Microeconomics – AP Test Study Guide

1. People face tradeoffs
2. The cost of somehting in what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A country's standard of living depends upon it's ability to provide goods and services
9. Prices rise when governments print too much money
10. Society faces a short run tradeoff between inflation and unemployment

Additional

Measure of satisfaction

How a society distributes scarce resources

1. Land
2. Labor
3. Capital (physical and human)
4. Entrepreneurship

Visual model of the economy that shows how dollars flow through markets among households and firms

Used directly

Used indirectly

1. Only two goods can be produced
2. Full employment of resources
3. Fixed resources (ceteris paribus)
4. Fixed technology

All things held constant

As you produce more of any good, the opportunity cost for the production of another good will increase

Products are being used in the least costly way (this is a singular point on the PPC)

Products being produced are the ones society desires most (this optimal point on the PPC depends of the desires of society)

1. Change in resource quant. & qual.
2. Change in technology
3. Change in trade

Opportunity cost/units gained

Producer that can produce the most amount of overall output or requires that leash amount of inputs

Producer with the lowest opportunity cost

If they have a lower opportunity cost

Other goes over

Other goes under

If it's talking about time or resources

The different quantities of goods and services that consumers are WILLING & ABLE to buy at different prices
- if price falls, quantity demanded rises
- if price rises, quantity demanded fall

States that there is an inverse relationship between price and quantity demanded caused by:
- The substitution effect
- The income effect
- Law of diminishing marginal utility

As you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease

1. Tastes & preferences
2. Number of consumers
3. Price of related goods
4. Income
5. Future expectations of price

*CHANGES IN PRICE DON'T SHIFT DEMAND

Goods that are bought & used together

1. Normal goods (ex. luxury cars, jewelry)
2. Inferior goods (ex. fast food, used cars)

The different quantities of a good that sellers are willing and able to sell/produce at different prices

There is a direct/positive relationship between price and quantity supplied

1. Price & availability of inputs (resources)
2. Number of sellers
3. Technology
4. Gov. Action
5. Expectations of future profit

*CHANGES IN PRICE DON'T SHIFT SUPPLY

Difference between what you are willing to pay and what you actually pay

CS = buyer's maximum - price

The area under the demand curve and above equilibrium price

difference between the amount a producer of a good receives and the minimum amount the producer is willing to accept for the good

PS = price - seller's maximum

The area above the supply curve and below

Shows how sensitive a product is to a change in price

New- old / old

% change quantity / % change price

Quantity of INsensitive to a change in price

An inelastic change in the demand curve results in a graph that looks like an "I'

- few substitutes
- necessities
- small portion of income
- required now, rather than later
- elasticity coefficient is less than 1

Examples: gasoline, chewing gum, milk, diapers

Quantity is sensitive to a change in price; an elastic graph is flat

- many substitutes
- luxuries
- large portion of income
- plenty of time to decide
- elasticity coefficient is greater than 1

Examples: gold, real estate, beef, boats

Curve is perfectly vertical - coefficient 0

Curve is perfectly horizontal - coefficient infinity

Coefficient 1