Must-know sheet

Microeconomics must-know sheet

The formulas, graphs and rules you should know cold for AP Microeconomics, with every graph described in words: its axes, its curves, what shifts them and which areas show surplus, profit or deadweight loss. The real exam gives you no formula sheet, so memorize these formulas; a four-function calculator is allowed on both sections.

Drawing graphs on the free-response section

Units 1, 2, 3, 4, 5, 6

Label everything: Label both axes, name every curve and mark equilibrium on both axes (for example P1 and Q1). Product-market graphs use Price (P) on the vertical axis and Quantity (Q) on the horizontal; a single firm's cost graph uses Price and Costs; a labor-market graph uses the Wage and the Quantity of Labor.
Show a shift: Draw the new curve, number it (D1 to D2, S1 to S2) and add an arrow for the direction. Then mark the new equilibrium on both axes (P2 and Q2). Rightward means an increase and leftward means a decrease, for both demand and supply.
Side-by-side graphs: For a perfectly competitive market, draw the market on the left (S and D crossing at the market price and quantity, often written with a capital Q) and one firm on the right (MC, ATC and maybe AVC, plus a horizontal line at the market price labeled P = MR = D = AR, with the firm's output as a small q). Carry the same price straight across from the market to the firm.
Shade and name areas: When asked for an area, shade it and say what its edges are: consumer surplus, producer surplus, profit or loss, tax revenue or deadweight loss. Describe it by its corners, for example "the triangle between the demand curve and MC, from Qm to Qs."
Triangle and rectangle math: Triangle area = ½ × base × height and rectangle area = base × height, using quantities for the base and prices for the height. Most surplus, deadweight-loss, revenue and profit questions are just these two shapes.
Calculator and work shown: There's no formula sheet. A four-function calculator (handheld, or the Desmos four-function calculator built into Bluebook) is allowed on both sections; scientific and graphing calculators are not. Show your setup with units (dollars, units of output, workers), since numbers on the exam are usually easy to do by hand.
Identify vs. explain: "Identify" or "calculate" wants just the answer. "Explain" wants the cause-and-effect reason, often using a rule like MR = MC or P = MC, and naming only the result usually misses that point.

Scarcity, the PPC and comparative advantage

Unit 1

Factors of production: Land (natural resources), labor (human work), capital (tools, machines and buildings used to make other goods) and entrepreneurship (risk-taking that puts the others together). They earn rent, wages, interest and profit.
Economic systems: Every society decides what to make, how to make it and who gets it. In a command economy the government decides; in a market economy prices and private buyers and sellers decide; most countries are mixed economies.
Opportunity cost: The value of the next-best option you give up. On a PPC, the opportunity cost of one more unit of one good is how much of the other good you give up.
PPC graph: Good X on one axis and good Y on the other. The curve shows the most of the two goods an economy can make with all its resources and today's technology. Points on the curve are efficient, points inside mean unused or wasted resources, and points outside can't be reached right now.
Productive vs. allocative efficiency: Productive efficiency means making goods at the lowest possible cost: any point on the PPC, or a firm producing at minimum ATC. Allocative efficiency means making the mix of goods society values most: the one point on the PPC people want most, or a market producing where P = MC (MB = MC).
PPC shape: Bowed out from the origin (concave) means increasing opportunity cost, because resources aren't equally good at making both goods. A straight line means constant opportunity cost.
PPC shifts: The whole curve shifts out with more or better resources or better technology (economic growth) and in when resources are lost. Better technology for only one good pivots the curve out along that good's axis. Moving from inside the curve onto it is not growth.
Absolute vs. comparative advantage: Absolute advantage: you can make more of a good with the same resources (or the same amount with fewer). Comparative advantage: you make it at a lower opportunity cost. Specialization and trade follow comparative advantage, not absolute advantage.
Opportunity cost from an output table: If a worker can make 10 wheat or 5 cloth, 1 cloth costs 10 ÷ 5 = 2 wheat and 1 wheat costs 5 ÷ 10 = ½ cloth. Divide what you give up by what you get.
Opportunity cost from an input table: If the table shows hours (or workers) needed for one unit, a good's opportunity cost is its own input ÷ the other good's input. If 1 cloth takes 4 hours and 1 wheat takes 2 hours, 1 cloth costs 4 ÷ 2 = 2 wheat.
Terms of trade: Each side specializes in its comparative-advantage good. Both gain if the terms of trade (the price of one good in units of the other) fall between the two sides' opportunity costs, and both can then consume a combination outside their own PPC.

Costs, benefits and consumer choice

Unit 1

Explicit vs. implicit costs: Explicit costs are money you actually pay. Implicit costs are the value of what you give up without paying, like your time or the interest your savings could have earned. A rational choice counts both.
Net benefit = total benefit − total cost: Pick the option with the largest net benefit. For a consumer, benefit is utility (satisfaction); for a firm, it's revenue. All-or-nothing choices are judged by comparing totals.
Marginal decision rule: Keep doing more while marginal benefit (MB) is greater than marginal cost (MC), and stop where MB = MC. In a table, choose the last unit where MB is still at least MC.
Sunk costs: Costs already paid that you can't get back. They shouldn't change your next decision, because they're the same whatever you choose.
Marginal utility = change in total utility ÷ change in quantity: Diminishing marginal utility means each extra unit adds less satisfaction than the one before. Total utility is highest where marginal utility reaches zero, if the good is free.
Utility-maximizing rule: MUx ÷ Px = MUy ÷ Py: With a fixed budget, you get the most total utility when the last dollar spent on each good adds the same utility and the whole budget is spent. If MUx ÷ Px is bigger than MUy ÷ Py, buy more X and less Y.
Using MU ÷ P in a table: Divide each unit's marginal utility by the good's price, then spend dollar by dollar on whichever next unit has the highest MU ÷ P until the budget runs out. Indifference curves are not tested.

Supply, demand and equilibrium

Unit 2

The graph: Price on the vertical axis and quantity on the horizontal. Demand (D) slopes down, supply (S) slopes up, and they cross at the equilibrium price (Pe) and quantity (Qe), where quantity demanded equals quantity supplied.
Law of demand: When price rises, quantity demanded falls. The reasons are the substitution effect (the good is now pricier than its substitutes), the income effect (your money buys less) and diminishing marginal utility.
Law of supply: When price rises, quantity supplied rises, because a higher price makes it worth covering the higher marginal cost of more output.
Movement vs. shift: A change in the good's own price causes a change in quantity demanded or supplied, which is a movement along the curve. Anything else causes a change in demand or supply, which shifts the whole curve.
What shifts demand: Tastes; income (more income raises demand for normal goods and lowers it for inferior goods); prices of related goods (a substitute's price rises → demand rises; a complement's price rises → demand falls); expectations; and the number of buyers.
What shifts supply: Input prices, technology and productivity, taxes and subsidies, producers' expectations, prices of other goods the seller could make, and the number of sellers. Lower costs, better technology or a subsidy shift S right; higher costs or a per-unit tax shift it left (up).
Market demand and market supply: Add the quantities each buyer (or seller) wants at each price. On a graph that's a horizontal sum of the individual curves.
Surplus and shortage: Above equilibrium, quantity supplied is more than quantity demanded (a surplus), so price tends to fall. Below equilibrium, quantity demanded is more (a shortage), so price tends to rise.
One curve shifts: Demand increases: price and quantity both rise. Demand decreases: both fall. Supply increases: price falls and quantity rises. Supply decreases: price rises and quantity falls.
Both curves shift: One result is indeterminate unless you know the sizes. D up and S up: quantity rises, price indeterminate. D down and S down: quantity falls, price indeterminate. D up and S down: price rises, quantity indeterminate. D down and S up: price falls, quantity indeterminate.
Solving for equilibrium with equations: Set quantity demanded equal to quantity supplied and solve for price, then plug it back in. Example: Qd = 100 − 2P and Qs = 20 + 2P give 100 − 2P = 20 + 2P, so P = 20 and Q = 60.

Elasticity

Unit 2

Percent change = (new − old) ÷ old × 100: Every elasticity is a ratio of two percent changes. Use this simple formula unless the question gives you a different method, such as the midpoint method (the change ÷ the average of the old and new values).
Price elasticity of demand = % change in quantity demanded ÷ % change in price: Ignore the minus sign. Above 1 is elastic, below 1 is inelastic and exactly 1 is unit elastic. Example: price rises from $10 to $12 (20%) and quantity falls from 100 to 70 (30%), so elasticity = 30 ÷ 20 = 1.5, elastic.
Perfectly elastic and perfectly inelastic: Perfectly inelastic demand or supply (elasticity 0) is a vertical line: quantity doesn't respond to price at all. Perfectly elastic (elasticity infinite) is a horizontal line, like the demand curve one perfectly competitive firm faces.
What makes demand more elastic: More close substitutes, a luxury rather than a necessity, a bigger share of the buyer's budget and more time to adjust. Narrowly defined goods (one brand) are more elastic than broad ones (all food).
Total revenue test (TR = P × Q): Elastic demand: price and total revenue move in opposite directions, so a price cut raises TR. Inelastic demand: they move in the same direction, so a price rise raises TR. Unit elastic: a small price change leaves TR unchanged; on a straight-line demand curve that's the midpoint, where TR is at its maximum.
Slope is not elasticity: Along a straight-line demand curve the slope stays the same, but demand is elastic on the upper (high-price) half, unit elastic at the midpoint and inelastic on the lower half.
Price elasticity of supply = % change in quantity supplied ÷ % change in price: Above 1 elastic, below 1 inelastic. Supply is more elastic when sellers have more time to adjust and when inputs are easy to get or switch; a good in fixed supply (like original paintings) is perfectly inelastic.
Income elasticity = % change in quantity demanded ÷ % change in income: Positive for a normal good and negative for an inferior good.
Cross-price elasticity = % change in quantity demanded of good X ÷ % change in price of good Y: Positive for substitutes, negative for complements and zero for unrelated goods. Here the sign matters, so don't drop it.

Surplus, price controls, taxes and subsidies

Unit 2

Consumer surplus: The area below the demand curve and above the price, out to the quantity bought. With a straight-line demand curve it's ½ × quantity × (demand's price intercept − price).
Producer surplus: The area above the supply curve and below the price, out to the quantity sold. Total surplus = consumer surplus + producer surplus (+ any tax revenue when a tax is involved).
Efficient competitive equilibrium: With no market failures, the competitive equilibrium makes total surplus as large as possible. That's allocative efficiency: the marginal benefit to buyers (demand) equals the marginal cost to sellers (supply).
Deadweight loss: Total surplus lost because the quantity traded isn't the efficient one. On a graph it's usually a triangle between demand and supply, from the quantity actually traded to the efficient quantity.
Price ceiling (a legal maximum): Binding only if set below equilibrium. Quantity supplied falls and quantity demanded rises, causing a shortage (Qd − Qs); only Qs is actually traded. Producer surplus falls, consumer surplus may rise or fall, and deadweight loss is the triangle between D and S from Qs to Qe. A ceiling above equilibrium does nothing.
Price floor (a legal minimum): Binding only if set above equilibrium. It causes a surplus (Qs − Qd); only Qd is bought. Consumer surplus falls, producer surplus may rise or fall, and deadweight loss is the triangle between D and S from Qd to Qe. A minimum wage above the market wage is a floor that causes unemployment (a surplus of labor).
Per-unit (excise) tax: Supply shifts up by exactly the tax. The price buyers pay (Pb) rises, the price sellers keep (Ps = Pb − tax) falls and quantity falls to Qt. Tax revenue = tax × Qt, the rectangle between Pb and Ps. Consumer and producer surplus both fall, and deadweight loss is the triangle between D and the original S from Qt to Qe.
Tax incidence: Buyers pay Pb − Pe per unit and sellers pay Pe − Ps. The less elastic side pays the larger share; if demand is perfectly inelastic, buyers pay all of it. It doesn't matter whether the law puts the tax on buyers or sellers.
Elasticity and deadweight loss: The more elastic demand or supply is, the more a tax cuts the quantity traded, so the bigger the deadweight loss. A tax on a good with inelastic demand raises more revenue with less deadweight loss.
Worked tax example: Qd = 100 − 2P and Qs = 20 + 2P (equilibrium P = 20, Q = 60) with a $10 per-unit tax: buyers pay $25, sellers keep $15 and Q = 50. Revenue = 10 × 50 = $500, and deadweight loss = ½ × 10 × (60 − 50) = $50.
Per-unit subsidy: Supply shifts down by the subsidy. Quantity rises past Qe, buyers pay less and sellers receive the buyer price plus the subsidy. The government pays subsidy × new quantity, and deadweight loss is the triangle between S and D from Qe to the new quantity, because units are made that cost more than buyers value them.

International trade

Unit 2

Trade graph: Draw the domestic demand and supply curves; they cross at the autarky price (the price with no trade). Add a horizontal line at the world price, which the country takes as given.
World price below autarky price: imports: Domestic price falls to the world price. Quantity demanded rises, domestic quantity supplied falls and imports fill the gap (Qd − Qs at the world price). Consumer surplus rises, domestic producer surplus falls and total surplus rises.
World price above autarky price: exports: Domestic price rises to the world price. Domestic quantity supplied is more than quantity demanded, and the extra is exported (Qs − Qd). Producer surplus rises, consumer surplus falls and total surplus rises.
Tariff (a tax on imports): Domestic price rises from the world price to world price + tariff. Domestic production rises, consumption falls and imports shrink. Consumer surplus falls, domestic producer surplus rises, the government collects tariff × new imports, and deadweight loss is two triangles: one on each side of the revenue rectangle.
Import quota (a limit on how much can be imported): Raises the domestic price and lowers imports much like a tariff, but the government collects no tariff revenue. You need to know its effects on price, quantity and surplus, but you won't be asked to graph a quota.

Production and costs

Unit 3

Short run vs. long run: In the short run at least one input (usually capital, like the factory) is fixed. In the long run every input can change, so all costs are variable.
Marginal product = change in total product ÷ change in labor: Average product = total product ÷ workers. Marginal product usually rises at first, then falls as more workers share the fixed input (diminishing marginal returns). Total product is highest where marginal product is zero.
Marginal and average: When the marginal is above the average, the average rises; when it's below, the average falls. So MP crosses AP at AP's peak, and MC crosses AVC and ATC at their lowest points.
TC = TFC + TVC: Fixed cost stays the same at every output, even zero (rent, insurance). Variable cost changes with output (wages, materials). At zero output, total cost equals fixed cost.
Per-unit costs: ATC = TC ÷ Q, AVC = TVC ÷ Q, AFC = TFC ÷ Q and ATC = AVC + AFC. Marginal cost = change in TC ÷ change in Q, which also equals change in TVC ÷ change in Q.
Cost-curve graph: Costs on the vertical axis and quantity on the horizontal. AFC falls the whole way. AVC and ATC are U-shaped, and the gap between them (AFC) gets smaller as output grows. MC falls and then rises, crossing AVC and then ATC from below at their minimums.
MC = wage ÷ MP: When labor is the only variable input, marginal cost is the wage divided by marginal product. Rising marginal product means falling marginal cost; diminishing marginal returns are why MC eventually rises.
What shifts cost curves: A change in fixed cost (or a lump-sum tax) shifts only ATC and AFC; MC and AVC don't move. A change in a variable cost (wages, materials, a per-unit tax) shifts MC, AVC and ATC.
Long-run average total cost (LRATC): It falls with economies of scale, is flat with constant returns to scale and rises with diseconomies of scale. Minimum efficient scale is the smallest output at which LRATC reaches its lowest level. Returns to scale are a long-run idea; diminishing marginal returns are a short-run idea.

Profit and the firm's choices

Unit 3

Revenue: Total revenue TR = P × Q. Average revenue AR = TR ÷ Q = P. Marginal revenue MR = change in TR ÷ change in Q.
Accounting vs. economic profit: Accounting profit = TR − explicit costs. Economic profit = TR − explicit costs − implicit costs, so it's always the smaller of the two whenever there are implicit costs.
Normal profit: Zero economic profit. The owner covers every opportunity cost, so staying in the business is still worthwhile, and accounting profit is positive whenever there are implicit costs.
Profit-maximizing rule: MR = MC: Produce the quantity where marginal revenue equals marginal cost. In a table, produce every unit where MR is at least MC and stop before MR falls below MC. This holds in every market structure.
Profit = (P − ATC) × Q: On a graph, find Q where MR = MC, go up to the price, then down to ATC at that same Q. The rectangle between price and ATC, out to Q, is profit if price is above ATC and a loss if it's below.
Shutdown rule (short run): Keep producing if price is at least minimum AVC (total revenue covers total variable cost), even at a loss. Shut down if price is below minimum AVC; the loss is then just the fixed cost.
Break-even and shutdown points: The break-even price is minimum ATC (zero economic profit). The shutdown price is minimum AVC. Between the two, the firm keeps producing at a loss in the short run.
Short-run supply curve of a competitive firm: The firm's MC curve above minimum AVC, because at each price it produces where P = MC.
Entry and exit (long run): With no barriers, economic profit draws new firms in and losses push firms out. In the long run a firm leaves if price is below minimum ATC.

Perfect competition

Unit 3

Features: Many firms, identical products, no barriers to entry or exit and full information. Each firm is a price taker.
The firm's demand curve: Horizontal (perfectly elastic) at the market price, so P = MR = AR = D. The firm produces where P = MC.
Short-run profit: If the market price is above the firm's minimum ATC, it earns economic profit. New firms enter, market supply shifts right and the price falls until it reaches minimum ATC.
Short-run loss: If price is below minimum ATC, firms lose money. Some exit, market supply shifts left and the price rises back to minimum ATC.
Long-run equilibrium: P = MR = MC = minimum ATC: Economic profit is zero. The market is allocatively efficient (P = MC) and productively efficient (P = minimum ATC).
Increase in market demand: Short run: market price rises, the firm's P = MR line moves up, each firm makes more and earns profit. Long run: entry shifts market supply right until price is back at minimum ATC (the original price in a constant-cost industry), with more firms and more total output.
Long-run industry supply: Constant-cost industry: entry doesn't change firms' costs, so the long-run price returns to where it started (horizontal long-run supply). Increasing-cost: entry raises costs, so the long-run price ends up higher (upward-sloping). Decreasing-cost: entry lowers costs, so it ends up lower (downward-sloping).
A change in fixed cost: A lump-sum tax or higher rent raises ATC but not MC, so in the short run each firm's output and the price stay the same while profit falls. In the long run some firms exit and the price rises to the new minimum ATC.

Monopoly and price discrimination

Unit 4

Monopoly features: One seller of a product with no close substitutes, protected by barriers to entry such as patents and licenses, control of a key resource, or economies of scale. The firm is a price maker.
Why MR is below demand: To sell one more unit, a single-price firm has to cut the price on every unit it sells, so MR is less than price after the first unit.
Straight-line demand and MR: If demand is P = a − bQ, then MR = a − 2bQ. MR starts at the same price-axis intercept, falls twice as steeply and hits zero at half the quantity where demand hits zero.
MR and elasticity: MR is positive where demand is elastic, zero at the unit-elastic point (where total revenue is at its maximum) and negative where demand is inelastic. So, as long as MC is positive, a profit-maximizing firm with market power produces only in the elastic range.
Revenue-maximizing quantity: Where MR = 0. This is different from the profit-maximizing quantity, which is where MR = MC.
Monopoly graph: Price on the vertical axis and quantity on the horizontal, with downward-sloping D, MR below it, and MC and ATC. Find Qm where MR = MC, then go straight up to the demand curve for the price Pm. Profit is the rectangle (Pm − ATC) × Qm, and consumer surplus is the triangle under D above Pm.
Monopoly deadweight loss: The triangle between the demand curve and MC, from Qm out to the quantity where D crosses MC. A monopoly charges a higher price and makes less than a competitive market, and P is above MC, so it's not allocatively efficient. It usually isn't productively efficient either.
Long-run profit: Barriers to entry stop new firms from coming in, so a monopoly can keep earning economic profit in the long run.
Natural monopoly: Economies of scale are so large that one firm can supply the whole market at a lower ATC than two or more firms could. On the graph, ATC is still falling where it meets demand, and MC is below ATC.
Price discrimination: Charging different buyers different prices for the same good for reasons other than cost. It needs market power, a way to tell groups of buyers apart and a way to stop resale.
Perfect price discrimination: Each buyer pays the most they're willing to pay, so MR = D. The firm produces where D meets MC (the efficient quantity), so there's no deadweight loss, but consumer surplus is zero and the firm gets all the surplus.

Monopolistic competition and oligopoly

Unit 4

Monopolistic competition features: Many firms, differentiated products (restaurants, salons), easy entry and exit, and non-price competition like branding, quality and advertising. Each firm has a downward-sloping demand curve with MR below it.
Short run: The graph and rules are the same as a monopoly's: produce where MR = MC, charge the price on the demand curve, and earn profit or loss depending on whether P is above or below ATC.
Long-run equilibrium: Profit draws in firms, which shifts each firm's demand left (and loss drives firms out, which shifts it right) until demand just touches ATC at the quantity where MR = MC. Then P = ATC, economic profit is zero and P is above MC.
Excess capacity: In the long run the firm produces less than the quantity at minimum ATC, so it's not productively efficient. Because P is above MC, it's not allocatively efficient either.
Oligopoly features: A few large firms with high barriers to entry, selling identical or differentiated products. They're interdependent: each firm's best choice depends on what its rivals do.
Collusion and cartels: Firms that agree to limit output and raise prices can act like one monopoly and share its profit. Each firm has a reason to cheat by producing more, which makes cartels unstable, and explicit agreements to fix prices or limit output are illegal under U.S. antitrust law.
Payoff matrix: Two players, two choices each. Each cell shows both players' payoffs; the first number usually belongs to the player whose choices are the rows, but check what the question says. Larger games, mixed strategies and game trees are not tested.
Dominant strategy: A choice that gives a player a higher payoff no matter what the other player does. Check it by comparing that player's payoffs for each of the other player's choices, one at a time. A player may have no dominant strategy.
Nash equilibrium: A pair of choices where neither player can do better by changing only its own choice. Find it by marking each player's best response to each of the other's choices; a cell where both payoffs are best responses is a Nash equilibrium. A game can have more than one.
Prisoner's dilemma: Each player's dominant strategy leads to a Nash equilibrium that leaves both worse off than if they had cooperated, which is why collusion is hard to keep up.
Changing a payoff: If asked how much a payoff must change to change a player's choice, compare the two payoffs that player is choosing between and find the amount that makes the other choice better. Also check that the other player's choices still hold.
Comparing market structures: Perfect competition: P = MC = minimum ATC in the long run, zero profit, fully efficient. Monopolistic competition: P = ATC but P above MC in the long run, zero profit, excess capacity. Monopoly: P above MC and possible long-run profit. All of them maximize profit where MR = MC.

Factor markets

Unit 5

Factor markets and derived demand: Firms buy or rent labor, land and capital from households and pay wages, rent and interest. Demand for a factor is derived demand: firms want workers only because people want what the workers make.
Marginal revenue product: MRP = MP × MR: The extra revenue from one more worker, which also equals change in TR ÷ change in labor. If the firm sells in a perfectly competitive product market, MR is the price, so MRP = MP × P.
MRP is the firm's demand for labor: It slopes down because marginal product falls as more workers are added (and, for a firm with market power where it sells, because MR falls too).
Marginal factor cost (MFC): The extra cost of hiring one more worker: change in total labor cost ÷ change in workers. Example: if the wage must rise from $10 to $11 to hire a 5th worker, MFC = (5 × 11) − (4 × 10) = $15.
Hiring rule: MRP = MFC: Hire workers until the last one's MRP equals MFC. In a table, hire every worker whose MRP is at least the MFC.
What shifts labor demand: Demand for the product (and its price), workers' productivity (better training or technology) and the prices of other inputs. Usually a rise in the price of a substitute input raises labor demand, and a rise in the price of a complementary input lowers it.
What shifts labor supply: Population and immigration, education and training requirements, preferences for leisure and the wages available in other jobs.
Labor-market graph: The wage on the vertical axis and the quantity of labor on the horizontal. Labor demand (MRP) slopes down and labor supply slopes up. More demand raises the wage and employment; more supply lowers the wage and raises employment.
Perfectly competitive labor market: Side-by-side graphs: the market sets the wage on the left, and on the right the firm faces a horizontal labor supply curve at that wage, so MFC = wage. The firm is a wage taker and hires where MRP = wage. A firm can be a wage taker even if it has market power where it sells.
Least-cost rule: MPL ÷ wage = MPK ÷ price of capital: A firm making a given output at the lowest cost gets the same marginal product per dollar from each input. If MPL ÷ wage is bigger than MPK ÷ price of capital, it should use more labor and less capital.
Profit-maximizing input rule: MRPL ÷ wage = MRPK ÷ price of capital = 1: To make the most profit, the firm also hires each input until its MRP equals its price. Meeting the least-cost rule alone keeps cost low but doesn't guarantee the most profit.
Monopsony: A single buyer of a factor, like the one big employer in a small town. To hire one more worker it must raise the wage for all its workers, so MFC lies above the upward-sloping labor supply curve.
Monopsony graph: Wage on the vertical axis, quantity of labor on the horizontal, with MRP (demand), labor supply and MFC above supply. Hire Qm where MRP = MFC, then go down to the supply curve for the wage. Compared with a competitive market (where MRP meets supply), it hires fewer workers at a lower wage, with deadweight loss.

Market failure: externalities and public goods

Unit 6

Socially efficient quantity: MSB = MSC: Where marginal social benefit equals marginal social cost, total surplus is as large as possible. Any other quantity creates deadweight loss. Markets miss it because of externalities, public goods, asymmetric information and market power.
Negative externality: A cost that falls on people outside the deal, like pollution. MSC = marginal private cost + the external cost, so the MSC curve is above supply (MPC). The market makes too much (where MPB = MPC) at too low a price compared with the socially optimal quantity (where MSB = MSC).
Positive externality: A benefit that goes to people outside the deal, like vaccination or education. MSB = marginal private benefit + the external benefit, so the MSB curve is above demand (MPB). The market makes too little.
Externality deadweight loss: The triangle between the MSC and MSB curves, from the market quantity to the socially optimal quantity. Its point is at the optimal quantity, where MSB and MSC cross, and its wide side is at the market quantity. That's more than optimal for a negative externality and less than optimal for a positive one.
Fixing externalities: A per-unit (Pigouvian) tax equal to the external cost per unit shifts MPC up to MSC. A per-unit subsidy equal to the external benefit per unit shifts MPB up to MSB (or supply down by the same amount). Regulation and clearer property rights can also help.
Rival and excludable: Rival: one person's use leaves less for others. Excludable: people who don't pay can be kept out. Private goods are both; public goods (national defense) are neither; common resources (ocean fish) are rival but not excludable; goods that are excludable but not rival (streaming service) are sometimes called club goods.
Free-rider problem: People can enjoy a public good without paying, so private markets make too little of it or none, which is why governments often provide it.
Tragedy of the commons: Because no one can be kept out of a common resource, people overuse it. Limits, fees or assigned property rights can reduce overuse.
Asymmetric information: One side of a deal knows more than the other, as when a used-car seller knows about hidden problems. It can keep some deals from happening or lead to bad ones.

Government policy in markets and inequality

Units 4, 5, 6

Per-unit vs. lump-sum tax on a firm: A per-unit tax raises MC (and AVC and ATC), so the firm makes less and, if it has market power, charges more. A lump-sum tax or subsidy changes only fixed cost, so in the short run it moves ATC and profit but not MC, output or price.
Regulating a monopoly: The socially optimal (allocatively efficient) price is where MC crosses demand. The fair-return price is where ATC crosses demand, which gives zero economic profit. An unregulated monopoly picks Q where MR = MC.
Natural monopoly at the socially optimal price: Because MC is below ATC, price = MC is below ATC and the firm takes a loss, so it needs a lump-sum subsidy to stay open. The fair-return price avoids that loss but leaves some deadweight loss.
Minimum wage in a monopsony: A minimum wage set between the monopsony wage and the competitive wage (where MRP crosses labor supply) raises both pay and employment, because the firm's MFC becomes the flat minimum wage over that range.
Antitrust policy: Laws that block mergers, collusion and other practices that reduce competition, to keep prices closer to competitive levels.
Lorenz curve: The cumulative share of households, poorest to richest, on the horizontal axis and the cumulative share of income on the vertical. The 45-degree line is perfect equality; the farther the curve sags below it, the more unequal incomes are. You compare given curves; you won't draw one.
Gini coefficient: A number from 0 (perfect equality) to 1 (one household gets everything). A higher Gini means more inequality. You compare given values; you won't calculate one.
Progressive, regressive and proportional taxes: Judge by the share of income paid. Progressive: higher incomes pay a larger share. Regressive: lower incomes pay a larger share (sales taxes usually work this way). Proportional (flat): everyone pays the same share.
Transfer payments and sources of inequality: Transfer payments like unemployment benefits or food assistance move income to lower-income households and reduce inequality. Inequality comes from differences in human capital (skills and education), inherited wealth, discrimination and more.