AP Microeconomics uses graphs and models to explain how consumers, firms, and markets make choices under scarcity. This cheat sheet helps students connect graph shapes, labels, formulas, and equilibrium rules that appear often on exams. It is especially useful for reviewing how changes in incentives shift curves and affect price, quantity, profit, and welfare.
Key Facts
- Market equilibrium occurs where quantity demanded equals quantity supplied, or Qd = Qs.
- Consumer surplus is the area below the demand curve and above the price, while producer surplus is the area above the supply curve and below the price.
- Price elasticity of demand is Ed = percent change in quantity demanded / percent change in price.
- Total revenue is TR = P x Q, and marginal revenue is MR = change in TR / change in Q.
- Profit is profit = TR - TC, and a firm maximizes profit where MR = MC if price or revenue covers the relevant cost.
- In perfect competition, the firm faces P = MR = demand, and long-run equilibrium occurs where P = MC = minimum ATC.
- A monopoly maximizes profit where MR = MC, then uses the demand curve to set price above marginal cost.
- A negative externality creates overproduction because the market supply curve reflects private cost, while the socially efficient quantity occurs where MSB = MSC.
Vocabulary
- Equilibrium
- The point where quantity demanded equals quantity supplied and there is no shortage or surplus.
- Elasticity
- A measure of how strongly quantity demanded or supplied responds to a change in price, income, or another factor.
- Marginal Cost
- The additional cost of producing one more unit of output.
- Marginal Revenue
- The additional revenue earned from selling one more unit of output.
- Deadweight Loss
- The loss of total surplus that occurs when a market produces less or more than the efficient quantity.
- Market Power
- A firm's ability to influence the price of its product rather than accepting the market price.
Common Mistakes to Avoid
- Confusing a movement along a curve with a shift of the curve is wrong because a price change causes movement, while a non-price determinant causes a shift.
- Setting price equal to marginal cost for a monopoly is wrong because monopolies choose quantity where MR = MC, then set price from the demand curve.
- Labeling deadweight loss as the entire surplus area is wrong because deadweight loss is only the lost gains from trades that do not occur or inefficient extra trades.
- Forgetting that average total cost determines profit is wrong because profit or loss depends on the gap between price and ATC at the profit-maximizing quantity.
- Using total values instead of marginal values for firm decisions is wrong because rational firms decide whether to produce one more unit by comparing MR and MC.
Practice Questions
- 1 A market has Qd = 100 - 2P and Qs = 20 + 2P. Find the equilibrium price and quantity.
- 2 A firm's total revenue rises from 260 when output rises from 10 to 13 units. Calculate marginal revenue over this range.
- 3 At the profit-maximizing output, a competitive firm's price is 14, and quantity is 50. Calculate the firm's economic profit.
- 4 Explain why a monopoly creates deadweight loss compared with a perfectly competitive market, using MR, MC, and the demand curve in your reasoning.
Understanding AP Microeconomics Graphs and Models
A graph is a model, not a photograph of a real market. Its job is to hold one relationship steady while showing the effect of a change. On a standard market graph, a movement along a curve happens when the good's own price changes.
A shift happens when some other condition changes. Income, tastes, the price of a related good, expectations, the number of buyers, and government rules can shift demand. Input costs, technology, taxes, subsidies, expectations, and the number of firms can shift supply.
Students often lose points by calling every change a shift. Read the wording closely.
A change in the price of coffee moves buyers along the coffee demand curve. A rise in income may shift coffee demand, depending on whether coffee is a normal good or an inferior good.
Elasticity tells you how strongly people or firms react, not simply whether they react. Demand tends to be more elastic when close substitutes exist, when the item takes a large share of a budget, when consumers have time to adjust, or when the item is a luxury. It tends to be inelastic for necessities with few substitutes, such as some medicines.
This matters because a price change affects total revenue differently in different cases. When demand is elastic, a lower price can raise total revenue because quantity sold rises by a larger percentage. When demand is inelastic, a higher price can raise total revenue because sales fall by a smaller percentage.
For calculations, use percentage changes based on the midpoint when the course question gives two prices and two quantities. Do not confuse elasticity with the slope of a line. A steep curve can be elastic or inelastic depending on the scale of the axes.
Firm graphs require careful attention to which curve belongs to the whole market and which belongs to one firm. Marginal cost usually rises because producing extra units eventually strains limited workers, machines, or space. Average total cost falls at first as fixed costs are spread over more output, then rises when diminishing returns become important.
Marginal cost crosses average total cost at average total cost's lowest point. It crosses average variable cost at that curve's lowest point too. In the short run, a firm may keep producing even with an economic loss if revenue covers variable cost.
It contributes something toward fixed cost. If price falls below average variable cost, shutting down limits the loss to fixed cost. In the long run, firms can enter or leave, so fixed cost no longer determines a shutdown decision.
Welfare graphs show who gains or loses when a market is changed. A tax creates a wedge between the price paid by buyers and the price received by sellers. The government collects revenue, yet some trades that would have benefited both sides no longer occur.
That lost value is deadweight loss. A price ceiling below the market price can create a shortage, while a price floor above it can create a surplus. Externalities need a separate social curve because private decision makers may ignore costs imposed on neighbors or benefits received by others.
Pollution is a familiar negative externality. Vaccination and education can create positive externalities. Factor markets use the same logic for labor, land, and capital.
A worker's wage reflects the firm's demand for the worker's marginal revenue product, which depends on productivity and the value of the output. Always label the axes, identify the relevant curve, and trace each change through price, quantity, surplus, and profit.