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)

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.