Advanced Placement Microeconomics: Course Description

  • AP Microeconomics:


    The purpose of the AP course in microeconomics is to give students a thorough

    understanding of the principles of economics that apply to the functions of individual

    decision makers, both consumers and producers, within the economic system. It

    places primary emphasis on the nature and functions of product markets and includes

    the study of factor markets and of the role of government in promoting greater

    efficiency and equity in the economy. The following is a brief discussion of these

    topics and some aspects of them that a teacher may choose to explore.


    Topics


    I. Basic Economic Concepts


    The study of microeconomics requires students to understand that, in any economy,

    the existence of limited resources along with unlimited wants results in the need

    to make choices. An effective AP course, therefore, begins by introducing the

    concepts of opportunity costs and trade-offs, and illustrates these concepts by using

    the production possibilities curve or other analytical examples. The course can then

    proceed to a consideration of how different types of economies determine which

    goods and services to produce, how to produce them, and to whom to distribute

    them. It is also important that students understand why and how specialization and

    exchange increase the total output of goods and services. Students need to be able

    to differentiate between absolute and comparative advantage, to identify comparative

    advantage from differences in opportunity costs, and to apply the concept of

    comparative advantage, in order to determine the basis under which mutually

    advantageous trade can take place between countries. Specific examples from actual

    economic situations can be used to illustrate and reinforce the principles involved.

    The importance of property rights, the role of incentives in the functioning of free

    markets, and the principle of marginal analysis should be highlighted.


    II. The Nature and Functions of Product Markets


    The study of the nature and functions of product markets falls into four broad areas:

    supply and demand models, consumer choice, production and costs, and theory of

    the firm.


    A well-planned AP course requires an analysis of the determinants of supply and

    demand and the ways in which changes in these determinants affect equilibrium

    price and output. In particular, the course helps students make the important

    distinction between movements along the curves and shifts in the curves. The course

    also emphasizes the impact of government policies, such as price floors and ceilings,

    excise taxes, tariffs, and quotas on the free-market price and quantity exchanged.

    The concepts of consumer surplus and producer surplus should also be introduced.

    Students are expected to comprehend and apply the concepts of elasticity, including

    calculating price, cross-price, income elasticities of demand, and the price elasticity

    of supply.


    The next area covered in the course is the theory of consumer choice. Students

    should gain an understanding of the basic postulates underlying consumer choice:

    utility, the law of diminishing marginal utility and utility-maximizing conditions, and

    their application in consumer decision-making and in explaining the law of demand.

    By examining the demand side of the product market, students learn how incomes,

    prices, and tastes affect consumer purchases. Here it is important that students

    understand how to derive an individual’s demand curve, how individual and market

    demand curves are related, and how the income and substitution effects explain the

    shape of the demand curve.


    The third area covers production and cost analysis both in the short run and in

    the long run. This section begins with an introduction of the short-run production

    function, describing the relationship between the quantity of inputs and the quantity

    of output. Within the context of the production function, students should understand

    average and marginal products as well as the law of diminishing marginal returns.

    Students learn the link between productivity and costs and examine the relationships

    among the short-run costs: total, average, and marginal. With an introduction of the

    concept of cost minimization and productive efficiency, this section also includes a

    discussion of long-run costs and an examination of economies and diseconomies of

    scale, as well as returns to scale.


    The fourth area covers the behavior of firms in different types of market structures.

    This section begins with the definition of profits, making the distinction between

    accounting and economic profits, and establishing the profit-maximizing rule, using

    marginal analysis. In covering perfect competition, the course focuses on determining

    short-run and long-run equilibrium, both for the profit-maximizing individual firm

    and for the industry, and on the equilibrium relationships among price, marginal

    and average revenues, marginal and average costs, and profits. Students should

    understand the adjustment process to long-run equilibrium.


    In considering the market behavior of a monopolist, students identify and examine

    the sources of monopoly power and understand the relationship between a monopolist’s

    demand curve and its marginal revenue curve. Students learn how a monopoly’s total

    revenue changes along its demand curve as price varies. Having learned the behavior

    of monopolies and perfect competition, students should compare a monopolist’s price,

    level of output, and profit with those of a firm operating in a perfectly competitive

    market. By paying particular attention to the concept of allocative efficiency, students

    learn how and why competitive markets achieve an efficient allocation of resources,

    whereas monopolists do not. The concept of deadweight loss is a good device to show

    the efficiency loss due to monopoly. The model of price discrimination provides

    another dimension of monopoly behavior that students need to learn and understand.

    In covering oligopoly, the course stresses the interdependency of firms and

    their tendency to collude or to form a cartel. With a simple payoff matrix, the basic

    game-theory model should be used to enhance a student’s understanding of the

    interdependent behavior of firms in an oligopolistic market and identification of

    dominant strategies and Nash equilibrium.


    Finally, the course considers the market structure of monopolistic competition and

    highlights the importance of product differentiation and the role of advertising in

    the behavior of firms. The course then proceeds to examine firm behavior in the

    short run and in the long run and the existence of excess capacity and its implication

    for efficiency.



    III. Factor Markets


    In this section of the course, students also apply the concepts of supply and demand

    to markets for factors such as labor, capital, and land. Students analyze the concept

    of derived demand, understand how a factor’s marginal product and the marginal

    revenue product affect the demand for the factor, and consider the role of factor prices

    in the allocation of scarce resources. When the markets for different factors are

    considered separately, most attention should be given to the labor market,

    particularly labor supply and wage and employment determination. Although the

    course may emphasize perfectly competitive labor markets, the effect of deviations

    from perfect competition, such as minimum wages, unions, monopsonies, and

    product market monopolies, can also be considered. The principles studied in the

    analysis of the labor market should be applied to the markets for land and capital to

    explain the determination of economic rent and the price of capital. By studying the

    determination of factor prices, students gain an understanding of how the market

    determines the distribution of income and the sources of income inequality in a

    market economy.



    IV. Market Failure and the Role of Government


    It is important for students to understand the arguments for and against government

    intervention in an otherwise competitive market. Students examine the conditions

    for allocative efficiency, using the marginal social benefit and marginal social cost

    principle, and the ways in which externalities, public goods, and the market distribution

    of income create market failures even in competitive free-market economies. In

    addition, students are expected to study the effectiveness of government policies such

    as subsidies, taxes, quantity controls, and public provision of goods and services, which

    are designed to correct market failures and achieve allocative efficiency. It is also

    important both to emphasize that monopolies can cause market failures when they use

    their market power to engage in behavior that restrains competition and to examine

    the government’s attempt to solve such problems by using antitrust policy and

    regulations. Although there is not a generally accepted standard for judging the equity

    of an economy’s income distribution, a well-designed course will incorporate key

    measures of income distribution (Lorenz curve and Gini coefficient) and examine the

    impact of government tax policies and transfer programs, both on the distribution of

    income and on allocative efficiency.


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