AP Microeconomics Formula Sheet

• Below you will find all the formulas you need to know for microeconomics. The microeconomics exam doesn’t generally have quite as much math as the macroeconomics exam so the list below isn’t overly long.

1. Total Revenue (TR) Test

• Formula: P x Q = Total Revenue

  • Purpose: Determines the price elasticity of demand.

  • Interpretation:

    • If higher prices increase TR → Demand is inelastic (PED<1\text{PED} < 1PED<1).

    • If higher prices decrease TR → Demand is elastic (PED>1\text{PED} > 1PED>1).

2. Elasticity Coefficients

• Price Elasticity:

  • Formula: % Change Quantity/%Change in Price (for price elasticity)

  • Interpretation:

    • Absolute value > 1 means elastic

    • Absolute value < 1 means inelastic

• Cross-Price Elasticity:

  • Formula: Negative = Complement; Positive = Substitute

  • Interpretation:

    • Negative value → Goods are complements.

    • Positive value → Goods are substitutes.

• Income Elasticity:

  • Formula: Negative = Inferior Good; Positive = Superior or Normal Good

  • Interpretation:

    • Negative value → Inferior goods (demand decreases as income rises).

    • Positive value → Normal goods (demand increases as income rises).

3. Profit-Maximizing Point

• Formula: MC=MR until MC<MR

  • Explanation: Firms maximize profit by producing up to the point where marginal cost equals marginal revenue.

  • Before this point: → Keep producing more.

4. Cost-Benefit Analysis

• Formula: MC=MB

  • Explanation: Continue an activity until the marginal cost equals the marginal benefit.

5. Utility Maximization

• Formula: MUA/PA=MUB/PB

  • Explanation: To maximize satisfaction, allocate spending so that the marginal utility per dollar is equal across all goods.

  • If not equal:

    • Consume more of the good with higher utility per dollar.

    • Consume less of the good with lower utility per dollar.

6. Lowest Cost Resource Combination

• Formula: MPL/PL=MPC/PC

  • Explanation: Allocate resources to minimize production costs by equalizing the marginal product per dollar of each resource.

7. Marginal Cost of Labor (MCL)

• Formula: MC=WL/MPL

  • Explanation: The marginal cost of labor is the wage rate divided by the marginal product of labor.

8. Marginal Revenue Product (MRP)

• Formulas:

  • Δ Total Revenue/Δ Quantity of resource OR Marginal Product x Price

  • Explanation: Measures the additional revenue generated by using one more unit of a resource.

9. Comparative and Absolute Advantage

• Absolute Advantage:

  • Definition: The ability to produce more output with the same inputs or the same output with fewer inputs.

• Comparative Advantage:

  • Definition: The ability to produce a good at a lower opportunity cost.

  • Formulas:

    • Outputs (bikes, corn, etc): Other Over

      • Opportunity cost of A is B/A units of B

    • Inputs (hours, machines, land): It Over

      • Opportunity cost of A is A/B units of B

Tips

• Know when to use each formula and understand its purpose.

• Remember the interpretations of elastic, inelastic, and unitary values.

• For utility maximization and resource allocation, focus on equalizing ratios.

• Use comparative advantage formulas to analyze trade scenarios effectively.