity measures responsiveness to price and income changes.