🤑AP Microeconomics AP Cram Sessions 2021

Key Concepts and Definitions

• Scarcity the fundamental economic problem of having limited resources to satisfy unlimited wants and needs
• Opportunity cost the highest-valued alternative forgone when making a choice
• Marginal analysis evaluating the additional benefits and costs of an activity
• Positive economics objective statements about how the economy actually functions
• Normative economics subjective statements about how the economy should function
• Microeconomics the study of individual decision-making units (households and firms) and the functioning of individual markets
• Macroeconomics the study of the economy as a whole, focusing on aggregate economic variables (GDP, inflation, unemployment)

Supply and Demand Analysis

• Supply the quantity of a good or service that producers are willing and able to offer for sale at each price
  • Law of supply states there is a direct relationship between price and quantity supplied, ceteris paribus
  • Determinants of supply include input prices, technology, expectations, number of sellers, and government policies
• Demand the quantity of a good or service that consumers are willing and able to purchase at each price
  • Law of demand states there is an inverse relationship between price and quantity demanded, ceteris paribus
  • Determinants of demand include income, prices of related goods, tastes and preferences, expectations, number of buyers
• Market equilibrium the price and quantity at which the supply and demand curves intersect, where quantity supplied equals quantity demanded
• Surplus occurs when the price is above the equilibrium price, resulting in excess supply
• Shortage occurs when the price is below the equilibrium price, resulting in excess demand
• Price elasticity of demand measures the responsiveness of quantity demanded to a change in price
  • Elastic demand (|Ed| > 1) quantity demanded is highly responsive to price changes
  • Inelastic demand (|Ed| < 1) quantity demanded is not very responsive to price changes
  • Unit elastic demand (|Ed| = 1) the percentage change in quantity demanded equals the percentage change in price

Market Structures and Competition

• Perfect competition a market structure characterized by many buyers and sellers, homogeneous products, free entry and exit, and perfect information
  • Firms are price takers and face a perfectly elastic demand curve
  • Long-run equilibrium occurs where P = MC = MR = minimum ATC
• Monopoly a market structure with a single seller, unique product, and high barriers to entry
  • Faces a downward-sloping demand curve and has market power to set prices
  • Produces where MR = MC, leading to higher prices and lower output compared to perfect competition
• Monopolistic competition a market structure with many sellers, differentiated products, and low barriers to entry
  • Firms have some market power but face competition from close substitutes
  • Long-run equilibrium occurs where P > MC and firms earn zero economic profits
• Oligopoly a market structure with few sellers and high barriers to entry
  • Firms are interdependent and engage in strategic behavior (price wars, collusion)
  • Examples include airlines, telecommunications, and automobiles
• Herfindahl-Hirschman Index (HHI) measures market concentration by summing the squared market shares of all firms in the industry
  • HHI < 1,500 indicates a competitive market
  • 1,500 ≤ HHI ≤ 2,500 indicates moderate concentration
  • HHI > 2,500 indicates high concentration

Production and Costs

• Production function shows the maximum output that can be produced with a given set of inputs
  • Short run at least one input (usually capital) is fixed
  • Long run all inputs are variable
• Total product (TP) the total output produced with a given amount of inputs
• Marginal product (MP) the change in total product resulting from using one more unit of an input
  • Law of diminishing marginal returns states that MP eventually decreases as more units of a variable input are added to a fixed input
• Average product (AP) total product divided by the quantity of the variable input
• Fixed costs (FC) costs that do not vary with the level of output (rent, insurance)
• Variable costs (VC) costs that vary with the level of output (wages, raw materials)
• Total cost (TC) the sum of fixed costs and variable costs (TC = FC + VC)
• Average fixed cost (AFC) fixed costs divided by the quantity of output (AFC = FC/Q)
• Average variable cost (AVC) variable costs divided by the quantity of output (AVC = VC/Q)
• Average total cost (ATC) total costs divided by the quantity of output (ATC = TC/Q)
  • U-shaped curve due to the interplay of fixed costs and variable costs
• Marginal cost (MC) the change in total cost resulting from producing one more unit of output
  • Increases as output expands due to the law of diminishing marginal returns

Factor Markets and Resource Allocation

• Factors of production the inputs used to produce goods and services (land, labor, capital, entrepreneurship)
• Factor markets the markets where factors of production are bought and sold
• Derived demand the demand for a factor of production that depends on the demand for the final good it helps produce
• Marginal revenue product (MRP) the additional revenue generated by using one more unit of a factor input
  • Profit-maximizing condition for hiring a factor input: MRP = MC of the input
• Wage determination in a perfectly competitive labor market
  • Equilibrium wage occurs where the supply of labor intersects the demand for labor (which equals the MRP)
  • Workers are paid a wage equal to their MRP
• Monopsony a labor market with a single buyer of labor
  • Faces an upward-sloping labor supply curve and has market power to set wages
  • Hires labor up to the point where MRP = MC of labor, leading to lower wages and employment compared to perfect competition
• Economic rent the difference between what a factor of production is paid and the minimum amount required to keep it in its current use
  • Arises due to unique talents, skills, or natural resources

Market Failures and Government Intervention

• Market failure occurs when the market fails to allocate resources efficiently, resulting in a loss of economic well-being
• Externalities the uncompensated impact of one person's actions on the well-being of a bystander
  • Negative externalities (pollution) impose a cost on third parties, leading to overproduction
  • Positive externalities (education) provide a benefit to third parties, leading to underproduction
• Public goods goods that are non-rival and non-excludable, leading to free-rider problems and underprovision by the market
  • Examples include national defense, public parks, and lighthouses
• Common resources goods that are rival but non-excludable, leading to overuse and depletion
  • Examples include fisheries, grazing lands, and groundwater
• Government intervention policies aimed at correcting market failures and improving economic efficiency
  • Pigouvian taxes/subsidies correct externalities by making the private cost/benefit equal to the social cost/benefit
  • Regulation sets standards or limits on economic activities (emissions standards, fishing quotas)
  • Public provision the government directly provides goods or services (education, healthcare)
  • Property rights establish ownership and control over resources, incentivizing conservation and efficient use

Exam Strategies and Practice Questions

• Read the question stem carefully and identify the key concepts being tested
• Eliminate obviously incorrect answer choices to narrow down the options
• Look for key words and phrases that signal the correct answer (e.g., "increases," "shifts to the right")
• Draw diagrams to visualize the problem and organize your thoughts
  • Label all curves, axes, and points clearly and accurately
  • Show the direction of shifts or movements with arrows
• Apply the appropriate economic principles and theories to the specific scenario
  • Break down complex problems into smaller, manageable steps
  • Use the information provided in the question stem to guide your analysis
• Manage your time effectively by allocating more time to higher-point questions
  • If stuck on a question, make an educated guess and move on to avoid running out of time
• Practice with a variety of question types (multiple-choice, free-response) to build familiarity and confidence
  • Focus on understanding the underlying concepts rather than memorizing specific questions
  • Review your mistakes and learn from them to avoid repeating the same errors

Real-World Applications and Case Studies

• Minimum wage laws and employment effects in the labor market
  • Debate over the impact on low-skilled workers and poverty reduction
  • Empirical studies (Card and Krueger, 1994) challenge the conventional wisdom of job losses
• Ride-sharing platforms (Uber, Lyft) and the market for transportation services
  • Impact on traditional taxi companies and consumer welfare
  • Regulatory challenges and debates over worker classification and benefits
• Environmental policies to combat climate change
  • Carbon taxes and cap-and-trade programs to internalize the negative externality of greenhouse gas emissions
  • Incentives for renewable energy adoption and energy efficiency improvements
• Antitrust cases in the technology industry
  • Allegations of anticompetitive practices by dominant firms (Google, Facebook, Amazon)
  • Debates over the appropriate role of government in regulating digital markets and protecting consumer privacy
• Healthcare markets and the Affordable Care Act (ACA)
  • Expansion of health insurance coverage and the individual mandate
  • Impact on healthcare costs, quality, and access for different socioeconomic groups
• Trade policies and tariffs in the global economy
  • Effects of protectionist measures on domestic industries, consumers, and international relations
  • Debates over the benefits and costs of free trade agreements (NAFTA, TPP)