Microeconomics Review - Key Concepts for AP Test

Introduction

• Lecturer: Jacob Clifford
• Purpose: Quick review for AP or college introductory Microeconomics exams
• Ultimate Review Packet: Practice questions and videos available for purchase
• Focus: Key concepts and test preparation

Key Concepts in Microeconomics

Unit 1: Basic Economic Concepts

• Scarcity: Unlimited wants vs. limited resources
• Opportunity Costs: Every decision involves a cost
• Production Possibilities Curve (PPC):
  • Efficient points (on the curve)
  • Inefficient points (inside the curve)
  • Impossible points (outside the curve)
  • Shapes: Straight line vs. Bowed out (concave to the origin)
• Shift Factors for PPC:
  • More/less resources or better technology
  • Trade can affect consumption beyond the PPC
• Comparative Advantage: Specialization based on lower opportunity cost
  • Absolute Advantage: Who produces more?
  • Terms of Trade: Beneficial trade ratios
• Economic Systems: Free market (capitalism), command economy, mixed economy
  • Circular Flow Model: Interactions between businesses, individuals, and government

Unit 2: Supply and Demand

• Demand: Downward sloping; Substitution effect, Income effect, Law of Diminishing Marginal Utility
• Supply: Upward sloping; Price affects quantity supplied
• Equilibrium: Price and quantity determined by intersection of supply and demand
  • Shortage: Price below equilibrium
  • Surplus: Price above equilibrium
• Shifts in Supply and Demand: Increase or decrease in demand/supply
  • Double Shift Rule: Indeterminate outcome for price or quantity
• Elasticity: Sensitivity of quantity demanded/supplied to changes in price
  • Price Elasticity of Demand (PED): Elastic vs. inelastic demand
  • Cross Price & Income Elasticity: Substitutes/complements, Normal/inferior goods
  • Total Revenue Test: Relation between price changes and total revenue
• Consumer and Producer Surplus: Measures of economic welfare
• Government Interventions: Price ceilings (below equilibrium) and floors (above equilibrium)
  • Deadweight Loss: Inefficiency created by intervention
  • International Trade: Effects of tariffs and world prices
  • Taxes and Elasticity: Who bears the tax burden

Unit 3: Costs of Production and Perfect Competition

• Inputs and Outputs: Marginal Product, Law of Diminishing Marginal Returns
  • Three Stages: Specialization, fixed resources, inefficiency
• Costs: Fixed, variable, and total costs; Average and marginal costs
  • Graphs: Cost curves (MC, ATC, AVC, AFC)
• Short Run vs. Long Run: Different cost concepts; Economies and diseconomies of scale
• Perfect Competition: Many firms, identical products, low barriers, price takers
  • Marginal Revenue = Marginal Cost (MR = MC)
  • Profit, loss, and shut-down points
  • Long-Run Equilibrium: Normal profit (breaking even)
  • Efficiency: Productive and allocative efficiency

Unit 4: Imperfect Competition

• Monopoly: One firm, unique product, high barriers, price makers
  • Graphs: Demand (D), Marginal Revenue (MR), Cost curves
  • Profit Maximization: MR = MC
  • Natural Monopolies and regulation (socially optimal point, fair return)
  • Price Discrimination: Charging multiple prices, elimination of deadweight loss
• Oligopoly: Few firms, strategic interactions, Game Theory (dominant strategy, Nash equilibrium)
• Monopolistic Competition: Many firms, differentiated products, low barriers
  • Short Run and Long Run Equilibrium

Unit 5: Factor Markets

• Resource Markets: Supply and demand for labor
  • Derived Demand: Dependence on the demand for the product produced
  • Minimum Wage: Price floor leading to unemployment
• Marginal Revenue Product (MRP): Additional revenue from hiring one more worker
• Marginal Resource Cost (MRC): Cost of hiring one more worker
  • Perfect Competition and Monopsony: Hiring decisions and wage determination
  • Least-Cost Rule: Optimal combination of resources

Unit 6: Market Failures and Role of Government

• Market Failures: When markets allocate resources inefficiently
  • Public Goods: Non-rivalry and non-exclusion
  • Externalities: Negative (additional costs) and positive (additional benefits)
    • Government responses: Taxes (negative externalities), subsidies (positive externalities)
  • Lorenz Curve: Measure of income inequality
  • Types of Taxes: Progressive, regressive, proportional

Conclusion

• Difficulty Ratings:
  • Unit 1: 3/10
  • Unit 2: 5/10
  • Unit 3: 9/10
  • Unit 4: 8/10
  • Unit 5: 6/10
  • Unit 6: 4/10
• Final Tips: Review thoroughly, understand fundamentals, and practice drawing graphs. Good luck on your exams!