AP Microeconomics Review Notes

Introduction

Welcome message by Jacob Clifford, ACDC Econ.
Purpose: Quick review for AP or college introductory microeconomics.
Highlights: Ultimate Review Pack with practice questions and hidden videos available.

Scarcity: Unlimited wants vs. limited resources.
Opportunity Cost: Every decision has a cost associated with it.
Production Possibilities Curve (PPC):
- Depicts different combinations of two goods produced with available resources.
- Points on the curve: Efficient use of resources.
- Points inside the curve: Inefficient use.
- Points outside the curve: Impossible given resources.
- Shapes of the curve:
  - Straight Line: Constant opportunity cost (similar resources).
  - Concave to Origin: Increasing opportunity cost (dissimilar resources).
Factors that can shift the PPC: More resources, better technology, trade.
Comparative Advantage: Specializing in the product with a lower opportunity cost.
Absolute Advantage: Producing more with the same resources.
Terms of Trade: Units of one product traded for another to benefit both parties.
Overview of economic systems: Free market, capitalism, command economy, mixed economy.
Circular Flow Model: Interaction between businesses, individuals, and government in product and resource markets.
- Transfer Payments: Government payments without a purchase.
- Subsidies: Government funding to businesses.
- Factor Payments: Payments made to individuals for their resources.

Demand Curve: Downward sloping, law of demand.
- Influenced by substitution effect, income effect, law of diminishing marginal utility.
Supply Curve: Upward sloping, law of supply.
Equilibrium: Where the demand and supply curves intersect.
- Movements along the curve: Not shifts, just changes in price/quantity.
Shifts in Demand/Supply: Four possible changes (up or down for both).
Double Shift Rule: When both curves shift simultaneously, one variable becomes indeterminate.
Elasticity:
- Elastic Demand: Quantity changes significantly with price changes.
- Inelastic Demand: Quantity changes little with price changes.
Elasticity Coefficient: Percent change in quantity divided by percent change in price.
Consumer and Producer Surplus: Measures of economic welfare in markets.
Price Controls: Price ceilings (set below equilibrium) and floors (set above equilibrium).
- Result in deadweight loss and impacts on surplus.

Cost Curves: Relationship between inputs and outputs.
- Types: Fixed, variable, total costs.
Marginal Product: Additional output from hiring one more worker.
Law of Diminishing Marginal Returns: As more workers are hired, additional output decreases.
Perfect Competition: Many firms, price takers, profit maximizing at MR=MC.
Long-Run Equilibrium: Zero economic profit (breaking even).
Types of Profit: Economic vs. accounting profit.
Efficiency in Perfect Competition: Allocative and productive efficiency.

Monopoly: One firm, unique product, price maker.
Oligopoly: Few firms, strategic pricing, game theory applications.
Monopolistic Competition: Many firms, differentiated products, price maker, long-run equilibrium leads to zero economic profit.

Derived Demand: Demand for labor based on product demand.
Minimum Wage: A binding price floor leading to unemployment.
Marginal Revenue Product (MRP) and Marginal Resource Cost (MRC): Decision criteria for hiring workers.
Monopsony: A single buyer in the labor market.
Least-Cost Rule: Optimal combination of resources based on marginal product and price.

Public Goods: Non-rivalry and non-excludability; government provision needed.
Externalities: Costs/benefits affecting third parties (negative/positive externalities).
Lorenz Curve and Gini Coefficient: Measures of income inequality in an economy.
Types of Taxes: Progressive, regressive, proportional tax systems.