AP® Microeconomics

Graphs and formulas you must know

The exam gives you no formula sheet. These are the calculations and the graphs it expects you to know, in our own words: what each means, when to use it, and the trap that costs points. The ones students most often get wrong are flagged "Easy to forget".

Easy to forget

These 11 formulas and 7 graphs cost the most points every year. Each is flagged below.

Opportunity cost per unit, read off a PPC or an output table. Comparative advantage goes to the lower opportunity cost, not the larger output (that is absolute advantage).
Marginal utility per dollar. Compare MU divided by price, not MU alone, and stop when the budget runs out.
The price elasticity of demand. Quantity on top, price on the bottom; read the absolute value: above 1 is elastic, below 1 inelastic.
The cross-price elasticity of demand. Positive means substitutes, negative means complements; the price is the other good's.
Consumer surplus under a straight demand curve. A triangle needs the one half; use the quantity actually bought.
What a per-unit subsidy costs the government. The whole rectangle between the price sellers receive and the price buyers pay, out to the new, larger quantity.
Deadweight loss, a triangle. Between demand (MSB) and supply (MC, MSC), from the quantity traded to the efficient quantity; do not forget the one half.
Marginal cost. Divide the change in total cost by the change in output, which is not always 1.
Average fixed cost. Divide fixed cost by output, not by workers; TFC is the same at every output, including zero.
Marginal revenue. For a monopoly MR is below the price, because selling one more means a lower price on every unit.
Marginal revenue product (MP x P when the firm sells in a competitive product market). Marginal product times marginal revenue, never MR times P.
Supply and demand. The tax shifts supply up by the tax. Tax revenue b + d on the quantity after the tax (buyers pay b, sellers d), deadweight loss c + e.
Supply and demand. The subsidy shifts supply down by the subsidy. Its cost is the whole rectangle b + c + e + f + g out to the new quantity; deadweight loss g.
Cost curves. MC crosses AVC and ATC at their minimums; the gap between ATC and AVC (AFC) narrows as output grows.
Perfect competition: market and firm. Market on the left, firm on the right, the price carried across. The firm's demand is horizontal: d = MR = AR = P; it produces where MR = MC. Profit is area a.
Monopoly. Quantity where MR = MC, price up on demand. Consumer surplus a, profit b, deadweight loss d between demand and MC.
Monopsony. Hire where MRP = MFC, then read the wage down on labor supply, not on MRP.
Externality. A negative production externality: MSC above MPC, so the market overproduces. Deadweight loss is area a, from the efficient to the market quantity.

Choices and trade

Formula and a worked line	What it is and when to use it	The trap	Learn it in
Easy to forget $\text{opportunity cost of 1 unit of X}$ $= \frac{\text{units of Y given up}}{\text{units of X gained}}$ Worked: $\frac{20 \text{ bolts}}{10 \text{ chairs}}$ $= 2\,\text{ bolts per chair}$	Opportunity cost per unit, read off a PPC or an output table. Comparative advantage and moving along a PPC.	Comparative advantage goes to the lower opportunity cost, not the larger output (that is absolute advantage).	Unit 1 Comparative Advantage and Trade
Easy to forget $\text{marginal utility per dollar}$ $= \frac{MU}{P}$ Worked: $\frac{30 \text{ utils}}{$2}$ $= 15\,\text{ utils per dollar}$	Marginal utility per dollar. Choosing the bundle that maximizes total utility: equal MU per dollar across goods, budget spent.	Compare MU divided by price, not MU alone, and stop when the budget runs out.	Unit 1 Marginal Analysis and Consumer Choice

Elasticity and revenue

Formula and a worked line	What it is and when to use it	The trap	Learn it in
$\%\Delta$ $= \frac{\text{new} - \text{old}}{\text{old}} \times 100$ Worked: $\frac{12 - 10}{10} \times 100 = 20\,\%$	A percent change. Every elasticity starts from two of them.	Divide by the old value, and keep the sign until you take the absolute value.	Unit 2 Price Elasticity of DemandPractice it: Elasticity Lab
Easy to forget $E_d = \left\| \frac{\%\Delta Q_d}{\%\Delta P} \right\|$ Worked: $\left\| \frac{-20\%}{+10\%} \right\| = 2$	The price elasticity of demand. How strongly buyers respond to a price change; the total revenue test.	Quantity on top, price on the bottom; read the absolute value: above 1 is elastic, below 1 inelastic.	Unit 2 Price Elasticity of DemandPractice it: Elasticity Lab
$E_d$ $= \left\| \frac{(Q_2 - Q_1) / \tfrac{Q_1 + Q_2}{2}}{(P_2 - P_1) / \tfrac{P_1 + P_2}{2}} \right\|$ Worked: $\left\| \frac{-20 / 90}{+2 / 11} \right\|$ $= 1.22$	The price elasticity of demand by the midpoint method. One route that gives the same answer whichever way the price moves (not keyed as the only route).	Each change is divided by the average of the two values.	Unit 2 Price Elasticity of DemandPractice it: Elasticity Lab
$E_I = \frac{\%\Delta Q_d}{\%\Delta \text{income}}$ Worked: $\frac{+10\%}{+10\%} = 1$	The income elasticity of demand. Telling normal goods (positive) from inferior goods (negative).	The sign matters here: keep it.	Unit 2 Other ElasticitiesPractice it: Elasticity Lab
Easy to forget $E_{xy}$ $= \frac{\%\Delta Q_{d,x}}{\%\Delta P_y}$ Worked: $\frac{-25\%}{+20\%} = -1.25$	The cross-price elasticity of demand. Telling substitutes (positive) from complements (negative).	Positive means substitutes, negative means complements; the price is the other good's.	Unit 2 Other ElasticitiesPractice it: Elasticity Lab
$E_s = \frac{\%\Delta Q_s}{\%\Delta P}$ Worked: $\frac{+50\%}{+25\%} = 2$	The price elasticity of supply. How strongly sellers respond to a price change; more elastic with more time and spare capacity.	Quantity supplied on top; supply elasticity is positive, and time to adjust raises it.	Unit 2 Price Elasticity of SupplyPractice it: Elasticity Lab
$TR = P \times Q$ Worked: $$8 \times 50 = $400$	Total revenue. The total revenue test, and a firm's revenue at its output.	With elastic demand a price cut raises total revenue; with inelastic demand it lowers it.	Unit 2 Price Elasticity of DemandPractice it: Elasticity Lab

Surplus, taxes and trade

Formula and a worked line	What it is and when to use it	The trap	Learn it in
Easy to forget $CS$ $= \tfrac{1}{2} \times Q \times (\text{top of demand} - P)$ Worked: $\tfrac{1}{2} \times 40 \times ($10 - $6) = $80$	Consumer surplus under a straight demand curve. Surplus at equilibrium and after a change.	A triangle needs the one half; use the quantity actually bought.	Unit 2 Market Equilibrium and Consumer and Producer SurplusPractice it: Surplus and Policy Lab
$PS$ $= \tfrac{1}{2} \times Q \times (P - \text{bottom of supply})$ Worked: $\tfrac{1}{2} \times 40 \times ($6 - $2) = $80$	Producer surplus above a straight supply curve. Surplus at equilibrium and after a change.	Above supply and below the price sellers receive; the one half again.	Unit 2 Market Equilibrium and Consumer and Producer SurplusPractice it: Surplus and Policy Lab
$\text{tax revenue}$ $= \text{tax per unit} \times Q_{\text{after}}$ Worked: $$2 \times 40 = $80$	The government's revenue from a per-unit tax. Shading and sizing the tax rectangle.	Use the quantity after the tax, not the old equilibrium quantity.	Unit 2 The Effects of Government Intervention in MarketsPractice it: Surplus and Policy Lab
Easy to forget $\text{subsidy cost}$ $= \text{subsidy per unit} \times Q_{\text{after}}$ Worked: $$3 \times 60 = $180$	What a per-unit subsidy costs the government. Shading and sizing the subsidy rectangle.	The whole rectangle between the price sellers receive and the price buyers pay, out to the new, larger quantity.	Unit 2 The Effects of Government Intervention in MarketsPractice it: Surplus and Policy Lab
Easy to forget $DWL$ $= \tfrac{1}{2} \times \Delta Q \times \text{price wedge}$ Worked: $\tfrac{1}{2} \times (50 - 40) \times $4 = $20$	Deadweight loss, a triangle. Taxes, subsidies, price controls, monopoly and externalities.	Between demand (MSB) and supply (MC, MSC), from the quantity traded to the efficient quantity; do not forget the one half.	Unit 2 The Effects of Government Intervention in MarketsPractice it: Surplus and Policy Lab, Externality Lab
$\text{shortage} = Q_d - Q_s$ Worked: $70 - 40 = 30\,\text{ units}$	A shortage at a binding price ceiling (a surplus is the reverse). Price controls.	Quantity demanded against quantity supplied at the controlled price, not demand against supply.	Unit 2 The Effects of Government Intervention in MarketsPractice it: Surplus and Policy Lab
$\text{tariff revenue}$ $= \text{tariff} \times \text{imports}_{\text{after}}$ Worked: $$1 \times (50 - 30) = $20$	The government's revenue from a tariff. A domestic market with a world price and a tariff.	Imports after the tariff: quantity demanded minus quantity supplied at the higher price.	Unit 2 International Trade and Public PolicyPractice it: Surplus and Policy Lab

Production, costs and profit

Formula and a worked line	What it is and when to use it	The trap	Learn it in
$MP = \frac{\Delta TP}{\Delta L}$ Worked: $\frac{25 - 15}{3 - 2}$ $= 10\,\text{ units}$	Marginal product. A production table; diminishing marginal returns.	The change in output from one more worker, not output per worker (that is average product).	Unit 3 The Production FunctionPractice it: Cost Curve Lab
$\text{average product} = \frac{TP}{L}$ Worked: $\frac{60}{4} = 15\,\text{ units}$	Average product: output per worker. A production table; marginal product pulls it up or down.	When marginal product is below average product, average product falls.	Unit 3 The Production FunctionPractice it: Cost Curve Lab
$TC = TFC + TVC$ Worked: $$100 + $140 = $240$	Total cost: fixed plus variable cost. Filling a cost table; TC at zero output is the fixed cost.	Fixed cost does not change with output, so it does not change MC.	Unit 3 Short-Run Production CostsPractice it: Cost Curve Lab
Easy to forget $MC = \frac{\Delta TC}{\Delta Q}$ Worked: $\frac{$300 - $240}{30 - 20}$ $= $6$	Marginal cost. A cost table; the MR = MC rule.	Divide the change in total cost by the change in output, which is not always 1.	Unit 3 Short-Run Production CostsPractice it: Cost Curve Lab
$ATC = \frac{TC}{Q}, \quad AVC = \frac{TVC}{Q}$ Worked: $\frac{$600}{50} = $12$	Average total and average variable cost. A cost table; profit per unit; the shutdown point (minimum AVC).	Divide by output, and remember TC = TFC + TVC.	Unit 3 Short-Run Production CostsPractice it: Cost Curve Lab
Easy to forget $AFC = \frac{TFC}{Q}$ Worked: $\frac{$200}{50} = $4$	Average fixed cost. A cost table.	Divide fixed cost by output, not by workers; TFC is the same at every output, including zero.	Unit 3 Short-Run Production CostsPractice it: Cost Curve Lab
Easy to forget $MR = \frac{\Delta TR}{\Delta Q}$ Worked: $\frac{$28 - $24}{4 - 3} = $4$	Marginal revenue. A revenue table; for a price taker MR equals the price, for a firm with market power it lies below demand.	For a monopoly MR is below the price, because selling one more means a lower price on every unit.	Unit 3 Profit MaximizationPractice it: Firm and Market Lab
$\text{profit}$ $= TR - TC$ $= (P - ATC) \times Q$ Worked: $($12 - $9) \times 100 = $300$	Economic profit (or loss, when negative). Sizing the profit or loss rectangle.	Use ATC at the profit-maximizing quantity, and subtract implicit costs for economic profit.	Unit 3 Profit MaximizationPractice it: Firm and Market Lab
$\text{economic profit}$ $= TR - \text{explicit} - \text{implicit costs}$ Worked: $90{,}000 - 60{,}000 - 40{,}000$ $= -10{,}000\,\text{ dollars}$	Economic profit, against accounting profit (TR minus explicit costs only). An owner who gives up a salary or interest to run the business.	Accounting profit is larger whenever implicit costs are positive.	Unit 3 Types of Profit

Factor markets

Formula and a worked line	What it is and when to use it	The trap	Learn it in
Easy to forget $MRP = MP \times MR$ Worked: $8 \times $5 = $40$	Marginal revenue product (MP x P when the firm sells in a competitive product market). A hiring table; labor demand.	Marginal product times marginal revenue, never MR times P.	Unit 5 Introduction to Factor MarketsPractice it: Factor Market Lab
$MRC = \frac{\Delta TC}{\Delta L}$ Worked: $\frac{$480 - $400}{6 - 5}$ $= $80$	Marginal resource (factor) cost. Hiring where MRP = MRC; a monopsony's MFC.	For a firm that takes the market wage, MRC is the wage; for a monopsonist it is above the wage.	Unit 5 Profit-Maximizing Behavior in Perfectly Competitive Factor MarketsPractice it: Factor Market Lab
$\frac{MP_L}{w} = \frac{MP_K}{r}$ Worked: $\frac{20}{$10}$ $= 2\,\text{ units per dollar}$	The least-cost rule: equal marginal product per dollar for every input. Choosing the input mix that makes an output at least cost.	Use each input's own price, and compare products per dollar, not marginal utility.	Unit 5 Profit-Maximizing Behavior in Perfectly Competitive Factor MarketsPractice it: Factor Market Lab
$\text{wage bill} = W \times L$ Worked: $$12 \times 30 = $360$	The wage bill. A monopsony or any hiring answer.	A monopsonist pays the wage read from labor supply at the number hired.	Unit 5 Monopsonistic MarketsPractice it: Factor Market Lab

The graphs you must draw

Label every axis and curve exactly as here, show each shift with a new curve (D2) and the new equilibrium, and shade the whole area a question names.

Production possibilities curve. Label both goods; a bowed-out curve shows increasing opportunity cost, and growth shifts the whole curve out. Production Possibilities Curve

Supply and demand. A change in the good's own price is a movement along a curve, not a shift. Market Disequilibrium and Changes in Equilibrium

Demand. Total revenue is price times quantity: rectangle a. On a straight demand curve the midpoint is unit elastic; above it demand is elastic, below it inelastic. Price Elasticity of Demand

Supply and demand. A binding ceiling sits below equilibrium: the quantity traded is QS. Consumer surplus a + b + d, producer surplus f, deadweight loss c + e. The Effects of Government Intervention in Markets

Easy to forget

Supply and demand. The tax shifts supply up by the tax. Tax revenue b + d on the quantity after the tax (buyers pay b, sellers d), deadweight loss c + e. The Effects of Government Intervention in Markets

Easy to forget

Supply and demand. The subsidy shifts supply down by the subsidy. Its cost is the whole rectangle b + c + e + f + g out to the new quantity; deadweight loss g. The Effects of Government Intervention in Markets

Supply and demand. At the world price the gap between QD and QS is imports. The tariff raises revenue e and creates deadweight loss d + f. International Trade and Public Policy

Easy to forget

Cost curves. MC crosses AVC and ATC at their minimums; the gap between ATC and AVC (AFC) narrows as output grows. Short-Run Production Costs

Cost curves. Economies of scale where LRATC falls, diseconomies where it rises; minimum efficient scale at the bottom. Long-Run Production Costs

Easy to forget

Perfect competition: market and firm. Market on the left, firm on the right, the price carried across. The firm's demand is horizontal: d = MR = AR = P; it produces where MR = MC. Profit is area a. Perfect Competition

Easy to forget

Monopoly. Quantity where MR = MC, price up on demand. Consumer surplus a, profit b, deadweight loss d between demand and MC. Monopoly

Monopoly. A natural monopoly: ATC falls over the whole demand range. The fair-return price is where demand meets ATC. Monopoly

Monopolistic competition. In the long run demand is tangent to ATC: zero economic profit, price above MC, excess capacity. Monopolistic Competition

Competitive labor market and firm. The market sets the wage; the firm takes it (S = MFC = W) and hires where MRP meets it. Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

Easy to forget

Monopsony. Hire where MRP = MFC, then read the wage down on labor supply, not on MRP. Monopsonistic Markets

Easy to forget

Externality. A negative production externality: MSC above MPC, so the market overproduces. Deadweight loss is area a, from the efficient to the market quantity. Externalities

Lorenz curve. The further the Lorenz curve bows below the line of equality, the more unequal the income distribution. Inequality

Payoffs (dollars): Firm A first, Firm B second
		Low price	High price
		Firm B
Firm A	Low price	$40, $30	$70, $20
Firm A	High price	$20, $60	$50, $50

Payoff matrix. Firm A's payoff is first in each cell. Firm A's dominant strategy is Low price: 40 > 20 if B goes low, and 70 > 50 if B goes high. Compare twice, then decide. Oligopoly and Game Theory

Habits that save points

Label everything. Every axis, every curve and every point the question names (PM, QM, PF, QF). A mislabeled graph loses the graph point and usually the next one. Axes, Variables and Points
MC through the minimums. Draw MC so it crosses AVC and ATC at their lowest points, every time. Short-Run Production Costs
Price from demand. In monopoly and monopolistic competition, find the quantity where MR = MC, then go straight up to the demand curve for the price. Monopoly
Shade the whole area. Partial shading loses the point; shade the full triangle or rectangle the question names. Curves That Cross and Areas
Both comparisons. A dominant-strategy claim needs both comparisons from the matrix, with the numbers. Oligopoly and Game Theory
Show your work. "Calculate" needs the formula or the numbers used, not just the answer. Short-Run Production Costs

On exam day

Four-function calculator. Bluebook has one built in (add, subtract, multiply, divide, square root, percent) for both sections; no scientific or graphing calculator.
No formula sheet. Nothing on this page is given on exam day.
Graphs by hand. Free responses are handwritten in a paper booklet, graphs drawn by hand.

Practice with it

Free unit practice tests · Formula flashcards · Graph Studio · Free notes for every topic · Full practice exams