AP Microeconomics — Cheatsheet

Formulas & relationships

On the exam

• For utility-maximization problems, always convert to **marginal utility per dollar** (MU ÷ price) before comparing goods — never compare raw marginal utilities when prices differ. Buy from whichever good has the higher MU-per-dollar until they equalize and the budget is spent.
• Label PPC diagrams fully: both goods on the axes, and be explicit about whether a change is a **movement along** (reallocation) or a **shift/rotation** (capacity change). Biased technology rotates the curve along one axis — a favorite AP variation.
• On comparative-advantage free-response items, always (1) compute each party’s opportunity costs, (2) assign each good to the lower-cost producer, and (3) give a specific trade rate *between* the two costs. Showing the numbers, not just naming the winner, earns the points.
• For a **double shift**, one variable is always determinate and the other ambiguous. Identify the shared direction (both shifts pushing price *or* quantity the same way) — that variable is certain; the other depends on relative shift sizes.
• For cross-price and income elasticities, read the **sign** first: cross-price positive = substitutes, negative = complements; income positive = normal, negative = inferior. Magnitude tells you *how strong*, but the sign tells you *what kind*.
• On price-control graphs, show the **reduced quantity traded**, then mark the **deadweight-loss triangle** between the supply and demand curves at that quantity. Distinguish the **transfer** of surplus between groups from the **deadweight loss** that no one captures — the exam tests both.
• Remember the marginal-average rule: when **MC < ATC, ATC falls**; when **MC > ATC, ATC rises**; and **MC crosses ATC and AVC at their minimum points**. This lets you locate the minimum of the average curves directly on a graph.
• Run the two-step firm analysis: (1) find output where **MR = MC**, then (2) compare price to **ATC** for profit/loss and to **AVC** for the shutdown decision. Zero economic profit is *breaking even* (normal profit), not a loss — a distinction the exam tests directly.
• Draw the competitive firm with a **horizontal demand = MR = price** line and the U-shaped ATC/AVC/MC curves. In the long run, that price line is **tangent to minimum ATC**. Free-response prompts reward showing entry/exit driving profit to zero.
• Draw the monopoly graph with demand *above* MR, find output at MR = MC, then go **straight up to the demand curve** for price. Mark the deadweight-loss triangle between demand and MC from the monopoly quantity out to the efficient (P = MC) quantity.
• For monopolistic competition, draw it like a "shrunken monopoly": downward-sloping demand with MR below it, MR = MC for quantity, and in the long run the **demand curve tangent to ATC** (zero profit). Label the excess capacity gap between that output and minimum ATC.
• To solve a payoff matrix, analyze **one firm at a time**: hold the rival’s choice fixed and find that firm’s best response, then repeat. Where both best responses meet is the **Nash equilibrium**. Always identify dominant strategies before naming the equilibrium.
• The hiring rule **MRP = MRC** is the factor-market twin of the product-market rule MR = MC. In a competitive labor market, set **MRP = wage**. Always confirm whether the *product* market is competitive before using MRP = MP × P.
• Free-response items often pair a **market** labor diagram (setting the wage) with a **firm** diagram (MRP = wage). Show the wage determined in the market, then carry that horizontal wage line to the firm’s MRP curve to find how many workers it hires.
• For least-cost problems, compute **marginal product per dollar** (MP ÷ input price) for each input and shift toward the higher one until they equalize. Do not compare raw marginal products when input prices differ — always divide by price first.
• On externality graphs, draw both the private and social curves (MPC vs. MSC, or MPB vs. MSB), mark the market quantity and the optimal quantity where **MSB = MSC**, and shade the **deadweight-loss triangle** between them. State the corrective tax or subsidy as the **vertical distance** equal to the external cost or benefit.
• When a question describes a good, test it on **both** rivalry and excludability before classifying it. The **free-rider problem** stems from **non-excludability**; the **tragedy of the commons** stems from rivalry combined with non-excludability. Naming the right property earns the point.
• On tax graphs, show the tax as a **vertical wedge** between the price buyers pay and sellers receive, then identify each side’s share and the **deadweight-loss triangle**. For inequality, remember: Lorenz curve farther from the 45° line ⇒ **higher Gini ⇒ more inequality**.
• When a question asks whether an outcome is "efficient", check which efficiency it means. Productive and allocative efficiency are different conditions, and market-failure questions almost always turn on the second.
• Write both opportunity costs in a labeled two-row table before answering, with units ("1 table = 2 chairs"). The calculation is scored separately from the conclusion, so a correct table earns credit even if you then name the wrong party.
• When a table of totals appears, compute the marginal column in the margin before reading the question. Nearly every quantitative decision item is answered from it.
• Compute the whole utility-per-dollar column first, then allocate the budget in descending order. Working good by good is slower and makes it easy to miss that the budget is exhausted.
• Label both axes with the specific goods and mark the point the question describes before reasoning. Most PPC errors come from answering about the wrong axis rather than from misunderstanding the concept.
• On any supply-and-demand free response, name the determinant explicitly — "the price of the substitute rose, so demand shifts right" — rather than just drawing the arrow. The named determinant is usually its own point.
• When a graph question involves a tax, label three prices: what consumers pay, what producers receive, and the original equilibrium. The gap between the first two is the tax, and tax incidence is read from how the original price sits between them.
• Use the midpoint method unless the question explicitly says otherwise, and show the two averages. Rubrics award the setup separately from the value, so a visible ΔQ/average-Q calculation earns credit even if the division slips.
• State the sign and the classification together — "−0.25, so the good is inferior". Rubrics typically award the coefficient and the interpretation as separate points, and the interpretation is the one students omit.
• Draw both shifts and then check each variable separately: do the two arrows agree about price? About quantity? The one they agree about is determined, the other is not. This is faster and safer than recalling four memorized cases.
• Label the world price line, the tariffed price line, and the four domestic quantities before computing any area. Trade-graph questions are almost entirely about reading areas correctly, and an unlabeled diagram makes that impossible to do reliably.
• When a table gives total product, write the marginal product column immediately, then divide the wage by each entry for marginal cost. Both columns are usually needed and computing them once saves recomputation under time pressure.
• When a cost table has gaps, fill in TC and TVC first, then derive the averages and marginals. Working out of order leads to using an unfilled cell, which propagates through every later answer.
• Read whether the scenario holds an input fixed. "More workers in the same plant" is short-run diminishing returns; "a larger plant" or "all inputs doubled" is long-run scale. The two have different answers and the wording is the only clue.
• List explicit and implicit costs in two separate columns before computing either profit. Free responses award the two figures separately, and the usual failure is a correct accounting profit followed by an economic profit missing one implicit item.
• Show the loss both ways — producing and shutting down — when a free response asks whether a firm should continue. The comparison is the argument, and stating only the rule without the two loss figures often loses a point.
• Free responses often ask for both the short-run and long-run outcome. Answer them as two separate stages, and state explicitly that entry or exit is what moves the market between them — the mechanism is usually its own point.
• Draw MR with the same vertical intercept as demand and twice the slope, so it bisects the horizontal distance to the quantity axis. A visibly wrong MR curve makes every subsequent area on the graph wrong too.
• Shade the deadweight loss and label its three boundaries. Rubrics award identifying the region, and an unlabeled shaded blob between the wrong curves earns nothing even when the concept is understood.
• When asked whether a pricing practice is discrimination, check explicitly whether the cost of serving the two groups differs. If it does, the practice is cost-based pricing and the answer is no.
• Mark both regulated prices and both quantities on the graph before writing. The comparison is the answer, and having both points visible prevents describing one outcome's efficiency with the other's profitability.
• Draw the long-run graph with demand tangent to ATC and mark both the actual output and minimum-ATC output. Excess capacity is the horizontal gap between them, and questions ask you to identify it on the diagram.
• Work through both players' best responses explicitly and write them down, rather than eyeballing the matrix. Game-theory rubrics award identifying each dominant strategy separately from naming the equilibrium.
• When a table gives total product, compute marginal product and then MRP as separate columns. Rubrics award the MRP column, and skipping straight to a hiring number forfeits that credit.
• Write both ratios as decimals side by side before concluding anything. The comparison is the whole answer, and rubrics reward showing the two computed values rather than just naming which input to use more of.
• Label four things on a monopsony graph: MRP, supply, MFC, and the chosen quantity. Then mark the wage on supply and MRP directly above it — the vertical gap between them is the monopsonistic exploitation the question will ask you to identify.
• Read the market structure before answering any minimum-wage question. "Perfectly competitive labor market" and "the sole employer in the region" call for opposite employment answers, and the wording is the only signal.
• When explaining a wage differential, give one demand-side and one supply-side reason. Rubrics frequently award one point for each, and answers that offer two versions of the same story earn only one.
• Draw and label all four relevant curves and mark both quantities — market and socially optimal. Rubrics award identifying the two quantities separately from computing the deadweight loss between them.
• State the corrective tax or subsidy as a per-unit amount and say explicitly which curve it moves and by how much. "Impose a $30 tax, shifting MPC up to coincide with MSC" earns more than "tax the pollution".
• Answer rivalry and excludability separately and explicitly before naming the category. Rubrics often award the two properties as separate points, and the classification follows automatically once both are stated.
• When a question gives cumulative shares, sketch the Lorenz curve before comparing. The comparison is visual — which curve is further from the diagonal — and attempting it from the numbers alone invites errors.

How to get a 5

• Always label your axes! P and Q for product markets, Wage and Quantity of Labor for factor markets. Unlabeled axes result in zero points for the graph.
• Remember that 'Profit' implies Economic Profit (Accounting Profit minus Implicit/Opportunity Costs). Zero economic profit is a normal, sustainable outcome in the long run.
• For monopolies and monopolistically competitive firms, the MR curve is always below the Demand curve. To find price, find where MR=MC, then go UP to the Demand curve.
• Lump-sum taxes or subsidies affect fixed costs (ATC), changing profit but NOT changing the profit-maximizing quantity (MC is unaffected). Per-unit taxes/subsidies affect variable costs (MC and ATC), shifting output quantity.
• Every graph point requires labeled axes and named curves. Price and cost go on the vertical axis, quantity on the horizontal, and marginal revenue must be drawn below demand with twice the slope for a linear demand curve. Read price off the demand curve, never off MR — pricing at the MR-MC intersection is the most common single error on monopoly questions.
• Learn the four market structures as a comparison table you can reproduce from memory: number of firms, product differentiation, barriers to entry, long-run profit, whether P equals MC, and whether output occurs at minimum ATC. Most multiple-choice items are one cell of that table.
• Distinguish the shutdown rule from the profit rule. MR = MC tells you how much to produce; comparing P with AVC tells you whether to produce at all. A firm losing money should still operate whenever price covers average variable cost, because the alternative is losing the entire fixed cost.
• For externality problems, always locate three quantities: the market quantity where private curves cross, the efficient quantity where social curves cross, and the deadweight loss triangle between them. Then state the corrective tax or subsidy as a per-unit amount equal to the marginal external cost or benefit.
• Write out every calculation as formula, substitution, then answer, and label units and dollar signs. On elasticity and surplus problems especially, readers give credit for a correct setup with an arithmetic slip but no credit for an unsupported number, and triangles are always one-half base times height.

Key terms