Essential AP Microeconomics
Formulas
AVERAGE PRODUCT (AP)
TOTAL PRODUCT (TP OR
Q)/LABOR (QL)
MARGINAL PRODUCT
(MP)
ΔTP/ΔQL
PROFIT
TOTAL REVENUE (TR) – TOTAL
COST (TC)
TOTAL COST
TC = TFC + TVC
TOTAL FIXED COSTS (TFC) +
TOTAL VARIABLE COSTS (TVC)
Also, TC = Explicit Costs + Implicit Costs
AVERAGE TOTAL COST (ATC)
TOTAL COSTS (TC) / QUANTITY
(Q)
AVERAGE FIXED COSTS (AFC)
TOTAL FIXED COSTS (TFC) /
QUANTITY (Q)
AVERAGE VARIABLE COSTS (AVC)
TOTAL VARIABLE COST (TVC) /
QUANTITY (Q)
AVERAGE REVENUE (AR)
TOTAL REVENUE (TR) / QUANTITY
(Q)
IN PERFECT COMPETITION…
DEMAND (D) = AVERAGE
REVENUE (AR) = PRICE (P)
MARGINAL REVENUE (MR)
ΔTR / ΔQ (OR ΔTR / ΔTP)
MARGINAL COST (MC)
ΔTC / ΔQ
or
ΔTVC / ΔQ
PROFIT MAXIMIZATION POINT
WHERE MC = MR
“BREAKEVEN” POINT
WHERE P = ATC
SHUTDOWN POINT
WHERE P = AVC
Utility Maximization occurs
when…
(MU/P)A = (MU/P)A
Don’t forget the “PER DOLLAR”
For Factor Markets (aka inputs)
the LEAST COST COMBINATION
occurs when…
(MP/P)L = (MP/P)K
Don’t forget the “PER DOLLAR”
What is true of MR and TR when
Ed is INELASTIC?
If Inelastic,
MR < 0
TR must be decreasing
What is true of MR and TR when
Ed is ELASTIC?
If elastic,
MR > 0,
TR must be increasing
For Factor Markets, what
determines a firm’s profitmaximizing hiring decision?
Firms will maximize profits by
hiring any factor until
MFC = MRP
If MU/P for good A is less than
MU/P for good B, what should a
rational consumer do?
A rational consumer should buy
less A and more B until MU/P is
equal for both goods
If Marginal Private Benefit (MPB)
is less than Marginal Social
Benefit (MSB), what is likely the
reason? How could this be
‘fixed’
A Positive Externality,
use a PER UNIT subsidy to
increase output to Social optimal
level
If Marginal Social Cost (MSC) is
greater than Marginal Private
Cost (MPC), what is likely the
reason? How could this be fixed?
A Negative Externality, use a PER
UNIT Tax to decrease output to
the social optimal level
If the Gini Coefficient is higher
than most countries… what does
this mean? What could a
country do to effectively
decrease the Gini Coefficient?
High Gini Coefficient means
more unequal INCOME
DISTRIBUTION. Gov’t could
impose a PROGRESSIVE tax or
some other policy to redistribute wealth from upper to
lower class.
What graph will always be both
ALLOCATIVELY and
PRODUCTIVELY efficient?
A firm in PERFECT COMPETITION
– in Long-Run Equilibrium