Microeconomics AP EXAM Study Guide PDF

Preview

Summary

AP Exam study guide with link to practice exam...

Description

Microeconomics AP EXAM STUDY GUIDE: AP EXAM PRACTICE LINK: https://apcentral.collegeboard.org/pdf/ap-microeconomics-practice-exam-2012.pdf?course=apmicroeconomics Economics The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited wants Factors of Production Labor, Land, Capital, Entrepreneurial ability Physical capital Man-made equipment like machinery, but also buildings, roads, vehicles, and computers Entrepreneurial Ability The effort and know how to put the other resources (Factors of Production) together in a productive venture Scarcity The difference between unlimited wants and limited economic resources Trade-offs The fact that we are faced with scarce resources implies that individuals, firms, and governments are constantly faced with trade-offs Opportunity Cost The opportunity cost of doing something is what you sacrifice to do it (i.e. if you use a scarce resource to pursue activity X, the opportunity cost of activity X is activity Y, the next best use of that resource) Marginal Analysis Rational individuals and firms weigh the additional benefits against the additional costs (They think at the margin) Marginal "the next one" or "additional" or "incremental" Marginal Cost The additional cost incurred from the consumption of the next unit of a good or service Marginal Benefit The additional benefit received from the consumption of the next unit of a good or service

Production Possibilities Curve A model of an individual or a nation that can choose to allocate its scarce resources between the production of two goods or services, it is assumed that those resources are being fully employed and used efficiently Points outside of the Production Possibilities Curve Any point outside the frontier is currently unattainable The slope of the PPF The slope of the curve measures the opportunity cost of the good on the x axis The inverse of the slope measures the opportunity cost of the good on the y axis Shape of a realistic PPF Concave or bowed outward

Comparative Advantage The ability to produce goods at a lower opportunity cost that another individual/firm/nation Specialization Individuals/firms/nations produce the goods in which they have a comparative advantage Productive efficiency

The economy is producing the maximum output for a given level of technology and resources (all points on the PPF are productively efficient) Allocative efficiency The economy is producing the optimal mix of goods and services (the combination of goods and services that provides the most net benefit to society; the best point on the PPF) Substitution effect The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods Income effect The change in quantity demanded resulting from a change in the consumer purchasing power (real income) Determinants of Demand -Consumer income -The price of a substitute good -The price of a complimentary good -Consumer tastes and preferences for the good -Consumer expectations about the future price of the good -The number of buyers in the market for that specific good Normal Good A good for which higher income increases demand Inferior Good A good for which higher income decreases demand Substitute Goods Two goods are substitute goods if the consumer can use either to satisfy the same essential function, therefore experiencing the same degree of happiness (utility) Price of Complementary Goods If any two goods are compliments and the price of one good X falls (rises), the consumer demand for the complement good Y increases (decreases) Determinants of Supply -The cost of an input -Technology and productivity -Taxes and subsidies on a good -Producer expectations about future prices -The price of other goods that could be produced -The number of producers in the industry

Taxes and Subsidies A per unit tax is treated by firms as an additional cost of production and would therefore decrease the supply cure, or shift it leftward A per unit subsidy lowers the per unit cost of production and therefore shifts the supply curve rightward Market Equilibrium The market is in this state when the quantity supplied equals the quantity demanded at a given price Shortage this exists at a market price when the quantity demanded exceeds the quantity supplied, can be the result of a price ceiling Surplus this exists at a market price when the quantity supplied exceeds the quantity demanded, this can be the result of a price floor(such as setting a minimum wage) Simultaneous Changes in Demand and Supply When both demand and supply are changing, one of the equilibrium outcomes (price or quantity) is predictable and one is indeterminant Consumer Surplus The difference between your willingness to pay and the price you actually pay Producer Surplus The difference between the price received and the marginal cost of producing the good Consumer Surplus on the Graph The area under the demand curve and above the market price is equal to total consumer surplus Producer Surplus on the Graph The area above the supply curve and below the market price is equal to total producer surplus

Elasticity Measures the sensitivity, or responsiveness, of a choice to a change in an external factor Price Elasticity of Demand Measures the sensitivity of consumer quantity demanded for good X when the price of good X changes Price Elasticity Formula Ed= (%change in quantity demanded of good X)/(%change in the price of good X) A good is price elastic if... If Ed > 1 A good is unit price elastic if... If Ed = 1 A good is price inelastic if... If Ed < 1 Elasticity on the Demand Curve Above the midpoint demand is price elastic At the midpoint demand is unit elastic Below the midpoint the demand is price inelastic

Delta Percentage Delta Percentage = [final cost - initial cost]/initial cost Perfectly Inelastic Any increase in the price results in no decrease in the quantity demanded Perfectly Elastic A decrease in the price causes the quantity demanded to increase without limits As the demand curve becomes more vertical The price elasticity falls and consumers become more price inelastic As the demand curve becomes more horizontal The price elasticity increases and consumers become more price elastic Determinants of Elasticity -Number of Good Substitutes -Proportion of Income -Time Number of Good Substitutes If the price of good X increase, and many (few) substitutes exist, the decrease in quantity demanded can be quite elastic (inelastic) Proportion of Income If the price of a good increases, the consumer loses purchasing power. If that good takes up a large (small) portion of the consumers income his responsiveness will be significant (insignificant), or elastic (inelastic) Time it is expected that price elasticity increases (decreases) as more (less) time passes after the initial increase in price Total Revenue TR = Price * Quantity Demanded

Total Revenue and Elasticity If demand is inelastic TR increases with a price increase If demand is elastic TR decreases with a price increases If demand is unit elastic TR stays the same Income Elasticity A measure of how sensitive consumption of good X is to a change in a consumer's income Income Elasticity Formula Ei = (%change Qd good X) / (%change income) Luxury vs. Necessity vs. Inferior goods If Ei > 1, the good is normal and income elastic (luxury) If 1 > Ei > 0, the good is normal but income inelastic (a necessity) If Ei < 0, the good is inferior Cross-Price Elasticity of Demand The sensitivity of consumption of good X to a change in the price of good Y Cross-Price Elasticity of Demand Formula Ex,y = (%change Qd good X) / (%change Price good Y)...