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Essential AP Microeconomics Formulas
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AVERAGE PRODUCT (AP)
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TOTAL PRODUCT (TP OR Q)/LABOR (QL)
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MARGINAL PRODUCT (MP)
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ΔTP/ΔQL
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PROFIT
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TOTAL REVENUE (TR) – TOTAL COST (TC)
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TOTAL COST
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TC = TFC + TVC TOTAL FIXED COSTS (TFC) + TOTAL VARIABLE COSTS (TVC)
Also, TC = Explicit Costs + Implicit Costs
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AVERAGE TOTAL COST (ATC)
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TOTAL COSTS (TC) / QUANTITY (Q)
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AVERAGE FIXED COSTS (AFC)
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TOTAL FIXED COSTS (TFC) / QUANTITY (Q)
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AVERAGE VARIABLE COSTS (AVC)
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TOTAL VARIABLE COST (TVC) / QUANTITY (Q)
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AVERAGE REVENUE (AR)
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TOTAL REVENUE (TR) / QUANTITY (Q)
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IN PERFECT COMPETITION…
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DEMAND (D) = AVERAGE REVENUE (AR) = PRICE (P)
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MARGINAL REVENUE (MR)
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ΔTR / ΔQ (OR ΔTR / ΔTP)
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MARGINAL COST (MC)
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ΔTC / ΔQ or ΔTVC / ΔQ
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PROFIT MAXIMIZATION POINT
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WHERE MC = MR
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“BREAKEVEN” POINT
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WHERE P = ATC
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SHUTDOWN POINT
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WHERE P = AVC
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Utility Maximization occurs when…
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(MU/P)A = (MU/P)A Don’t forget the “PER DOLLAR”
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For Factor Markets (aka inputs) the LEAST COST COMBINATION occurs when…
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(MP/P)L = (MP/P)K Don’t forget the “PER DOLLAR”
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What is true of MR and TR when Ed is INELASTIC?
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If Inelastic, MR < 0 TR must be decreasing
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What is true of MR and TR when Ed is ELASTIC?
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If elastic, MR > 0, TR must be increasing
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For Factor Markets, what determines a firm’s profit-maximizing hiring decision?
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Firms will maximize profits by hiring any factor until MFC = MRP
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If MU/P for good A is less than MU/P for good B, what should a rational consumer do?
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A rational consumer should buy less A and more B until MU/P is equal for both goods
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If Marginal Private Benefit (MPB) is less than Marginal Social Benefit (MSB), what is likely the reason? How could this be ‘fixed’
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A Positive Externality, use a PER UNIT subsidy to increase output to Social optimal level
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If Marginal Social Cost (MSC) is greater than Marginal Private Cost (MPC), what is likely the reason? How could this be fixed?
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A Negative Externality, use a PER UNIT Tax to decrease output to the social optimal level
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If the Gini Coefficient is higher than most countries… what does this mean? What could a country do to effectively decrease the Gini Coefficient?
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High Gini Coefficient means more unequal INCOME DISTRIBUTION
High Gini Coefficient means more unequal INCOME DISTRIBUTION. Gov’t could impose a PROGRESSIVE tax or some other policy to re-distribute wealth from upper to lower class.
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What graph will always be both ALLOCATIVELY and PRODUCTIVELY efficient?
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A firm in PERFECT COMPETITION – in Long-Run Equilibrium
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