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Sherry Yao
99
AP MICRO
REVIEW
1.
Basic
Economic Concepts (8%-14%)
A.
Scarcity,
choice, and opportunity cost
Scarcity: the limited
nature of society
’
s
resources
Economics: the study of how society
manages its
scarce
resources
People face trade-off (efficiency or
equality)
Opportunity cost: whatever must be
given up to obtain some item
B.
Production
possibilities curve
The production possibilities curve
shows the combinations of output
that
the economy can possibly produce given the
available factors of
production and the
available production technology
Qy
1.
The
opp
cost
of
Qx
equals
the
slope
of
curve
2.
The
opp
cost
of
Qx
is
higher,
the
curve
is
steeper
3.
opp cost is constant, the PPF is strict
line
4. Technology advance
→
PPF
shift
Inefficie
nt
Qx
C.
Comparative advantage, absolute
advantage, specialization and trade
Comparative
advantage:
the
ability
to
produce
a
good
at
a
lower
opportunity cost than another
producer
Absolute advantage: the ability to
produce a good using fewer inputs
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than another producers
Trade can benefit everyone
in society because it allows people to
specialize
in activities in
which they have a
comparative
advantage
.
D.
Economic
system
E.
Property rights and the role of
incentives
Property
rights:
the
ability
of
an
individual
to
own
an
exercise
control
over scarce
resources
Market power
Market failure: allocate resources
inefficiently
←
Negative externality
Incentive: something that
induces a person to act (the prospect of a
punishment or a reward)
F.
Marginal
analysis
Marginal change: a small incremental
adjustment to a plan of action
People make choice when
marginal benefit
＞
marginal cost
2. The Nature and Functions
of Product Markets (55%-70%)
A.
Supply and
Demand (15%-20%)
a)
Market
equilibrium
A
situation
in
which
the
market
price
has
reached
the
level
at
which
quantity supplied
equals quantity demanded
b)
Determinants
of supply
Income:
income
↓
,
demand
of
normal
goods
↓
,
demand
of
inferior
good
↑
Prices of related goods: price of
substitute
↓
, demand of
another
good
↓
price
of
complements
↓
,
demand
of
another
good
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↑
Tastes
Expectations: expect higher income,
demand
↑
Number of buyers:
buyers
↑
,
demand
↑
c)
Determinants
of demand
d)
e)
f)
3
Input price: input
price
↑
,
supply
↓
Technology: advance in technology,
supply
↑
Expectations: expect the price of
goods
↑
,
supply
↑
Number of sellers: number of
sellers
↑
,
supply
↑
Price and
quantity controls
Demand
→
,
price
↑
,
quantity
↑
Supply
→
,
price
↓
,
quantity
↑
Elasticity
Demand Curve Inelastic:
Price
↑
, total
revenue
↑
Demand Curve Elastic:
Price
↑
, total
revenue
↓
Normal Goods & Income
Elasticity:
The Quantity of
Normal Goods moves the same direction with the
Percentage of Income
对
normal goods
的需求量
与收入变动同方向
运动
The
Elasticity of Normal Goods is usually
positive
Inferior Goods & Income
Elasticity
The Quantity of
Inferior Goods moves the opposite direction with
the Percentage of Income
对
inferior goods
的需
求量与授予变动反
方向运动
The
Elasticity of Inferior Goods is usually
negative
E
xy
＞
1,
substitute,
E
xy
＜
1,
complementary
Consumer
surplus, producer surplus, and allocative
efficiency
g)
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Consumer surplus: the
amount a buyer is willing to pay for a good
minus the amount the buyer actually
pays for it
Producer
surplus: the amount
a seller is
paid for a good
minus the
seller
’
s cost of
providing it
Allocative
efficiency:
the last unit
provides marginal benefit to
consumer =
the marginal cost to producer
Tax incidence and deadweight
loss
Tax
incident: the manner in which the burden of a tax
is a shared
among participants in a
market
Elasticity
↑
, the
tax burden
↓
Deadweight loss: the fall in total
surplus that results from a
market
distortion such as tax
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B.
Theory of
consumer choice (5%-10%)
a)
Total utility
and marginal utility
Total utility:
The aggregate level of satisfaction or
fulfillment
that
a
consumer
receives
through
the
consumption
of
a
specific
good
or
service
Marginal
utility: gain from an increase, or loss from a
decrease,
in the
consumption
of that good or service
b)
Utility
maximization:
equalizing
marginal
utility
per
dollar.
(MU
X
/P
X
=MU<
/p>
Y
/P
Y
)
c)
Income and substitution
effects
C.
Production and Costs
(10%-15%)
a)
Production functions
5
b)
c)
d)
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Production
function:
the
relationship
between
the
quantity
of
inputs used to make a good and the
quantity of output of that good
The quantity of the
input
↑
, the production
function gets flatter
Marginal product and diminishing
returns
Marginal
product: the increase in the amount of output from
an
additional unit of labor
Diminishing return: the
property whereby the marginal product of
an input declines as the quantity of
the input increases
Short-
run costs
Fixed
cost in the short run
Long-
run costs and economies of scale