ACDC Econ: AP Microeconomics Review Summary

Introduction

• Presenter: Jacob Clifford
• Purpose: Summary for AP or college introductory microeconomics class.
• Goal: Prep for AP test/final exam, identify areas needing review.
• Note: Detailed concepts available in the Ultimate Review Pack.

Unit 1: Basic Economic Concepts

Key Concepts

• Scarcity: Unlimited wants vs. limited resources.
• Opportunity Costs: Cost of any decision, what you give up.
• Production Possibilities Curve (PPC): Shows efficient, inefficient, and impossible production points.
  • Shapes: Straight line (constant opportunity cost) vs. bowed out (increasing opportunity cost).
  • Shifts: More resources, better technology, trade.
• Comparative Advantage: Specialize in goods with lower opportunity cost.
  • Absolute Advantage: Who produces more.
  • Terms of Trade: Mutually beneficial trade terms.
• Economic Systems: Free market (capitalism), command economy, mixed economy.
  • Focus on circular flow model: Interactions between businesses, individuals, government.
• Key Vocab: Transfer payments, subsidies, factor payments.

Unit 2: Supply and Demand

Demand

• Law of Demand: Inverse relationship between price and quantity demanded.
  • Effects: Substitution, income, diminishing marginal utility.

Supply

• Law of Supply: Direct relationship between price and quantity supplied.
• Equilibrium: Intersection of supply and demand.
  • Surplus/Shortage: Effects of price changes.
  • Shifts: Demand up/down, supply up/down.
  • Double Shifts: Indeterminate price or quantity.
• Related Concepts: Substitutes, complements, normal goods, inferior goods.

Elasticity

• Elasticity of Demand: Sensitivity of quantity demanded to price changes.
  • Elastic vs. Inelastic: High vs. low sensitivity.
  • Coefficient: Percent change in quantity/percent change in price.
  • Cross Price Elasticity: Substitutes (+) vs. complements (-).
  • Income Elasticity: Normal (+) vs. inferior (-) goods.
• Total Revenue Test: Assessing elasticity based on total revenue changes.
• Consumer/Producer Surplus: Difference between willingness to pay/receive and actual price.
• Deadweight Loss: Loss of consumer/producer surplus.

Price Controls

• Price Ceilings: Maximum price, creates shortages (binding if below equilibrium).
• Price Floors: Minimum price, creates surpluses (binding if above equilibrium).
• International Trade: Effects of tariffs, import levels, deadweight loss.
• Taxes: Effects on supply curves, tax incidence.

Consumer Choice

• Utility Maximization: Marginal utility per dollar spent.

Unit 3: Production, Cost, and the Perfect Competition Model

Production

• Inputs and Outputs: Total product, marginal product.
• Law of Diminishing Marginal Returns: Decreasing additional output with more input.

Costs

• Types: Fixed, variable, total.
• Per Unit Costs: Average total cost (ATC), average variable cost (AVC), average fixed cost (AFC), marginal cost (MC).
  • Calculations: Important to compute and graph.
  • Shapes: Marginal cost curve (U-shaped), ATC hits MC at lowest point.
• Short Run vs. Long Run: Short run has fixed resources, long run all resources are variable.
  • Economies of Scale: Cost advantages with increased output.

Theory of the Firm

• Perfect Competition: Many firms, identical products, low barriers, price takers.
  • Graph: Horizontal demand/marginal revenue curve (Mr. DARP), cost curves.
  • Profit/Loss/Long Run: Identify using graphs.
  • Profit Maximization: Produce where MR = MC.
  • Shut Down Rule: Shut down if price < AVC.
• Efficiency: Productive (lowest cost) and allocative (socially optimal) efficiency.

Unit 4: Imperfect Competition

Market Structures

• Monopolies: One firm, unique product, high barriers, price makers.
  • Graph: Downward sloping demand, MR below demand, cost curves.
  • Profit Maximization: MR = MC, find price on demand curve.
  • Natural Monopoly: Single firm due to cost advantages.
  • Regulation: Socially optimal (P = MC), fair return (P = ATC).
  • Price Discrimination: Multiple prices, eliminate consumer surplus.

Oligopolies

• Characteristics: Few firms, high barriers, interdependent pricing.
• Game Theory: Dominant strategies, Nash equilibrium.

Monopolistic Competition

• Characteristics: Many firms, differentiated products, low barriers.
• Graph: Similar to monopoly but firms enter, reducing demand in the long run.

Unit 5: Factor Markets

• Supply and Demand for Labor: Firms demand labor, individuals supply labor.
• Derived Demand: Demand for labor depends on demand for the product.
• Minimum Wage: Binding price floor, creates unemployment if above equilibrium.
• MRP and MRC: Marginal revenue product (additional revenue from one more worker), marginal resource cost (cost of hiring one more worker).
  • Graph: MRP downward sloping, MRC horizontal in perfect competition.
• Monopsony: Single firm hiring labor, MRC above supply curve.
• Least Cost Rule: Equating marginal product per dollar across resources.

Unit 6: Market Failures

• Public Goods: Non-rivalry, non-excludability.
• Externalities: Additional costs/benefits to third parties.
  • Negative Externalities: Social cost > private cost, solution: per unit tax.
  • Positive Externalities: Social benefit > private benefit, solution: per unit subsidy.
• Lorenz Curve: Income inequality, area between line of equality and actual distribution curve.
• Types of Taxes: Progressive (higher % income for rich), regressive (higher % income for poor), proportional (same % income for all).

Conclusion

• Review and practice key concepts.
• Utilize resources like Ultimate Review Pack for further study.
• Aim for success on AP test or final exam.