AP Microeconomics Exam Review.Final Test
2026\2027.
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
Manmade 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
,AP Microeconomics Exam Review.Final Test
2026\2027.
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
, AP Microeconomics Exam Review.Final Test
2026\2027.
-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
2026\2027.
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
Manmade 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
,AP Microeconomics Exam Review.Final Test
2026\2027.
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
, AP Microeconomics Exam Review.Final Test
2026\2027.
-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
