AP Microeconomics Review Notes

Introduction

• Summary video by Jacob Clifford from ACDC Econ.
• Designed to quickly review essential concepts before AP test or final exam.
• Ultimate Review Pack available for deeper learning with practice questions and hidden videos.

Unit 1: Basic Economic Concepts

Key Ideas

• Scarcity: Unlimited wants but limited resources.
• Opportunity Cost: Every decision has a cost; producing one good means giving up another.
• Production Possibilities Curve (PPC):
  • Shows combinations of two goods produced using all resources.
  • Points on the curve = efficient; inside = inefficient; outside = impossible.
  • Shapes:
    • Straight line = constant opportunity cost.
    • Concave to origin = increasing opportunity cost.
• Shifts: Can occur due to changes in resources or technology.

Comparative Advantage

• Countries should specialize in products with lower opportunity costs.
• Absolute Advantage: Who produces more; simpler calculation than comparative advantage.
• Terms of Trade: Units of one product traded for another beneficially.

Economic Systems Overview

• Types: Free market, capitalism, command economy, mixed economy.
• Focus on capitalism and the Circular Flow Model: interaction of businesses, individuals, and government.
• Transfer Payments: Government payments not for goods/services (e.g., welfare).
• Subsidies: Government funds to businesses to increase production.

Unit 2: Supply and Demand

Demand and Supply Basics

• Law of Demand: Price increases = quantity demanded decreases; price decreases = quantity demanded increases.
• Law of Supply: Price increases = quantity supplied increases; vice versa.
• Equilibrium: Where supply and demand meet.
• Shifts in Demand/Supply:
  • Factors causing shifts: consumer preferences, number of suppliers, etc.

Elasticity

• Elastic vs. Inelastic Demand:
  • Elastic: sensitive to price changes.
  • Inelastic: less sensitive to price changes.
• Calculating Elasticity:
  • Demand elasticity = percent change in quantity demanded / percent change in price.
  • Cross-price elasticity and income elasticity concepts.
• Total Revenue Test: Understanding effects of price changes on total revenue.

Unit 3: Theory of the Firm

Costs and Production

• Inputs and Outputs: Relationship analyzed through total product and marginal product.
• Law of Diminishing Marginal Returns: More workers lead to less additional output.
• Types of Costs: Fixed costs, variable costs, total costs; understanding per unit cost curves.
• Short vs. Long Run: Different cost behaviors; economies of scale in the long run.

Market Structures

• Perfect Competition: Many firms, identical products, price takers.
• Profit Maximization: Produce where MR = MC.
• Long-Run Equilibrium: Total revenue = total cost; no economic profit.
• Types of Efficiency: Productive efficiency (lowest ATC) and allocative efficiency (society's demand met).

Unit 4: Market Structures Continued

Different Market Structures

• Monopoly: Single firm, unique product, high barriers to entry.
• Natural Monopoly: Most efficient for one firm to produce due to economies of scale.
• Oligopoly: Few firms, interdependent pricing strategies (game theory).
• Monopolistic Competition: Many firms, differentiated products; long-run adjustments reduce profits as competition increases.

Unit 5: Resource Markets

Labor Market Concepts

• Derived Demand: Demand for labor based on the product produced.
• Minimum Wage: Binding floor leading to unemployment.
• Marginal Revenue Product (MRP) and Marginal Resource Cost (MRC): Determine hiring decisions.
• Monopsony: Single buyer of labor, MRC above supply curve.

Unit 6: Market Failures

Causes and Solutions

• Public Goods: Non-rivalry and non-exclusion lead to market failure.
• Externalities: Costs/benefits to third parties not accounted for in market transactions.
  • Negative Externalities: Costs spill over; government intervention needed (taxes).
  • Positive Externalities: Benefits spill over; subsidies may be necessary.
• Income Inequality: Lorenz curve and Gini coefficient for measuring inequality.
• Types of Taxes: Progressive, regressive, proportional.

Conclusion

• Review all concepts thoroughly to prepare for the AP test or final exam.
• Emphasis on understanding application of concepts rather than rote memorization.
• Good luck on the exam!