AP Microeconomics focuses on individual markets, firm behavior, and resource allocation. Nearly every FRQ involves a graph — supply/demand, cost curves, or market structure diagrams. These notes organize the key models and relationships that you must be able to sketch and analyze.
Units 1–2: Supply, Demand, and Elasticity
Law of demand: price up → quantity demanded down (inverse relationship). Shifters of demand: income (normal vs. inferior goods), prices of related goods (substitutes vs. complements), tastes, expectations, buyers. Price elasticity of demand (PED) = % change in Qd / % change in P. If |PED| > 1: elastic (luxury goods, many substitutes); if < 1: inelastic (necessities, few substitutes). Total revenue test: if demand is elastic, price increase → TR falls. Cross-price elasticity positive = substitutes; negative = complements.
Units 3–4: Production, Costs, and Perfect Competition
Short-run cost curves: AFC continuously falls; AVC and ATC are U-shaped; MC is U-shaped and intersects AVC and ATC at their minimums. Profit maximization: produce where MR = MC. Perfect competition: P = MR = MC at equilibrium. In long run, zero economic profit; price = minimum ATC. Shutdown rule: if P < AVC, firm shuts down. Economic profit vs. accounting profit — include opportunity cost of owner's resources.
Units 5–6: Imperfect Competition
Monopoly: single seller, price maker, downward-sloping D = AR; MR lies below demand curve. Deadweight loss = area between demand and MC from Qmonopoly to Qcompetitive. Natural monopoly: ATC declines throughout relevant range; regulate at P = ATC (fair return) or P = MC (socially optimal but requires subsidy). Monopolistic competition: differentiated products, downward-sloping D, zero economic profit in long run, but P > MC (excess capacity). Oligopoly: mutual interdependence; kinked demand curve model; game theory — Nash equilibrium, prisoner's dilemma, collusion/cartel incentives.
Unit 7: Factor Markets and Market Failures
Labor demand = marginal revenue product (MRP = MR × MP). Monopsony: single buyer of labor; hires where MRC = MRP; wage below competitive level. Minimum wage in competitive labor market creates surplus (unemployment). Positive externalities: market under-produces → subsidy corrects. Negative externalities: market over-produces → tax (Pigouvian tax) corrects. Public goods: non-excludable and non-rival → free rider problem → government provision.
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