AP Microeconomics Reference 1
UNIT 1. Basic Economic Concepts
consumption possibilities curve: similar to productionpossibilities curve but for
1.1 Scarcity
consumption, can be greater than PPC if countries specialize and trade
c apital (K): something used to produce other things division of labor: people specializing in a job, sothey can be especially better at
ceteris paribus: all else equal the job than doing multiple different tasks at once
consumption: a good used for consumption, not production specialization: a country should specialize and exportwhat they have
economic systems: how resources are produced and allocationsof resources, comparativeadvantage in, not always absolute advantage
answers what to make, how to make, and who gets it questions terms of trade: the price where two countries agreeon to trade so that both of
entrepreneurship (technology): combination of land,labor, and capital for them can gain from trading, a good terms of trade should be between
production both opportunity costs, a seller is willing to sell at a price greater than
factors of production: land (natural resources), labor(L), capital (K), and their OC, and a buyer is willing to buy at a price less than their OC
entrepreneurship trading price:see terms of trade
macroeconomics: study of aggregate economy, interactionbetween many 𝑚𝑎𝑥𝑌𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐ℎ𝑎𝑛𝑔𝑒𝑖𝑛𝑌
opportunity cost:𝑂𝐶𝑋 = 𝑚𝑎𝑥𝑋𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = 𝑐ℎ𝑎𝑛𝑔𝑒𝑖𝑛𝑋
actors, policies
microeconomics: study of individual actors and firms'decisions, markets
resource, free: resources that seem infinite,ex:air WARNING: when determining the advantage that involves time taken, the less
resource, scarce: limited resources, why economicsexists,ex: goods, labor time it takes, the better.
scarcity: the idea that resources are limited,ex:land, fish, water, time, labor WARNING: if a country has absolute advantage in something, they can still gain
scarcity, absolute: physical limitations of resources,ex: land, water from trading and not specializing in it.
scarcity, relative: value of resources,ex: diamonds
1.5 Cost-Benefit Analysis
E conomics are complex, so models are used. This can lead to simplifications and
enefit: a benefit gained from doing something, suchas revenue
b
assumptions, which mean strong conclusions, so models should not be taken
cost-benefit analysis: analyzing costs and benefitsto make a decision
that seriously.
costs, explicit: money paid to produce something,ex: paying peoples' salaries
costs, implicit: non-monetary costs that were necessaryto produce something,
1.2 Resource Allocation and Economic Systems ex: spending 10 days to create an advertisement
economic system: is the answer to the three economicquestions: What goods foregone earnings: a type of implicit cost, it ismoney that could have been
and services should be produced? How should goods and services be earned if you were doing something else,ex: incomethat could have been
produced? Who should consume goods and services? earned if held a job instead of running a business
economics, normative: how economics should be profit, accounting:see definition in 3.4
economics, positive: a factual fact about economics profit, economic:see definition in 3.4
economy, command: the government has control overthe economy, centrally utility: a measure of the amount of satisfaction abuyer receives from
controlled, factors arecollectivelyowned purchasing a product
economy, market: factors areprivatelyowned utility, marginal (MU): change in utility from buyingone more unit
price signal: prices people are willing to pay forsomething utility, total (TU): the total utility received frombuying a certain number of the
property rights: important for market systems to functionwell, without product
property rights, it could be hard to tell who owns something, so people
could fight for it, and there wouldn't be price signals 1.6 Marginal Analysis and Consumer Choice
statement, normative: opinion on moral or ethics
c osts, fixed: recurring, predictable costs, such asrent, paying salaries, etc.
statement, positive: statement that can be tested
costs, sunk: expenses that cannot be recovered,ex:nonrefundable one-time fee
distributive efficiency (efficiency in exchange):when a product is sold to
1.3 Opportunity Cost and Production Possibilities Curve someone who values them the most, achieved when MRS for one
c ontraction: moving to a point further inside PPC consumer equals other's MRS,ex: auction
efficient: on the PPC, using all resources law of diminishing marginal utility: MU tends to eventuallydecrease as the
growth: PPC curve moves outward because more resourcesavailable quantity increase,ex: if you get 1 or 2 slices ofpizza, you are pretty happy,
inefficient: not using all available resource, withinPPC but if you start to eat like 10, 20, or 100, each additional slice provides less
interchangeable: constant opportunity cost/PPC utility because you don't need that many slices; at that point, an
marginal cost: the increase in total cost from producingone more unit of a additional slice isn't as valuable to you any more
product marginal rate of substitution (MRS): MU of one gooddivided by MU of another
opportunity cost: value or benefits of the next bestoption given up when a
decision is made; it includes both explicit and implicit costs (see 1.5) 𝑀𝑈𝐴 𝑀𝑈𝐵 𝑃 𝑀𝑈𝐵
opportunity cost, constant: linear PPC 𝑃𝐴
= 𝑃𝐵
⇒ 𝑃𝐵 = 𝑀𝑈𝐴
𝐴
opportunity cost, increasing: bowed out PPC
opportunity cost, decreasing: bowed in PPC
productivity: the effectiveness of combinations ofresources, causes economic Aside: Connection to Calculus
growth when productivity increases averagex(Ax): think average rate of change in x for all x between zero and a
technology:see productivity certain quantity
in economicsit is total x divided by amount of something
WARNING: less efficient to more efficient isnoteconomicgrowth. to findtotalxup to a certain quantity, find thearea of the rectangle with
the width = quantity and height = Ax
marginalx(Mx): think rate of change in x
1.4 Comparative Advantage and Gains From Trade
in economicsit is how much x changes when havingone more of
advantage, absolute: when a country returns more outputgiven the same something, when looking at a graph of Mx, you are looking at the
inputs derivative of total x
advantage, comparative: when a country's opportunitycost of producing to findtotalxup to a certain amount, find the areabelow the curve of Mx
something is less than the other totalx(Tx): this is equal to accumulation of marginalx
in economicsit is the sum of all marginal x up tothat quantity
to findtotalxup to a certain quantity, locate thepoint on the curve of Tx
UNIT 1. Basic Economic Concepts
consumption possibilities curve: similar to productionpossibilities curve but for
1.1 Scarcity
consumption, can be greater than PPC if countries specialize and trade
c apital (K): something used to produce other things division of labor: people specializing in a job, sothey can be especially better at
ceteris paribus: all else equal the job than doing multiple different tasks at once
consumption: a good used for consumption, not production specialization: a country should specialize and exportwhat they have
economic systems: how resources are produced and allocationsof resources, comparativeadvantage in, not always absolute advantage
answers what to make, how to make, and who gets it questions terms of trade: the price where two countries agreeon to trade so that both of
entrepreneurship (technology): combination of land,labor, and capital for them can gain from trading, a good terms of trade should be between
production both opportunity costs, a seller is willing to sell at a price greater than
factors of production: land (natural resources), labor(L), capital (K), and their OC, and a buyer is willing to buy at a price less than their OC
entrepreneurship trading price:see terms of trade
macroeconomics: study of aggregate economy, interactionbetween many 𝑚𝑎𝑥𝑌𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐ℎ𝑎𝑛𝑔𝑒𝑖𝑛𝑌
opportunity cost:𝑂𝐶𝑋 = 𝑚𝑎𝑥𝑋𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = 𝑐ℎ𝑎𝑛𝑔𝑒𝑖𝑛𝑋
actors, policies
microeconomics: study of individual actors and firms'decisions, markets
resource, free: resources that seem infinite,ex:air WARNING: when determining the advantage that involves time taken, the less
resource, scarce: limited resources, why economicsexists,ex: goods, labor time it takes, the better.
scarcity: the idea that resources are limited,ex:land, fish, water, time, labor WARNING: if a country has absolute advantage in something, they can still gain
scarcity, absolute: physical limitations of resources,ex: land, water from trading and not specializing in it.
scarcity, relative: value of resources,ex: diamonds
1.5 Cost-Benefit Analysis
E conomics are complex, so models are used. This can lead to simplifications and
enefit: a benefit gained from doing something, suchas revenue
b
assumptions, which mean strong conclusions, so models should not be taken
cost-benefit analysis: analyzing costs and benefitsto make a decision
that seriously.
costs, explicit: money paid to produce something,ex: paying peoples' salaries
costs, implicit: non-monetary costs that were necessaryto produce something,
1.2 Resource Allocation and Economic Systems ex: spending 10 days to create an advertisement
economic system: is the answer to the three economicquestions: What goods foregone earnings: a type of implicit cost, it ismoney that could have been
and services should be produced? How should goods and services be earned if you were doing something else,ex: incomethat could have been
produced? Who should consume goods and services? earned if held a job instead of running a business
economics, normative: how economics should be profit, accounting:see definition in 3.4
economics, positive: a factual fact about economics profit, economic:see definition in 3.4
economy, command: the government has control overthe economy, centrally utility: a measure of the amount of satisfaction abuyer receives from
controlled, factors arecollectivelyowned purchasing a product
economy, market: factors areprivatelyowned utility, marginal (MU): change in utility from buyingone more unit
price signal: prices people are willing to pay forsomething utility, total (TU): the total utility received frombuying a certain number of the
property rights: important for market systems to functionwell, without product
property rights, it could be hard to tell who owns something, so people
could fight for it, and there wouldn't be price signals 1.6 Marginal Analysis and Consumer Choice
statement, normative: opinion on moral or ethics
c osts, fixed: recurring, predictable costs, such asrent, paying salaries, etc.
statement, positive: statement that can be tested
costs, sunk: expenses that cannot be recovered,ex:nonrefundable one-time fee
distributive efficiency (efficiency in exchange):when a product is sold to
1.3 Opportunity Cost and Production Possibilities Curve someone who values them the most, achieved when MRS for one
c ontraction: moving to a point further inside PPC consumer equals other's MRS,ex: auction
efficient: on the PPC, using all resources law of diminishing marginal utility: MU tends to eventuallydecrease as the
growth: PPC curve moves outward because more resourcesavailable quantity increase,ex: if you get 1 or 2 slices ofpizza, you are pretty happy,
inefficient: not using all available resource, withinPPC but if you start to eat like 10, 20, or 100, each additional slice provides less
interchangeable: constant opportunity cost/PPC utility because you don't need that many slices; at that point, an
marginal cost: the increase in total cost from producingone more unit of a additional slice isn't as valuable to you any more
product marginal rate of substitution (MRS): MU of one gooddivided by MU of another
opportunity cost: value or benefits of the next bestoption given up when a
decision is made; it includes both explicit and implicit costs (see 1.5) 𝑀𝑈𝐴 𝑀𝑈𝐵 𝑃 𝑀𝑈𝐵
opportunity cost, constant: linear PPC 𝑃𝐴
= 𝑃𝐵
⇒ 𝑃𝐵 = 𝑀𝑈𝐴
𝐴
opportunity cost, increasing: bowed out PPC
opportunity cost, decreasing: bowed in PPC
productivity: the effectiveness of combinations ofresources, causes economic Aside: Connection to Calculus
growth when productivity increases averagex(Ax): think average rate of change in x for all x between zero and a
technology:see productivity certain quantity
in economicsit is total x divided by amount of something
WARNING: less efficient to more efficient isnoteconomicgrowth. to findtotalxup to a certain quantity, find thearea of the rectangle with
the width = quantity and height = Ax
marginalx(Mx): think rate of change in x
1.4 Comparative Advantage and Gains From Trade
in economicsit is how much x changes when havingone more of
advantage, absolute: when a country returns more outputgiven the same something, when looking at a graph of Mx, you are looking at the
inputs derivative of total x
advantage, comparative: when a country's opportunitycost of producing to findtotalxup to a certain amount, find the areabelow the curve of Mx
something is less than the other totalx(Tx): this is equal to accumulation of marginalx
in economicsit is the sum of all marginal x up tothat quantity
to findtotalxup to a certain quantity, locate thepoint on the curve of Tx
