AP Microeconomics Review Lecture

Introduction

• Presenter: Jacob Reed from ReviewEcon.com
• Focus: Quick review of major concepts for AP Microeconomics exam
• For detailed review: Use AP Microeconomics unit review summaries or ReviewEcon.com resources

Unit 1: Basic Concepts

Scarcity

• Scarcity: Limited resources cannot satisfy unlimited wants
• Factors of Production: Land, labor, capital, entrepreneurship
• Economic Systems:
  • Market-based: Private property rights, use prices for distribution
  • Command-based: Central planners allocate resources

Opportunity Cost

• Opportunity cost: Value of next best alternative not chosen

Production Possibilities Curve (PPC)

• Shows combinations of two goods with fixed resources
• Linear PPC: Constant opportunity costs
• Bowed-out PPC: Increasing opportunity costs
• Productive efficiency: Any point on PPC
• Economic growth: Outward shift of PPC

Absolute and Comparative Advantage

• Absolute Advantage: Ability to produce more or with fewer resources
• Comparative Advantage: Ability to produce at lower opportunity cost
• Terms of Trade: Mutually beneficial trade between opportunity costs

Marginal Analysis

• Marginal: Change in total
• Marginal Benefit vs. Marginal Cost: Continue until MB = MC
• Utility Maximizing Combinations: Ratio of marginal utility to price equal for all goods

Unit 2: Supply and Demand

Law of Demand

• Ceteris paribus: More bought at lower prices, fewer at higher
• Demand Shifters:
  • Tastes and preferences
  • Market size
  • Prices of related goods
  • Income
  • Future expectations
• Downward sloping due to substitution and income effects

Law of Supply

• Direct relationship between price and quantity supplied
• Supply Shifters:
  • Input prices
  • Government tools (taxes, subsidies, regulations)
  • Number of sellers
  • Technology
  • Expectations

Price Elasticity

• Inelastic Demand: Necessities, few substitutes, steep curve
• Elastic Demand: Luxuries, many substitutes, flat curve
• Total Revenue Test: Determines elasticity
• Elasticity Coefficients: Use percentage change formulas

Equilibrium

• Intersection of supply and demand curves
• Surplus: Price above equilibrium
• Shortage: Price below equilibrium
• Effects of shifts in demand and supply on equilibrium

Surplus and Deadweight Loss

• Consumer Surplus: Difference between willingness to pay and actual payment
• Producer Surplus: Difference between cost and price received
• Deadweight Loss: Efficiency loss from not reaching equilibrium

Government Interventions

• Price floors and ceilings create deadweight loss
• Taxes shift supply curve and create tax revenue area
• Tax incidence: Less elastic side bears more tax burden
• Tariffs and international trade impact on domestic markets

Costs and Perfect Competition

Diminishing Marginal Returns

• Increasing, decreasing, and negative returns
• Relationship between marginal product and marginal cost

Cost Curves

• Short-run: Fixed and variable costs
• Long-run: All costs are variable
• Economies and Diseconomies of Scale

Types of Profit

• Accounting Profit: Total revenue minus explicit costs
• Economic Profit: Total revenue minus explicit and implicit costs
• Normal Profit: Economic profit is zero

Firm Behavior

• Firms produce where MR = MC
• Perfect Competition: Many firms, identical products, zero economic profits in long run

Imperfect Competition

Monopolies

• One seller, high barriers, unique goods, price seekers
• Not allocatively efficient due to deadweight loss

Monopolistic Competition

• Many sellers, differentiated products, low barriers
• Zero economic profits in the long run

Oligopolies

• Few sellers, high barriers, differentiated or homogeneous products
• Game Theory and strategic behavior

Factor Markets

Labor Market

• Demand: Marginal Revenue Product of labor
• Supply: People's willingness to work
• Equilibrium wage and quantity

Monopsony

• One buyer of labor, hires less and pays less

Market Failures

Externalities

• Negative: Overproduction, social cost greater than private cost
• Positive: Underproduction, social benefit greater than private benefit
• Government correction: Taxes and subsidies

Public Goods

• Non-rival and non-excludable, suffer from free rider problem

Government Regulation

• Lump sum vs. per unit taxes and subsidies
• Natural monopolies and price regulation

Income Distribution

Lorenz Curve and Gini Coefficient

• Shows income distribution and inequality within an economy

Types of Taxes

• Regressive, progressive, and proportional taxes

• For further study, visit ReviewEcon.com for practice sets, exams, and additional resources.