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.