AP Microeconomics Math Review

Introduction

• Presenter: Jacob Reed from ReviewEcon.com
• Purpose: Review math concepts needed for the AP Microeconomics exam.
• Resources: Total review booklet with questions, answers, explanations, cheat sheets, and online games.

Key Concepts in Microeconomics Math

Marginal Analysis

• Marginal: Change in total (e.g., benefit, product, cost, revenue).
• Example: Total benefit from 30 to 35 units → Marginal benefit = 5 units.

Opportunity Cost

• Definition: Value of the next best alternative not chosen.
• Types:
  • Explicit Cost: Money out of pocket.
  • Implicit Cost: Money not earned.
• Calculation Example: Movie cost = $20 (explicit) + $80 missed work income (implicit) = $100 opportunity cost.

Production Possibilities Curve (PPC)

• Opportunity Cost Calculation: New number minus old number.
• Example: Move from 170 to 80 units of capital goods → Opportunity cost = 90 units.

Comparative Advantage

• Definition: Produce at lower opportunity cost.
• Output vs. Input Problems:
  • Output: Other over formula (numbers for B divided by A).
  • Input: It over formula (numbers for A divided by B).
• Example:
  • Output: Jason's opportunity cost for 1 ton of strawberries = 0.5 ton of zucchini.
  • Input: Amy's opportunity cost of 1 painted car = 6 brake jobs.

Utility Maximizing Combinations

• Marginal Utility: Benefit per dollar for goods.
• Optimal Consumption: Equal marginal utility per dollar across goods.
• Example: Consume more corn if marginal utility per dollar is higher than for lobster.

Elasticity

Price Elasticity of Demand

• Total Revenue Test:
  • Inelastic: Price and total revenue move in same direction.
  • Elastic: Price and total revenue move in opposite directions.
• Coefficient Calculation: % change in quantity / % change in price.
  • Elasticity Types: Inelastic (<1), Elastic (>1), Unit elastic (=1).

Other Elasticities

• Price Elasticity of Supply: Same formula as demand.
• Income Elasticity:
  • Normal Goods: Positive coefficient.
  • Inferior Goods: Negative coefficient.
• Cross-Price Elasticity:
  • Substitutes: Positive coefficient.
  • Complements: Negative coefficient.

Surplus and Efficiency

Consumer and Producer Surplus

• Consumer Surplus: Marginal benefit minus price.
• Producer Surplus: Price minus marginal cost.

Economic Surplus and Deadweight Loss

• Economic Surplus: Sum of consumer and producer surplus.
• Deadweight Loss: Efficiency loss when not allocatively efficient.
• Tax Revenue Calculation: Price difference due to tax multiplied by quantity.

Cost Calculations

Cost Terms

• Fixed Costs: Do not change with output.
• Variable Costs: Change with output.
• Total Costs: Fixed + Variable costs.

Marginal and Average Costs

• Marginal Cost: Change in total cost for one more unit.
• Average Costs: Total costs divided by quantity produced.

Profit Maximization

Firm Behavior

• Profit Maximization: Where marginal revenue equals marginal cost.

Types of Profit

• Accounting Profit: Total revenue minus explicit costs.
• Economic Profit: Total revenue minus explicit and implicit costs.

Monopolies and Market Structures

Single Price Monopolies

• Marginal Revenue vs. Demand: Marginal revenue is less.
• Deadweight Loss: Due to underproduction.

Factor Markets

Marginal Revenue Product

• Calculation: Marginal product times marginal revenue.

Monopsony

• Labor Supply vs. Marginal Resource Cost: Monopsony must increase wages, thus MRC > supply.

Market Failures

Externalities

• Negative Externalities: Lead to overproduction.
• Positive Externalities: Lead to underproduction.

Taxes and Deadweight Loss

• Progressive, Regressive, and Proportional Taxes: Tax impact based on income.

Lorenz Curve and Gini Coefficient

• Lorenz Curve: Income distribution.
• Gini Coefficient: Measures income inequality.

Conclusion

• Call to Action: Visit ReviewEcon.com and consider the total review booklet for comprehensive exam preparation.