AP® Microeconomics Cheat Sheets: Formulas, Graphs, Flashcards & Quiz

Unit 2: Supply, Demand, Elasticity, and Intervention

Unit 2 is the core market-analysis unit. Demand represents the quantities consumers are willing and able to buy at different prices. Supply represents the quantities producers are willing and able to sell at different prices. The equilibrium price and quantity occur where quantity demanded equals quantity supplied. A price above equilibrium creates a surplus because producers want to sell more than buyers want to purchase. A price below equilibrium creates a shortage because buyers want more than sellers provide.

The most important distinction is movement along a curve versus a shift. A change in the good's own price changes quantity demanded or quantity supplied and moves along the curve. A change in a determinant shifts the entire curve. Demand shifters include tastes, income, related goods, expectations, and number of buyers. Supply shifters include input prices, technology, taxes, subsidies, expectations, number of sellers, and prices of other goods.

Double shifts require caution. If demand and supply both increase, equilibrium quantity definitely rises, but price is indeterminate because the demand shift pushes price up while the supply shift pushes price down. If demand rises and supply falls, price definitely rises, but quantity is indeterminate. Always explain the definite effect first and state that the other depends on relative magnitude.

Surplus analysis is a major AP skill. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Producer surplus is the difference between the price producers receive and the lowest price they would accept. Total surplus is maximized in an unregulated competitive market when there are no externalities. Price ceilings, price floors, taxes, subsidies, tariffs, quotas, and monopoly power can create deadweight loss by moving quantity away from the efficient level.

Elasticity measures responsiveness. Price elasticity of demand tells how strongly quantity demanded responds to price changes. Elastic goods have many substitutes, take a large share of income, are luxuries, or are measured over long time periods. Inelastic goods are necessities, have few substitutes, take a small share of income, or are measured in the short run. Elasticity determines tax incidence. The more inelastic side of the market bears more of a tax because that side is less responsive.

Government intervention can be binding or non-binding. A price ceiling affects the market only if it is below equilibrium. Rent control is the classic example. A price floor affects the market only if it is above equilibrium. Minimum wage is the classic example in a competitive labor market. Taxes shift supply left by the amount of the tax, create a wedge between buyer price and seller price, reduce quantity, and create deadweight loss. Subsidies shift supply right, increase quantity, and can also create deadweight loss from overproduction.

Unit 3: Production, Costs, and Perfect Competition

Unit 3 explains firm behavior. In the short run, at least one input is fixed, so firms face diminishing marginal returns. At first, adding workers to fixed capital may increase marginal product because of specialization. Eventually, too many workers share the same fixed capital, so marginal product falls. This declining marginal product causes marginal cost to rise. That is why production and cost curves are mirror images: when marginal product rises, marginal cost falls; when marginal product falls, marginal cost rises.

Total fixed cost does not change with output. Total variable cost changes as output changes. Total cost is fixed cost plus variable cost. Average fixed cost falls continuously as output rises because fixed cost is spread over more units. Average variable cost and average total cost are U-shaped because of marginal returns. Marginal cost crosses AVC and ATC at their minimum points. This rule is essential for graphs.

Long-run cost analysis is different. In the long run, all inputs are variable. Economies of scale occur when long-run average total cost falls as output rises. This may happen because of specialization, bulk purchasing, or technological efficiency. Diseconomies of scale occur when long-run average cost rises because coordination, management, or communication becomes difficult. Constant returns to scale occur when long-run average cost stays flat.

Perfect competition is the benchmark market structure. Firms sell identical products, face many competitors, have free entry and exit, and are price takers. A perfectly competitive firm faces a horizontal demand curve at the market price, so price equals marginal revenue. The firm maximizes profit by producing the output where MR equals MC, as long as price is at least AVC in the short run.

The shutdown rule is often tested. If price is below average variable cost, the firm shuts down in the short run because it cannot cover variable costs. If price is between AVC and ATC, the firm produces at a loss because it can still cover variable costs and part of fixed costs. If price equals AVC, the firm is indifferent between producing and shutting down. Long-run exit is different from shutdown. Exit means the firm leaves the industry entirely after all contracts and fixed commitments expire.

In the long run, perfect competition earns zero economic profit because entry and exit eliminate profits and losses. If firms earn profit, new firms enter, supply increases, price falls, and profit disappears. If firms suffer losses, firms exit, supply decreases, price rises, and losses disappear. Long-run perfect competition achieves both allocative efficiency and productive efficiency.

Unit 4: Imperfect Competition

Imperfect competition includes monopoly, monopolistic competition, and oligopoly. These firms are not price takers. They face downward-sloping demand curves, so they must lower price to sell more output. For a monopoly, marginal revenue is below demand because selling one more unit requires lowering the price on all units sold. The monopolist chooses quantity where MR equals MC, then charges the price consumers are willing to pay on the demand curve.

Monopoly creates inefficiency because price exceeds marginal cost. Consumers value additional units more than the cost of producing them, but the monopolist restricts output to keep price high. This creates deadweight loss. Monopoly can be caused by legal barriers such as patents, control over key resources, government franchises, or economies of scale. Natural monopoly occurs when one firm can serve the market at lower cost than multiple firms because of high fixed costs and economies of scale.

Price discrimination occurs when a firm charges different prices for the same good based on willingness to pay. For price discrimination to work, the firm needs market power, the ability to separate consumers, and the ability to prevent resale. Perfect price discrimination converts all consumer surplus into producer surplus and can produce the efficient quantity, but consumers receive no surplus.

Monopolistic competition combines competition and product differentiation. Firms have some market power because products differ, but entry and exit are free. In the short run, firms can earn economic profit or loss. In the long run, entry and exit make demand tangent to ATC, creating zero economic profit. However, these firms are not allocatively efficient because price is greater than marginal cost, and they are not productively efficient because output is below the minimum ATC quantity. The gap between actual output and minimum-ATC output is excess capacity.

Oligopoly involves a few interdependent firms. Each firm's best decision depends on what rivals do. Game theory is used to model strategic behavior. A dominant strategy is the best choice regardless of the rival's decision. A Nash equilibrium occurs when no firm can improve its payoff by changing its decision alone. In a prisoner's dilemma, individual incentives lead firms to cheat even though both would be better off cooperating. Collusion is unstable because each firm can gain by secretly cutting price or expanding output.

Unit 5: Factor Markets

Factor markets are markets for resources such as labor, capital, and land. The demand for a factor is derived demand because firms want inputs only because those inputs help produce output that consumers demand. If demand for the final product rises, demand for the labor used to produce that product rises. If worker productivity rises, labor demand also rises.

Marginal revenue product is central. It measures the extra revenue a firm earns from hiring one more unit of input. In a competitive product market, MRP equals marginal product times product price. In an imperfectly competitive product market, MRP equals marginal product times marginal revenue. The firm hires where MRP equals marginal factor cost. If the extra worker brings in more revenue than the worker costs, the firm hires more. If the worker costs more than the revenue added, the firm hires fewer.

In a competitive labor market, many firms hire workers and many workers supply labor. The wage is set by the market, and each individual firm takes the wage as given. The marginal factor cost curve is horizontal at the wage. The firm's labor demand curve is its MRP curve.

In a monopsony, there is one buyer of labor. Because the firm must raise wages to attract more workers and often must pay the higher wage to all workers, marginal factor cost lies above the labor supply curve. The monopsonist hires where MRP equals MFC but pays the wage on the supply curve. This results in lower employment and lower wages compared with a competitive market. A minimum wage can have different effects in monopsony than in perfect competition. In a monopsony, a properly set minimum wage can increase employment and wages.

Unit 6: Market Failure and Government

Market failure occurs when the free market does not produce the socially efficient outcome. The efficient outcome occurs where marginal social benefit equals marginal social cost. In a simple competitive market without externalities, demand represents marginal social benefit and supply represents marginal social cost. But when externalities exist, private demand or supply does not reflect all benefits or costs.

A negative externality is an external cost. Pollution is the classic example. The private supply curve reflects producer cost, but it ignores the cost imposed on society. Therefore, marginal social cost is above private supply, and the market overproduces. The efficient solution is to internalize the externality, often through a per-unit tax equal to the external cost. This shifts the effective cost toward the social cost and reduces quantity to the optimal level.

A positive externality is an external benefit. Vaccinations and education are common examples. The private demand curve reflects private benefit, but social benefit is greater. Therefore, the market underproduces. A subsidy can increase quantity toward the socially optimal level. For production externalities, the subsidy or tax is usually applied to firms. For consumption externalities, it is usually applied to consumers.

Goods can be classified by rivalry and excludability. Private goods are rival and excludable. Public goods are non-rival and non-excludable. Club goods are excludable but non-rival. Common resources are rival but non-excludable. Public goods create a free-rider problem because people can benefit without paying. Common resources create tragedy of the commons because individuals overuse a shared resource. Government can respond with public provision, taxes, quotas, regulation, tradable permits, or property rights.

Income inequality is measured with the Lorenz curve and Gini coefficient. The Lorenz curve compares cumulative percent of population with cumulative percent of income. A perfectly equal distribution follows the 45-degree line. The Gini coefficient measures inequality from 0 to 1. Government policies such as progressive taxes, transfer payments, and minimum wage laws can reduce inequality, but may also create efficiency trade-offs.

AP® Microeconomics FRQ Strategy

AP Microeconomics FRQs reward precision. The exam often asks students to draw graphs, show changes, calculate results, and explain outcomes. A strong FRQ answer labels every axis, curve, equilibrium point, price, quantity, and area that matters. Graphs should be large enough to read and should show directional shifts clearly. Do not write a paragraph when a correctly labeled graph is required; do not draw a graph when the prompt asks for an explanation.

For market graphs, label supply, demand, equilibrium price, equilibrium quantity, consumer surplus, producer surplus, and deadweight loss if needed. For tax graphs, show the tax wedge, buyer price, seller price, tax revenue, and DWL. For externality graphs, show private cost or benefit, social cost or benefit, market quantity, socially optimal quantity, and the deadweight loss triangle. For firm graphs, show MR, MC, ATC, AVC, price, quantity, and the profit or loss rectangle. For monopoly graphs, remember that price comes from the demand curve after finding quantity where MR equals MC.

For calculations, write the formula first, substitute values, then state the result with units. For opportunity cost, use what is given up divided by what is gained. For elasticity, use percentage changes and absolute value when classifying demand elasticity. For profit, use \(\pi=(P-ATC)Q\). For MRP, multiply marginal product by product price or marginal revenue, depending on market structure.

Explanations should be causal. Instead of writing 'price changes,' say exactly why: 'The excise tax increases producers' marginal cost, shifting supply left, raising the price paid by buyers, lowering the price received by sellers, and reducing equilibrium quantity.' AP scoring favors precise chains of reasoning.

How to Study AP® Microeconomics With This Cheat Sheet

1. Start with the formulas. Write every formula from the formula bank without looking, then define each variable.
2. Redraw every graph. Practice supply and demand, tax, price ceiling, price floor, externality, perfect competition, monopoly, monopsony, and Lorenz curve graphs.
3. Use active recall. Answer flashcards aloud before revealing the answer.
4. Practice calculations. Do opportunity cost, elasticity, surplus area, profit, cost, and MRP calculations with units.
5. Write FRQ chains. Use a cause-effect sequence: event, curve shift, price/quantity effect, surplus or efficiency result.
6. Grade your readiness. After a timed practice set, use the AP Micro score calculator.

A seven-day plan works well. Day 1: scarcity, PPC, comparative advantage. Day 2: supply, demand, surplus. Day 3: elasticity, taxes, subsidies, trade. Day 4: production costs and perfect competition. Day 5: monopoly, monopolistic competition, oligopoly. Day 6: factor markets and monopsony. Day 7: externalities, public goods, inequality, and mixed FRQ practice.