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Essential AP Microeconomics Formulas
AVERAGE PRODUCT (AP)
TOTAL PRODUCT (TP OR Q)/LABOR (Q L )
MARGINAL PRODUCT (MP)
TOTAL REVENUE (TR) – TOTAL COST (TC)
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
WHERE P = ATC
WHERE P = AVC
Utility Maximization occurs when…
(MU/P) A = (MU/P) A Dont forget the PER DOLLAR
For Factor Markets (aka inputs) the LEAST COST COMBINATION occurs when…
(MP/P) L = (MP/P) K Dont forget the PER DOLLAR
What is true of MR and TR when E d is INELASTIC?
If Inelastic, MR < 0 TR must be decreasing
What is true of MR and TR when E d is ELASTIC?
If elastic, MR > 0, TR must be increasing
For Factor Markets, what determines a firms profit- maximizing 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. Govt could impose a PROGRESSIVE tax or some other policy to re- distribute wealth from upper to lower class.
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