Microeconomics Review Notes

Introduction

• Jacob Clifford presents a summary for AP and introductory microeconomics.
• Not a reteach; designed for review before exams.
• Ultimate Review Pack is available for deeper learning and practice.

Key Concepts

Scarcity and Opportunity Cost

• Scarcity: Unlimited wants vs. limited resources.
• Opportunity Cost: Cost of what you give up to produce or decide.
• Production Possibilities Curve (PPC): Graph showing combinations of two goods produced.
  • Points on curve: Efficient use of resources.
  • Points inside curve: Inefficient use of resources.
  • Points outside curve: Impossible production with current resources.
  • PPC shapes:
    • Straight line: Constant opportunity cost (similar resources).
    • Concave curve: Increasing opportunity cost (dissimilar resources).
  • Shifts in PPC can occur due to changes in resources or technology, or through trade.

Comparative Advantage

• Countries should specialize in goods with lower opportunity costs.
• Absolute Advantage: Ability to produce more of a good than another.
• Comparative Advantage: Requires calculations to understand specialization in trade.
• Terms of Trade: Agreement on how much of one product is traded for another.

Economic Systems

• Overview of different systems: Free market, capitalism, command economy, mixed economy.
• Focus on Circular Flow Model: Interactions between businesses, individuals, and government.
  • Businesses sell products and buy resources; individuals buy products and sell resources.

Unit 1: Basics of Economics

• Difficulty Level: 3/10
• Key Topics: Scarcity, PPC, opportunity cost, economic systems, circular flow model.

Unit 2: Demand and Supply

• Demand: Downward sloping curve; influenced by substitution effect, income effect, and diminishing marginal utility.
• Supply: Upward sloping; price increases lead to increased quantity supplied.
• Equilibrium: Market balance of supply and demand.
• Elasticity: Measure of responsiveness to price changes.
  • Elastic vs. inelastic demand explained using coefficients.
• Consumer and Producer Surplus: Differences between willingness to pay and actual price.
• Price Controls:
  • Price ceilings (below equilibrium) can create shortages.
  • Price floors (above equilibrium) can create surpluses.

Unit 3: Theory of the Firm

• Difficulty Level: 9/10
• Topics include cost curves, production inputs, and outputs.
• Cost Structures: Fixed costs, variable costs, total costs, and their graphical representations.
• Perfect Competition: Characteristics and graphs; firms are price takers.
• Profit Maximization: Produce where MR = MC.
• Long-Run Equilibrium: Total revenue equals total cost.

Unit 4: Market Structures

• Difficulty Level: 8/10
• Types of Market Structures:
  • Monopoly: Single firm, unique product, price maker.
  • Oligopoly: Few firms, strategic interactions, use of game theory.
  • Monopolistic Competition: Many firms, similar products, price maker.
• Graph Analysis: Ability to analyze profit maximization and consumer surplus.

Unit 5: Resource Markets

• Difficulty Level: 6/10
• Derived Demand: Demand for labor based on product demand.
• Minimum Wage: Impact on labor supply and demand.
• Marginal Resource Cost (MRC) vs. Marginal Revenue Product (MRP): Hiring decisions in resource market.
• Monopsony: Labor market monopoly with unique graph characteristics.
• Least Cost Rule: Calculating the optimal combination of resources.

Unit 6: Market Failures

• Difficulty Level: 4/10
• Public Goods: Non-rivalry and non-exclusion; government intervention needed.
• Externalities: Costs or benefits affecting third parties.
  • Negative Externalities: Lead to social costs above private costs.
  • Positive Externalities: Social benefits above private benefits.
• Income Inequality: Represented with Lorenz Curve and Gini Coefficient.
• Types of Taxes: Progressive, regressive, and proportional taxes explained.

Conclusion

• Encouragement for students before AP tests and finals.
• Success and confidence is emphasized.