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 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 High Gini Coefficient means more unequal INCOME DISTRIBUTION. Gov’t could impose a PROGRESSIVE tax or some other policy to re-distribute 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