1. AP Microeconomics Review #1
Rixie
April 5, 2018

2. Fundamentals of economic analysis
Key Terms; PPC; Absolute & Comparative Advantage

3. Central Dilemma
Societies have limited resources and unlimited wants, so the study of economics must determine how to best allocate these limited resources.

4. 4 Factors of Production Labor Workers (mental & physical) Land
The land itself & natural resources
Capital
Machines, technology, buildings, etc.
Entrepreneurial Ability
Someone to put it all together

5. Key Foundations
People are rational and follow their own self- interest
People seek to maximize utility (satisfaction/happiness)
All choices involve trade-offs (alternatives)
Opportunity cost is the value of your next best alternative

6. Marginal Analysis
You should always continue to do something as long as the benefits outweigh the costs
Marginal means additional
Should I eat the next slice of pizza?? Is it worth it?

7. Production Possibilities Curve/Frontier
Points on the curve represent the combination of products a country/firm/person can produce at a given time with set resources
Points inside the curve represent inefficiency/underutilization of resources
Points outside the curve are unattainable currently

8. What is the opportunity cost of moving from point B to point C?
A loss of 30 capital goods

9. Production Possibilities Curve/Frontier
The whole curve can shift in (left) or out (right)
Shift in: loss of resources
Shift out: economic growth (more resources or better tech/education)

10. Law of Increasing Opportunity Costs
As you continue to gain more of one thing, you must give up more and more of the other thing
Represented by bowed out (concave out to the origin) shape of the PPC
A straight PPC would indicate constant opportunity costs

11. Two Types of Efficiency
Productive efficiency
Using all resources in the most efficient/cost-effective way possible
Allocative efficiency
Producing the optimal combination of goods to meet societal needs

12. Specialization & Trade
People/countries/firms use their resources to specialize in specific tasks
They can benefit from trading with each other instead of each trying to make everything

13. Absolute Advantage vs. Comparative Advantage
Being able to produce something more efficiently (at a lower cost) than someone else
Comparative:
Being able to produce something at a lower opportunity cost than someone else (you give up less than they do to produce the same thing)

14. Input v. Output Problems
Input problem – you’re given varying resources (like time) that go into production
Output problem – you’re given varying amounts of the total product/service that comes out of production
Short-cut – cross multiply!
For input, take the lowest number
For output, take the highest

15. Apples per day (thousands) Oranges per day (thousands)
Country A 3 12
Country B 2 4
Output problem – looking for most product, so highest number
3 x 4 = 12
2 x 12 = 24
Second combo is the highest number, so Country B should produce apples (has the comp. adv.) and Country A should produce oranges (has the comp. adv)

16. Input problem – looking for fewest resources used, so lowest number
Minutes to produce 1 bushel of apples
Minutes to produce 1 bushel of oranges
Country A 10 20
Country B 80
Input problem – looking for fewest resources used, so lowest number
10 x 80 = 800
20 x 20 = 400
Second combo is the lowest number, so Country B should produce apples (has the comp. adv.) and Country A should produce oranges (has the comp. adv)

17. Market vs. Command Economic Systems
Market System
Private ownership of property
Gov’t role is limited; free enterprise
Competition; incentives
Command System
Gov’t owns most property & the means of production
Gov’t makes most economic decisions

18. Basics of Supply & demand
Laws; Determinants; Market Equilibrium; Welfare Analysis

19. Law of Demand
As price increases, quantity demanded decreases, and vice versa.
Inverse relationship between price & quantity demanded
Downward sloping demand curve

20. Some reasons behind the law of demand…
Substitution effect: if two goods are substitutes and the price of one decreases in relation to the other, people will switch to the cheaper one (demand more of it since it’s cheaper)
Income effect: as the price of a good decreases, people can afford more of it relative to their income

21. Determinants of Demand
When one of these changes, demand will increase or decrease
TRIBE:
T: tastes/preferences of consumers
R: related goods’ prices (substitutes & complements
I: income of consumers
B: number of buyers
E: expectations of consumers

22. Key Distinction
A change in quantity demanded is a movement along the demand curve and results only from an increase or decrease in the price of the good.
A change in demand means one of the determinants is at play, and the demand curve has shifted left (decrease in demand) or right (increase in demand).

23. Normal v. Inferior Goods
If a good is normal, consumers will demand more of it when their income increases, and less when income decreases
New clothes, electronics, restaurant meals
If a good is inferior, consumers will demand less of it when their income increases, and more when income decreases
Used clothes, Ramen noodles

24. Substitute v. Complementary Goods
If 2 goods are substitutes, one can easily be used in place of the other. If the price of one increases, consumers demand less of that one and more of the other.
Nike & Adidas shoes; paperback book & an eBook
If 2 goods are complements, they are often used together. If the price of one increases, consumers will demand less of it and therefore also demand less of the complementary good.
Movie tickets & popcorn; hotdogs & hotdog buns

25. Law of Supply
As price increases, quantity supplied increases, and as price decreases, Qs decreases.
Direct relationship between price & quantity supplied
Upward sloping supply curve

26. Determinants of Supply
When one of these changes, supply will increase or decrease
ROTTEN:
R: resource prices
O: other goods’ prices
T: taxes or subsidies
T: technology
E: expectations of producers
N: number of sellers

27. Key Distinction
A change in quantity supplied is a movement along the supply curve and results only from an increase or decrease in the price of the good.
A change in supply means one of the determinants is at play, and the supply curve has shifted left (decrease in supply) or right (increase in supply).

28. Typical Market Diagram & Market Equilibrium
Supply slopes upward
Demand slopes downward
Equilibrium is where they intersect
P* is equilibrium price
Q* is equilibrium quantity
Always label the curves, each axis (Price & Quantity), and whatever else you are asked to identify!

29. Practice shifting the supply & demand curves due to a change in one or more determinants!
Always sketch a quick market diagram to see what the effect will be on the equilibrium price & quantity.
Just one shift – show it on the diagram (use arrows to show the direction) and analyze how equilibrium price & quantity changed.
Double shift – you should draw two market diagrams and show each shift separately
The variable that changes in the same direction both times will definitely change in that direction.
The variable that changes in a different direction on each diagram is indeterminate.
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30. Government-set price floors & ceilings
Price floor – minimum price (only effective if above equilibrium)
Results in surplus (Qs > Qd)
Price ceiling – maximum price (only effective if below equilibrium)
Results in shortage (Qd > Qs)

31. Welfare Analysis
Consumer surplus – the difference between what you are willing to pay for something and what you actually pay (as long as you benefit)
Producer surplus – the difference between what a seller is willing to sell a product for and what they actually sell it for (as long as they benefit).

32. Consumer & Producer Surplus in a Market in Equilibrium
The sum of consumer surplus and producer surplus is known as total welfare, or total benefit to society.