AP Microeconomics Cram Sheet

• •Compute opportunity cost from a PPC or an output/input table and identify who has comparative advantage, this is a near-guaranteed exam question.
• •Know that a country can hold an absolute advantage in both goods but never a comparative advantage in both.
• •Apply the utility-maximizing rule: spend each dollar where marginal utility per dollar is highest, until MUx/Px = MUy/Py.
• •Read PPC shapes: a bowed-out PPC means increasing opportunity cost; a straight line means constant opportunity cost.

1.1 Scarcity

Watch out: Calling money or financial capital a factor of production. 'Capital' in economics means physical capital, tools, machinery, factories. Money is only a means of buying the real resources.

1.2 Resource Allocation and Economic Systems

Watch out: Labeling the United States a pure market economy. Every real economy is mixed, the U.S. has substantial government spending, regulation, and transfer programs alongside markets.

1.3 Production Possibilities Curve

Watch out: Reading a bowed-out PPC as constant opportunity cost. The bow means opportunity cost INCREASES as you produce more of one good; only a straight-line PPC has constant opportunity cost.

1.4 Comparative Advantage and Trade

Watch out: Assigning comparative advantage to whoever produces more. Compare opportunity costs, not outputs, a producer with absolute advantage in both goods still has comparative advantage in only one.

1.5 Cost-Benefit Analysis

Watch out: Letting sunk costs drive the decision ('I already paid, so I have to keep going'). Sunk costs are unrecoverable and must be ignored, compare only marginal benefits and marginal costs going forward.

1.6 Marginal Analysis and Consumer Choice

Watch out: Equating marginal utilities instead of marginal utility PER DOLLAR. The rule is MUx/Px = MUy/Py, skip the division by price and you will pick the wrong bundle whenever prices differ.

• •Master the double-shift rule: when both curves shift, either price or quantity is indeterminate.
• •Use the midpoint formula for elasticity and connect elasticity to the total revenue test.
• •Draw binding price ceilings (below equilibrium → shortage) and floors (above equilibrium → surplus) with the resulting deadweight loss.
• •Show tax incidence: the more inelastic side of the market bears more of the tax.

2.1 Demand

Watch out: Shifting the demand curve when the good's own price changes. Own-price changes move you along the curve; only outside determinants (income, tastes, related prices, expectations, number of buyers) shift it.

2.2 Supply

Watch out: Treating an increase in supply as an upward shift. An increase in supply shifts the curve RIGHT (down at each quantity), students who think 'up = more' draw a decrease by accident.

2.3 Price Elasticity of Demand

Watch out: Reading elasticity off the slope. A straight-line demand curve has constant slope but CHANGING elasticity, elastic near the top, unit elastic at the midpoint, inelastic near the bottom.

2.4 Price Elasticity of Supply

Watch out: Recycling demand's determinants (substitutes, necessity, income share) for supply elasticity. Supply elasticity is about production flexibility and TIME, the longer the horizon, the more elastic supply becomes.

2.5 Other Elasticities

Watch out: Dropping the sign. For income and cross-price elasticity the sign carries the meaning (normal vs inferior, substitute vs complement), taking absolute value, correct for PED, destroys the answer here.

2.6 Market Equilibrium and Consumer and Producer Surplus

Watch out: Shading the surpluses on the wrong side of the price line. Consumer surplus sits BELOW demand and ABOVE price; producer surplus sits ABOVE supply and BELOW price, swapping them is an instant lost point.

2.7 Market Disequilibrium and Changes in Equilibrium

Watch out: Giving definite answers for both price and quantity on a double-shift question. When both curves shift, one of the two is indeterminate unless relative magnitudes are given, say so explicitly.

2.8 The Effects of Government Intervention in Markets

Watch out: Drawing price controls on the wrong side of equilibrium. A BINDING ceiling sits BELOW equilibrium (shortage); a binding floor sits ABOVE it (surplus). Drawn the other way, the control has no effect at all.

2.9 International Trade and Public Policy

Watch out: Treating a tariff and a quota as identical in every way. Their price and quantity effects match, but a tariff raises GOVERNMENT revenue while a quota's markup goes to import-license holders.

• •Draw the cost-curve family correctly: MC cuts both ATC and AVC at their minimums.
• •Apply the shut-down rule: operate if P ≥ AVC; shut down if P < AVC; exit in the long run if P < ATC.
• •Draw the side-by-side graph, market on the left sets the price, the firm takes it as a horizontal demand/MR line.
• •Explain long-run adjustment: profits attract entry, supply shifts right, price falls to minimum ATC, economic profit returns to zero.

3.1 The Production Function

Watch out: Confusing diminishing marginal returns with falling output. Diminishing returns means MP is FALLING but still positive, total product keeps rising. Output only falls when MP goes negative.

3.2 Short-Run Production Costs

Watch out: Drawing MC crossing ATC or AVC somewhere other than their minimums. MC below an average pulls it down, MC above pulls it up, so MC must pass through each average's lowest point.

3.3 Long-Run Production Costs

Watch out: Explaining economies of scale with diminishing marginal returns. Diminishing returns is SHORT-run (one input fixed); scale economies are LONG-run, where all inputs rise together, mixing them loses the reasoning point.

3.4 Types of Profit

Watch out: Reading zero economic profit as 'the firm is broke.' Zero economic profit (normal profit) means all costs INCLUDING opportunity costs are covered, the owner is doing exactly as well as the next-best alternative.

3.5 Profit Maximization

Watch out: Choosing the output with the biggest per-unit profit (largest P − ATC gap) or the highest total revenue. Firms maximize TOTAL profit, and that happens only at the quantity where MR = MC.

3.6 Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market

Watch out: Shutting down whenever the firm takes a loss. If P ≥ AVC, operating pays off part of the fixed costs, so a loss-making firm should keep producing in the short run, shut down only when P < AVC.

3.7 Perfect Competition

Watch out: Drawing the FIRM's demand curve downward sloping. In perfect competition the firm's demand is horizontal at the market price (P = MR); only the market graph has a downward-sloping demand curve.

• •Draw the monopoly graph: produce where MR = MC, price off the demand curve, shade deadweight loss.
• •Read payoff matrices: find each player's dominant strategy (if any) and the Nash equilibrium.
• •Know the monopolistic competition long-run tangency (zero profit, excess capacity, P > MC).
• •Compare all four market structures on efficiency: only perfect competition delivers P = MC.

4.1 Introduction to Imperfectly Competitive Markets

Watch out: Drawing MR on top of the demand curve for an imperfectly competitive firm. MR = D only for a perfectly competitive price taker; with downward-sloping demand, MR lies strictly below demand.

4.2 Monopoly

Watch out: Reading the monopoly price at the MR = MC intersection. That intersection gives the quantity only, go straight up from it to the demand curve to find the price.

4.3 Price Discrimination

Watch out: Claiming perfect price discrimination creates deadweight loss. It eliminates it, output expands to where demand meets MC. Consumers aren't hurt by lost efficiency; they lose because all their surplus becomes producer surplus.

4.4 Monopolistic Competition

Watch out: Drawing long-run equilibrium with demand tangent to the bottom of the ATC curve. The tangency is on ATC's downward-sloping section, the firm keeps excess capacity, with P above both MC and minimum ATC.

4.5 Oligopoly and Game Theory

Watch out: Picking the cell with the biggest combined payoff as the Nash equilibrium. Check each player separately: hold one player's choice fixed and ask if the other would switch. The Nash outcome is often NOT the best joint outcome.

• •Hire where MRP = MFC (wage, in a competitive labor market). MRP = MP × price of output.
• •Remember factor demand is derived demand, it shifts when output demand, productivity, or output price changes.
• •Draw the monopsony graph: MFC above supply, hire where MRP = MFC, pay the lower wage off the supply curve.
• •Least-cost rule for two inputs: MPL/PL = MPK/PK.

5.1 Introduction to Factor Markets

Watch out: Computing MRP as the change in total revenue per extra unit of OUTPUT, that's marginal revenue. MRP is the change in total revenue per extra unit of the FACTOR (ΔTR ÷ Δlabor).

5.2 Changes in Factor Demand and Factor Supply

Watch out: Shifting the labor demand curve because the wage changed. A wage change moves you along the curve; only changes in productivity, the product's price/demand, or other input prices shift labor demand.

5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

Watch out: Drawing an upward-sloping labor supply curve for an individual competitive firm. A wage taker faces a horizontal supply at the market wage, the upward-sloping curve belongs on the market graph (or to a monopsonist).

5.4 Monopsonistic Markets

Watch out: Reading the monopsony wage at the MRP = MFC intersection. That intersection gives the quantity of labor hired; drop straight down to the labor SUPPLY curve to find the wage actually paid.

• •Draw negative externality (MSC above MPC, market overproduces, tax fixes it) and positive externality (MSB above MPB, market underproduces, subsidy fixes it) graphs.
• •Shade deadweight loss between the market quantity and the socially optimal quantity.
• •Classify goods by rivalry and excludability; public goods fail markets because of free riders.
• •Read a Lorenz curve: farther from the diagonal = more inequality; Gini closer to 1 = more unequal.

6.1 Socially Efficient and Inefficient Market Outcomes

Watch out: Assuming market equilibrium is always efficient. It maximizes total surplus only when private and social costs and benefits coincide, with an externality or market power, the market quantity is the wrong one.

6.2 Externalities

Watch out: Drawing the deadweight-loss triangle pointing away from the socially optimal quantity. DWL always points TO the MSB = MSC intersection, covering the units between the market quantity and the optimal quantity.

6.3 Public and Private Goods

Watch out: Calling anything the government provides a 'public good.' The test is nonexcludability plus nonrivalry, public schools and toll roads fail it, and a crowded free road is rival, making it a common resource.

6.4 The Effects of Government Intervention in Different Market Structures

Watch out: Shifting the MC curve after a lump-sum tax. Lump-sum taxes are fixed costs, only ATC moves, so output and price stay put. Only per-unit taxes shift MC and change the MR = MC quantity.

6.5 Inequality

Watch out: Classifying a tax by dollars paid instead of the average tax rate. A tax is progressive only if the average rate RISES with income, the rich pay more dollars under a flat tax, but it is still proportional.

Formulas you must know

Price Elasticity of Demand

PED = %ΔQ ÷ %ΔP, where %Δ = (new − old) ÷ ((new + old) ÷ 2). |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic.

Consumer Surplus

Consumer surplus = ½ × base × height = ½ × quantity × (maximum willingness to pay − price)

Deadweight Loss

DWL = ½ × base × height = ½ × |Q_efficient − Q_actual| × (price wedge)

Comparative Advantage

Opportunity cost of 1 unit of Good A = (units of Good B given up) ÷ (units of Good A gained). Lower ratio = comparative advantage.

Total Revenue Test

TR = P × Q. P↑ & TR↓ (or P↓ & TR↑) → elastic. P↑ & TR↑ (or P↓ & TR↓) → inelastic. TR unchanged → unit elastic.

Price Elasticity of Supply

PES = %ΔQs ÷ %ΔP, with %Δ = (new − old) ÷ ((new + old) ÷ 2) on AP exams. PES > 1 elastic, < 1 inelastic, = 1 unit elastic.

Cross-Price Elasticity

XED = %ΔQd of good A ÷ %ΔP of good B. XED > 0 → substitutes; XED < 0 → complements; XED ≈ 0 → unrelated goods.

Income Elasticity

YED = %ΔQd ÷ %Δincome. YED > 0 → normal good (0–1 necessity, > 1 luxury); YED < 0 → inferior good.

Marginal Cost

MC = ΔTC ÷ ΔQ = ΔVC ÷ ΔQ (fixed costs don't change, so only variable costs matter)

Average Total Cost

ATC = TC ÷ Q = AFC + AVC | AFC = FC ÷ Q | AVC = VC ÷ Q

Marginal Revenue

MR = ΔTR ÷ ΔQ, where TR = P × Q. Perfect competition: MR = P. Monopoly/imperfect competition: MR < P.

Economic Profit

Economic profit = TR − explicit costs − implicit costs = accounting profit − implicit costs | Per-unit form: (P − ATC) × Q

Marginal Revenue Product

MRP = MP × P (competitive output market) = ΔTR ÷ Δlabor. Hire until MRP = wage (MRC).

Producer Surplus

Producer surplus = ½ × base × height = ½ × quantity × (price − supply curve's price intercept)

Opportunity Cost

Per-unit opportunity cost of good A = units of good B given up ÷ units of good A gained

Gini Coefficient

Gini = Area A ÷ (Area A + Area B) = Area A ÷ 0.5 = 2 × Area A (where A = area between the line of equality and the Lorenz curve, B = area under the Lorenz curve, and A + B = 0.5 on a unit square)

Tax Incidence

Consumer burden per unit = P(paid, after tax) − P(before tax) Producer burden per unit = P(before tax) − P(received, after tax) Consumer burden + Producer burden = tax per unit Burden rule: Consumer burden ÷ Producer burden = Es ÷ Ed (the more inelastic side pays the larger share)

Percentage Change

Percentage change = ((New value − Old value) ÷ Old value) × 100

Herfindahl-Hirschman Index (HHI)

HHI = (s₁)² + (s₂)² + ... + (sₙ)² = Σ (share%)² where each share is a whole-number percent (0 to 100)

Marginal Utility

MU = ΔTU ÷ ΔQ = (TU₂ − TU₁) ÷ (Q₂ − Q₁)

MU per Dollar

MU per dollar = MU ÷ P | compare MUx ÷ Px against MUy ÷ Py to decide what to buy next

Utility-Maximizing Rule

MUx ÷ Px = MUy ÷ Py and PxQx + PyQy = Income (both conditions must hold)

Total Utility

TU = MU₁ + MU₂ + ... + MUn | TU at Q = TU at (Q − 1) + MU of unit Q

Budget Constraint

PxQx + PyQy = Income | slope = −Px ÷ Py | intercepts = Income ÷ Px and Income ÷ Py

MRS

MRS = MUx ÷ MUy = absolute slope of the indifference curve | at the optimum, MRS = Px ÷ Py

Consumer Equilibrium

MUx ÷ Px = MUy ÷ Py and PxQx + PyQy = Income | equivalently MUx ÷ MUy = Px ÷ Py

Average Variable Cost

AVC = VC ÷ Q = ATC − AFC | VC = TC − FC

Average Fixed Cost

AFC = FC ÷ Q = ATC − AVC

Total Cost

TC = FC + VC = ATC × Q | FC = AFC × Q, VC = AVC × Q

Total Variable Cost

VC = TC − FC = AVC × Q = the sum of the marginal costs from the first unit up to Q

Marginal Product

MP = ΔTP ÷ ΔL (change in total product ÷ change in units of the input, usually labor)

Average Product

AP = TP ÷ L (total product ÷ quantity of the variable input)

Break-Even Point

Break-even quantity: Q = FC ÷ (P − AVC) | Break-even price: P = minimum ATC, where TR = TC and economic profit = 0

Marginal Factor Cost

MFC = ΔTotal factor cost ÷ ΔQuantity of the input hired | Perfectly competitive labor market: MFC = wage | Monopsony: MFC > wage, and the MFC curve lies above the labor supply curve

Labor's Marginal Product

MPL = ΔTotal output ÷ ΔQuantity of labor = ΔQ ÷ ΔL | With one-worker steps, MPL is simply the extra output that worker adds

Optimal Hiring

Hire where MRP = MFC | Competitive labor market: MRP = W (the wage) | Monopsony: hire where MRP = MFC, then read the wage off the labor supply curve at that quantity | MRP = MP × P

Least-Cost Rule

MPL ÷ PL = MPK ÷ PK (marginal product per dollar equal across every input) | Profit-maximizing version: MRPL ÷ PL = MRPK ÷ PK = 1

Marginal Social Cost

MSC = MPC + Marginal external cost | No externality: MSC = MPC, the supply curve | Negative externality: MSC lies above MPC by the external cost per unit

Marginal Social Benefit

MSB = MPB + Marginal external benefit | No externality: MSB = MPB, the demand curve | Positive externality: MSB lies above MPB by the external benefit per unit

Socially Optimal Quantity

Socially optimal Q solves MSB = MSC, where MSB = MPB + marginal external benefit and MSC = MPC + marginal external cost | The market quantity instead solves MPB = MPC

Profit Max Quantity

Produce where MR = MC (MC rising). Profit = (P − ATC) × Q

Shutdown Point

Shut down if P < minimum AVC. AVC = TVC ÷ Q, and minimum AVC occurs where MC = AVC

Accounting Profit

Accounting profit = Total revenue − Explicit costs

Total Revenue

Total revenue = Price × Quantity (TR = P × Q)

Markup Over MC

Dollar markup = P − MC. Percentage markup = [(P − MC) ÷ MC] × 100

Lerner Index

Lerner index = (P − MC) ÷ P (equals 1 ÷ |price elasticity of demand| at the profit-maximizing output)

Concentration Ratio

CRn = share of firm 1 + share of firm 2 + ... + share of firm n, where each share = (firm sales ÷ total industry sales) × 100

Labor Productivity

Labor productivity = Real output ÷ Labor hours

Gains From Trade

Gains from trade = Consumption with trade − Production without trade (computed per good, per country)

Terms of Trade Range

Lower opportunity cost of 1 X < Terms of trade for 1 X < Higher opportunity cost of 1 X (both bounds measured in units of good Y)

Compound Growth

End value = Start value × (1 + g)ⁿ where g = growth rate as a decimal, n = number of periods. Average growth rate = (End ÷ Start) raised to the power (1 ÷ n), minus 1

Future Value

FV = PV × (1 + r)ⁿ where r = interest rate as a decimal, n = number of years

Expected Value

Expected value = Σ (probability of an outcome × payoff of that outcome), where the probabilities must sum to 1

Pigouvian Tax

Pigouvian tax per unit = MSC − MPC measured at Q(optimal) Q(optimal) is where MSB = MSC

Per-Unit Subsidy

Per-unit subsidy = MSB − MPB measured at Q(optimal) Total cost to government = per-unit subsidy × quantity traded after the subsidy

Excise Tax Revenue

Excise tax revenue = per-unit tax × Q(after tax) Revenue from consumers = consumer burden per unit × Q(after tax) Revenue from producers = producer burden per unit × Q(after tax)

Externality DWL

DWL = ½ × base × height base = |Q(market) − Q(optimal)| height = vertical gap between MSC and MSB at Q(market), which equals the external cost or benefit per unit when that spillover is constant

Tariff Revenue

Tariff revenue = tariff per unit × imports after the tariff Imports after the tariff = Qd − Qs, both read at the price (world price + tariff)

Effective Tax Rate

Effective (average) tax rate = (total tax paid ÷ total income) × 100

Marginal Tax Rate

Marginal tax rate = [(tax₂ − tax₁) ÷ (income₂ − income₁)] × 100

Market Equilibrium

Set Qd = Qs, solve for P*, then Q* = Qd at P* = Qs at P*

Shortage

Shortage = Qd − Qs at the given price (positive only when that price is below equilibrium)

Market Surplus

Surplus = Qs − Qd at the given price (positive only when that price is above equilibrium)

Price Ceiling

Shortage = Qd − Qs at the ceiling; quantity traded = Qs; DWL = ½ × (Q equilibrium − Q traded) × (demand price − supply price at Q traded)

Price Floor

Surplus = Qs − Qd at the floor; quantity traded = Qd; DWL = ½ × (Q equilibrium − Q traded) × (floor price − supply price at Q traded)

Total Surplus

Total surplus = consumer surplus + producer surplus = ½ × Q × (demand's price intercept − supply's price intercept)

Midpoint Method

%Δ = (new − old) ÷ ((new + old) ÷ 2), then elasticity = %ΔQ ÷ %ΔP

Production Function

Q = f(L, K) | Cobb-Douglas form: Q = A × L^α × K^β | APL = Q ÷ L | MPL = α × Q ÷ L | MPK = β × Q ÷ K | Returns to scale: read the sum α + β

Excess Capacity

Excess capacity = Q at minimum ATC − Q actual | Capacity utilization = (Q actual ÷ Q at minimum ATC) × 100 | The firm carries excess capacity whenever Q actual < Q at minimum ATC

Market Capitalization

Market cap = share price × shares outstanding | Percent change in market cap = percent change in share price, when the share count is unchanged

Capital Gain

Capital gain = selling price − purchase price (cost basis) | Percent return = (gain ÷ purchase price) × 100 | After-tax gain = gain × (1 − tax rate)

P/E Ratio

P/E ratio = share price ÷ earnings per share (EPS) | EPS = net income ÷ shares outstanding | Earnings yield = (EPS ÷ share price) × 100

Marginal-Average Rule

New ATC = (TC + MC of the next unit) ÷ (Q + 1) | MC < ATC ⇒ ATC falls | MC > ATC ⇒ ATC rises | MC = ATC at minimum ATC

Two-Part Tariff

Total charge = access fee (A) + (per-unit price × quantity) | Identical buyers: per-unit price = MC, and A = consumer surplus = ½ × (choke price − MC) × quantity bought

Monopoly Inefficiency

Monopoly output: MR = MC, where MR = choke price − (2 × slope × Q) | Efficient output: P = MC | Deadweight loss = ½ × (efficient Q − monopoly Q) × (monopoly price − MC)

Hotelling's Rule

Net price = P − MC | Net price after t years = (P₀ − MC) × (1 + r)ᵗ | Price after t years = MC + (P₀ − MC) × (1 + r)ᵗ

Stackelberg Model

q_leader = (a − c) ÷ (2b) | q_follower = (a − c) ÷ (4b) | P = a − b × (q_leader + q_follower) | Profit = (P − c) × q

Cournot Competition

q per firm = (a − c) ÷ [(n + 1) × b] | Q = n × q | P = a − bQ = (a + n × c) ÷ (n + 1) | Profit per firm = (P − c) × q

Hyperbolic Discounting

PV = V ÷ (1 + k × t) | exponential form for comparison: PV = V ÷ (1 + r)^t

Present Bias

Weight on a payoff today = 1 | Weight on a payoff t periods away = beta × delta^t, with 0 < beta < 1

Scarcity Rent

Scarcity rent = price − marginal extraction cost Scarcity rent after t years = scarcity rent today × (1 + r)^t Price after t years = marginal extraction cost + scarcity rent after t years

Contingent Valuation

Aggregate benefit = mean willingness to pay per household × number of affected households Net benefit = aggregate benefit − cost Break-even mean willingness to pay = cost ÷ number of affected households

Permit Price

Required abatement = baseline emissions − cap Trading sets MAC(firm A) = MAC(firm B) = permit price Permit price = the common marginal abatement cost once the required cuts are split

Total Economic Value

Total economic value = use value + option value + non-use value Non-use value = existence value + bequest value Net gain from preserving = total economic value − net benefit of the alternative use

Hedge Fund Fees

Management fee = management fee rate × assets | Performance fee = performance fee rate × gross gain | Investor's net gain = gross gain − management fee − performance fee

Mixed Strategy Equilibrium

Let q = the chance the column player picks Left. Set EV(Up) = EV(Down) and solve for q | Let p = the chance the row player picks Up. Set EV(Left) = EV(Right) and solve for p | q = (Down-Right payoff − Up-Right payoff) ÷ (Up-Left − Up-Right − Down-Left + Down-Right), all read off the row player's payoffs

Repeated Game Payoffs

Cooperating = cooperate payoff × rounds still to come | Cheating = cheat payoff + punishment payoff × (rounds still to come − 1) | Break-even rounds = (cheat payoff − punishment payoff) ÷ (cooperate payoff − punishment payoff) | Open-ended version: cooperation holds when the discount factor is at least gain from cheating ÷ (gain from cheating + per-round loss)

Market for Lemons

Buyer's maximum offer = (share good × value if good) + (share lemon × value if lemon) | Good units trade only when that offer is at least what a good unit's owner will accept

Customs Union Welfare

Net welfare = trade creation gain − trade diversion loss Trade creation gain = ½ × price fall × rise in imports Trade diversion loss = old import volume × (partner price − world price) Price fall = (world price + tariff) − partner price

Poverty Line

Poverty line per person = annual food budget + non-food allowance Annual food budget = daily cost of the calorie-minimum basket × days covered Non-food allowance = food budget × the non-food share Household line = line per person × household size

Poverty Headcount Ratio

Headcount ratio (P0) = people below the line ÷ total population × 100 Poverty gap index (P1) = headcount ratio × (average shortfall ÷ poverty line) Total shortfall = people below the line × average shortfall

Relative Poverty Threshold

Relative poverty threshold = threshold percentage × median equivalized household income A household is in relative poverty when its equivalized income falls below that threshold Relative poverty rate = households below the threshold ÷ all households × 100

Unit Labor Cost

Unit labor cost = Wage per hour ÷ Output per hour | Output per hour = Total output ÷ Total hours worked

Horizontal Merger

Change in HHI = 2 × share A × share B | Post-merger HHI = pre-merger HHI + change | Pre-merger HHI = sum of every firm's squared percent share

Switching Costs

Total switching cost = fees + (hours spent × value of an hour) | Switch if saving per period × periods > total switching cost | Break-even periods = total switching cost ÷ saving per period

Minimum Efficient Scale

MES = smallest output where long-run ATC reaches its minimum | Firms the market supports ≈ market quantity ÷ MES | MES as a share of the market = (MES ÷ market quantity) × 100

Rate-of-Return Regulation

Allowed revenue = operating costs + (allowed rate of return × rate base) | Regulated price = allowed revenue ÷ units sold

Limit Pricing

Limit price = entrant's minimum ATC − undercut margin, with ATC of the incumbent < limit price < ATC of the entrant | Profit given up = profit with no entry threat − profit at the limit price

Isoquant MRTS

MRTS = −(ΔK ÷ ΔL) = MPL ÷ MPK | output is held constant along one isoquant | least-cost input mix: MRTS = w ÷ r

Isocost Line

wL + rK = C | slope = −w ÷ r | intercepts: C ÷ w units of labor and C ÷ r units of capital

Returns to Scale

Scale every input by t | Q(tK, tL) > t × Q(K, L) is increasing returns, = t × Q(K, L) is constant, < t × Q(K, L) is decreasing | elasticity of scale = ln(output multiplier) ÷ ln(t)

Social Welfare Function

Utilitarian: W = U1 + U2 + ... + Un | Rawlsian (maximin): W = min(U1, U2, ..., Un) | rank allocations by W under the rule you chose

Expected Utility

EU = p₁ × U(x₁) + p₂ × U(x₂) + ... + pₙ × U(xₙ), where the probabilities sum to 1

Certainty Equivalent

U(CE) = expected utility of the gamble | with utility = wealth^r, CE = EU^(1 ÷ r) | risk premium = expected value − CE

Compensating Variation

CV = (income needed at the new prices to reach the old utility) − actual income | Cobb-Douglas shortcut: CV = income × [(new price ÷ old price)^α − 1], where α is the share of income spent on the good

Estate Tax

Taxable estate = gross estate − exemption − deductions | Estate tax owed = tax rate × taxable estate | Effective rate = tax owed ÷ gross estate

Corporate Income Tax

Taxable profit = revenue − deductible costs (wages, materials, interest, depreciation) | Tax owed = statutory rate × taxable profit | After-tax profit = taxable profit − tax owed

Tax Expenditure

Tax expenditure = revenue under a clean base − revenue actually collected | Per taxpayer: marginal rate × amount removed from the base | Program cost = per-taxpayer amount × number of claimants

Means-Tested Benefit

Benefit = maximum benefit − [phase-out rate × (income − threshold)], floored at zero | Break-even income = threshold + (maximum benefit ÷ phase-out rate) | Effective marginal tax rate = phase-out rate + other taxes on the next dollar

EITC

Phase-in (earnings up to the ceiling): credit = phase-in rate × earnings | Plateau: credit = maximum = phase-in rate × phase-in ceiling | Phase-out: credit = maximum − [phase-out rate × (earnings − plateau end)], floored at zero

Negative Income Tax

Net payment = Guaranteed minimum − (Clawback rate × Earned income) | Break-even income = Guaranteed minimum ÷ Clawback rate | Income after the payment = Earned income + Net payment

Graphs you must be able to draw

Drawing points are the easiest points to lose. Practice each of these until you can draw it from memory, fully labeled.

Then test yourself: draw the graph for a graded check or watch a shock move through it step by step.