MKT-1.A.2
Most factors of production (such as land, labor, and capital) are scarce, but some factors of production (such as established knowledge) may not be scarce due to their non-rival nature.

1. Define (using graphs as appropriate) the production possibilities curve (PPC) and related terms.
2. Explain (using graphs as appropriate) how the production possibilities curve (PPC) illustrates opportunity costs, trade-offs, inefficiency, efficiency, and economic growth or contraction under various conditions.
3. Calculate (using data from PPCs or tables as appropriate) opportunity cost.

MKT-1.C.2
The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, underutilized resources, and economic growth or contraction.

MKT-1.C.3
The shape of the PPC depends on whether opportunity costs are constant, increasing, or decreasing.

MKT-1.C.4
The PPC can shift due to changes in factors of production as well as changes in productivity/technology.

MKT-1.C.5
Economic growth results in an outward shift of the PPC.

1. Define absolute advantage and comparative advantage.
2. Determine (using data from PPCs or tables as appropriate) absolute and comparative advantage.

MKT-2.A.2
Comparative advantage describes a situation in which an individual, business, or country can produce a good or service at a lower opportunity cost than another producer.

1. Explain (using data from PPCs or tables as appropriate) how specialization according to comparative advantage with appropriate terms of trade can lead to gains from trade.
2. Calculate (using data from PPCs or tables as appropriate) mutually beneficial terms of trade.

MKT-2.B.2
Comparative advantage and opportunity costs determine the terms of trade for exchange under which mutually beneficial trade can occur.

1. Define the key assumptions of consumer choice theory.
2. Explain (using a table or graph as appropriate) how a rational consumer’s decision making involves the use of marginal benefits and marginal costs.
3. Calculate (using a table or a graph when appropriate) how a rational consumer’s decision making involves the use of marginal benefits and marginal costs.

CBA-2.A.2
In a model of rational consumer choice, consumers are assumed to make choices so as to maximize their total utility.

CBA-2.A.3
Consumers experience diminishing marginal utility in the consumption of goods and services.

CBA-2.A.4
Consumers allocate their limited income to purchase the combination of goods that maximizes their utility by equating/comparing the marginal utility of the last dollar spent on each good.

[X] Exclusion:
Indifference curves are beyond the scope of the course and the AP Exam, but equating the ratios of marginal utility to price is within the scope.

1. Define marginal analysis and related terms.
2. Explain a decision using marginal analysis (using a table or a graph when appropriate).

CBA-2.B.2
The optimal quantity at any point in time does not depend on fixed costs (sunk costs) or fixed benefits that have already been determined by past choices.

CBA-2.B.3
The optimal quantity is achieved when marginal benefit is equal to marginal cost or where total benefit is maximized.

1. Define (using graphs as appropriate) key terms and factors related to consumer decision making and the law of demand.
2. Explain (using graphs as appropriate) the relationship between price and quantity demanded and how buyers respond to incentives and constraints.

MKT-3.A.2
Economic agents respond to incentives.

MKT-3.A.3
Individuals often respond to incentives, such as those presented by prices, but also face constraints, such as income, time, and legal and regulatory frameworks.

MKT-3.A.4
The law of demand suggests that a change in the own-price causes a change in quantity demanded in the opposite direction and a movement along a demand (marginal benefit) curve.

MKT-3.A.5
The conceptual relationship between price and quantity stated by the law of demand leads to downward-sloping demand curves explained by the income effect and substitution effect and/or by diminishing marginal utility.

MKT-3.A.6
The market demand curve (schedule) is derived from the summation of individual demand curves (schedules).

1. Define (using graphs as appropriate) the law of supply.
2. Explain (using graphs as appropriate) the relationship between price and quantity supplied.

MKT-3.C.2
The market supply curve (schedule) is derived from the summation of individual supply curves (schedules). The market supply curve is upward-sloping.

MKT-3.E.2
Price elasticity of demand is measured by the percentage change in quantity demanded divided by the percentage change in price or the responsiveness of the quantity demanded to changes in price. Elasticity varies along a linear demand curve, meaning slope is not elasticity.

MKT-3.E.3
Ranges of values of elasticity of demand are described as elastic or inelastic with the separating benchmark being a magnitude of 1, where the change in the price and the change in the quantity demanded are proportional.

1. When the magnitude of the value of elasticity is greater than 1, the demand is described as being elastic with respect to that price in the range of the given change.
2. When the magnitude of the value of elasticity is less than 1, the demand is described as being inelastic with respect to that price in the range of the given change.
3. When the magnitude of the value of elasticity is equal to 1, the demand is described as being unit elastic with respect to that price in the range of the given change.

MKT-3.E.4
The price elasticity of demand depends on certain factors such as the availability of substitutes.

MKT-3.E.5
The impact of a given price change on total revenue or total expenditure will depend on whether demand is elastic, inelastic, or unit elastic.

1. Define measures of elasticity.
2. Explain (using graphs where appropriate) measures of elasticity and the impact of a given price change on total revenue or total expenditure.
3. Calculate (using data from a graph or a table as appropriate) measures of elasticity.

MKT-3.E.7
Ranges of values of elasticity of supply are described as elastic or inelastic with the separating benchmark being a magnitude of 1, where the change in the price and the change in the quantity supplied are proportional.

1. When the magnitude of the value of elasticity is greater than 1, the supply is described as being elastic with respect to that price in the range of the given change.
2. When the magnitude of the value of elasticity is less than 1, the supply is described as being inelastic with respect to that price in the range of the given change.
3. When the magnitude of the value of elasticity is equal to 1, the supply is described as being unit elastic with respect to that price in the range of the given change.

MKT-3.E.8
The price elasticity of supply depends on certain factors such as the price of alternative inputs.

1. Define measures of elasticity.
2. Explain (using graphs where appropriate) measures of elasticity and the impact of a given price change on total revenue or total expenditure.
3. Calculate (using data from a graph or a table as appropriate) measures of elasticity.

MKT-3.E.10
Income elasticity of demand is measured by the percentage change in the quantity demanded divided by the percentage change in consumers’ income. Economists use the income elasticity of demand to determine whether a good is normal or inferior.

MKT-3.E.11
Cross-price elasticity of demand is measured by the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. Economists use the cross-price elasticity of demand to determine whether goods are substitutes, complements, or not related.

1. Define (using graphs as appropriate) market equilibrium, consumer surplus, and producer surplus.
2. Explain (using graphs as appropriate) how equilibrium price, quantity, consumer surplus, and producer surplus for a good or service are determined.
3. Calculate (using data from a graph or table as appropriate) areas of consumer surplus and producer surplus at equilibrium.

MKT-4.A.2
In a perfectly competitive market, equilibrium is achieved (and markets clear with no shortages or surpluses) when the price of a good or service brings the quantity supplied and quantity demanded into balance, in the sense that buyers wish to purchase the same quantity that sellers wish to provide.

MKT-4.A.3
Equilibrium price provides information to economic decision-makers to guide resource allocation.

MKT-4.A.4
Economists use consumer surplus and producer surplus to measure the benefits markets create to buyers and sellers and understand market efficiency.

MKT-4.A.5
Market equilibrium maximizes total economic surplus in the absence of market failures, meaning that perfectly competitive markets are efficient.

1. Define a surplus and shortage.
2. Explain (using graphs where appropriate) how changes in underlying conditions and shocks to a competitive market can alter price, quantity, consumer surplus, and producer surplus.
3. Calculate (using data from a graph or table as appropriate) changes in price, quantity, consumer surplus, and producer surplus in response to changes in market conditions or market disequilibrium.

MKT-4.B.2
Factors that shift the market demand and market supply curves cause price, quantity, consumer surplus, producer surplus, and total economic surplus (within that market) to change. The impact of the change depends on the price elasticities of demand and supply.

1. Define forms of government price and quantity intervention.
2. Explain (using graphs where appropriate) how government policies alter consumer and producer behaviors that influence incentives and therefore affect outcomes.
3. Calculate (using data from a graph or table where appropriate) changes in market outcomes resulting from government policies.

POL-1.A.2
Governments use taxes and subsidies to change incentives in ways that influence consumer and producer behavior, shifting the supply and demand curves accordingly.

POL-1.A.3
Taxes and subsidies affect government revenues or costs.

POL-1.A.4
Government intervention in a market producing the efficient quantity through taxes, subsidies, price controls, or quantity controls can only decrease allocative efficiency.

POL-1.A.5
Deadweight loss represents the losses to buyers and sellers as a result of government intervention in an efficient market.

POL-1.A.6
The incidence of taxes and subsidies imposed on goods traded in perfectly competitive markets depends on the elasticity of supply and demand.

1. Define tariffs and quotas.
2. Explain (using graphs where appropriate) how markets are affected by public policy related to international trade.
3. Calculate (using data from a graph or table as appropriate) changes in market outcomes resulting from public policy related to international trade.

POL-1.B.2
Tariffs, which governments sometimes use to influence international trade, affect domestic price, quantity, government revenue, and consumer surplus and total economic surplus.

POL-1.B.3
Quotas can be used to alter quantities produced and therefore affect price, consumer surplus, and total economic surplus.

[X] Exclusion:
The graphing of quotas is beyond the scope of the course and the AP Exam, but understanding how quotas affect quantities produced is within the scope.

1. Define (using graphs where appropriate) key terms and concepts relating to production and cost.
2. Explain (using graphs where appropriate) how production and cost are related in the short run and long run.
3. Calculate (using data from a graph or table as appropriate) the various measures of productivity and short-run and long-run costs.

PRD-1.A.2
Marginal product and average product change as input usage changes, and hence, total product changes.

PRD-1.A.3
Diminishing marginal returns occur as the firm employs more of one input, holding other inputs constant, to produce a product (output) in the short run.

1. Define (using graphs where appropriate) key terms and concepts relating to production and cost.
2. Explain (using graphs where appropriate) how production and cost are related in the short run and long run.
3. Calculate (using data from a graph or table as appropriate) the various measures of productivity and short-run and long-run costs.

PRD-1.A.5
Marginal cost, average (fixed, variable, and total) cost, total cost, and total variable cost change as total output changes, but total fixed cost remains constant at all output levels, including zero output.

PRD-1.A.6
Production functions with diminishing marginal returns yield an upward-sloping marginal cost curve.

PRD-1.A.7
Specialization and the division of labor reduce marginal costs for firms.

PRD-1.A.8
Cost curves can shift in response to changes in input costs and productivity.

1. Define (using graphs where appropriate) key terms and concepts relating to production and cost.
2. Explain (using graphs where appropriate) how production and cost are related in the short run and long run.
3. Calculate (using data from a graph or table as appropriate) the various measures of productivity and short-run and long-run costs.

PRD-1.A.10
The relationship between inputs and outputs in the long run is described by the scale of production—increasing, decreasing, or constant returns to scale.

PRD-1.A.11
The long-run average total cost is characterized by economies of scale, diseconomies of scale, or constant returns to scale (efficient scale).

PRD-1.A.12
The minimum efficient scale plays a role in determining the concentration of firms in a market and the market structure.

1. Define the different types of profit.
2. Explain how firms respond to profit opportunities.
3. Calculate a firm’s profit or loss.

CBA-2.C.2
Accounting profit fails to account for **implicit costs** (such as cost of financial capital, compensation for risk, or an entrepreneur’s time), which, if fully compensated, result in **normal profit**.

1. Define (using graphs or data as appropriate) the profit-maximizing rule.
2. Explain (using a graph or data as appropriate) the profit-maximizing level of production.

PRD-2.A.2
In the absence of barriers to entry or exit, in the long run (i.e., once factors that are fixed in the short run become variable), firms enter a market in which there are profit-making opportunities and exit a market when they anticipate economic losses.

1. Define (using graphs as appropriate) the characteristics of perfectly competitive markets and efficiency.
2. Explain (using graphs where appropriate) equilibrium and firm decision making in perfectly competitive markets and how prices in perfectly competitive markets lead to efficient outcomes.
3. Calculate (using data from a graph or table as appropriate) economic profit (loss) in perfectly competitive markets.

PRD-3.A.2
In perfectly competitive markets, **prices communicate** to consumers and producers the magnitude of others’ **marginal costs of production** and **marginal benefits of consumption** and provide incentives to act on that information (i.e., **price equals marginal cost** in an efficient market).

PRD-3.A.3
In perfectly competitive markets, firms can sell all their outputs at a **constant price** determined by the market.

PRD-3.A.4**
At a competitive market equilibrium, firms are **price takers** and select output to **maximize profit** by producing the level of output where the **marginal cost equals marginal revenue (at the price)**.

PRD-3.A.5
At a competitive market equilibrium, the price of a product equals both the **private marginal benefit** received by the last unit consumed and the **private marginal cost** incurred to produce the last unit, thus achieving **allocative efficiency**.

PRD-3.A.6
In a **short-run** competitive equilibrium, price can either be **above or below its long-run competitive level** resulting in **profits or losses**, motivating **entry or exit of firms** and moving prices and quantities toward long-run equilibrium.

PRD-3.A.7
In a **long-run** perfectly competitive equilibrium, **productive efficiency** implies all operating firms produce at **efficient scale**, **price equals marginal cost and minimum average total cost**, and firms earn **zero economic profit**.

PRD-3.A.8
Firms may be in a **constant cost, increasing cost, or decreasing cost industry**. Long-run prices depend on the portion of the long-run cost curves on which firms operate.

PRD-3.A.9
A perfectly competitive market in long-run equilibrium is **allocatively and productively efficient**.

1. Define (using graphs where appropriate) the characteristics of imperfectly competitive markets and inefficiency.

PRD-3.B.2
In imperfectly competitive output markets and assuming all else is constant, a firm must lower price to sell additional units.

PRD-3.B.3
In imperfectly competitive markets, consumers and producers respond to prices that are above the marginal costs of production and/or marginal benefits of consumption (i.e., price is greater than marginal cost in an inefficient market).

PRD-3.B.4
Incentives to enter an industry may be mitigated by barriers to entry. Barriers to entry—such as high fixed/start-up costs, legal barriers to entry, and exclusive ownership of key resources—can sustain imperfectly competitive market structures.

2. Explain (using graphs where appropriate) equilibrium, firm decision making, consumer surplus, producer surplus, profit (loss), and deadweight loss in imperfectly competitive markets and why prices in imperfectly competitive markets cannot be relied on to coordinate the actions of all possible market participants and can lead to inefficient outputs.
3. Calculate (using data from a graph or table as appropriate) areas of consumer surplus, producer surplus, profit (loss), and deadweight loss in imperfectly competitive markets.

PRD-3.B.6
In a monopoly, equilibrium (profit-maximizing) quantity is determined by equating marginal revenue (MR) to marginal cost (MC). The price charged is greater than the marginal cost.

PRD-3.B.7
In a natural monopoly, long-run economies of scale for a single firm exist throughout the entire effective demand of its product.

2. Explain (using graphs where appropriate) equilibrium, firm decision making, consumer surplus, producer surplus, profit (loss), and deadweight loss in imperfectly competitive markets and why prices in imperfectly competitive markets cannot be relied on to coordinate the actions of all possible market participants and can lead to inefficient outputs.
3. Calculate (using data from a graph or table as appropriate) areas of consumer surplus, producer surplus, profit (loss), and deadweight loss in imperfectly competitive markets.

PRD-3.B.9
With perfect price discrimination, a monopolist produces the quantity where price equals marginal cost (just as a competitive market would) but extracts all economic surplus associated with its product and eliminates all deadweight loss.

2. Explain (using graphs where appropriate) equilibrium, firm decision making, consumer surplus, producer surplus, profit (loss), and deadweight loss in imperfectly competitive markets and why prices in imperfectly competitive markets cannot be relied on to coordinate the actions of all possible market participants and can lead to inefficient outputs.
3. Calculate (using data from a graph or table as appropriate) areas of consumer surplus, producer surplus, profit (loss), and deadweight loss in imperfectly competitive markets.

1. Define (using tables as appropriate) key terms, strategies, and concepts relating to oligopolies and simple games.
2. Explain (using tables as appropriate) strategies and equilibria in simple games and the connections to theoretical behaviors in various oligopoly market and non-market settings.
3. Calculate (using tables as appropriate) the incentive sufficient to alter a player’s dominant strategy.

PRD-3.C.2
Firms in an oligopoly have an incentive to collude and form cartels.

PRD-3.C.3
A game is a situation in which a number of individuals take actions, and the payoff for each individual depends directly on both the individual’s own choice and the choices of others.

PRD-3.C.4
A strategy is a complete plan of actions for playing a game; the normal form model of a game shows the payoffs that result from each collection of strategies (one for each player).

PRD-3.C.5
A player has a dominant strategy when the payoff to a particular action is always higher independent of the action taken by the other player.

PRD-3.C.6
A Nash equilibrium is a condition describing the set of actions in which no player can increase his or her payoff by unilaterally taking another action, given the other players’ actions.

[X] Exclusion:
Dominant strategies and Nash equilibrium with more than two players or more than two actions per player, mixed-strategy equilibria, extensive form games, and normal form games with more than two players or more than two actions per player are beyond the scope of the course and the AP Exam.

PRD-3.C.7
Oligopolists have difficulty achieving the monopoly outcome for reasons similar to those that prevent players from achieving a cooperative outcome in the Prisoner’s Dilemma; nevertheless, prices are generally higher and quantities lower with oligopoly (or duopoly) than with perfect competition.

1. Define (using graphs where appropriate) key terms and concepts relating to factor markets.
2. Explain (using graphs where appropriate) the relationship between factors of production, firms, and factor prices.
3. Calculate (using data from a graph or table where appropriate) the marginal revenue product and marginal resource cost.

PRD-4.A.2
The quantity of labor demanded is negatively related to the wage rate, while the quantity of labor supplied is positively related to the wage rate in a given labor market, other things constant.

PRD-4.B.2
Changes in the determinants of labor supply (such as immigration, education, working conditions, age distribution, availability of alternative options, preferences for leisure, and cultural expectations) cause the labor supply curve to shift.

1. Define (using graphs as appropriate) the characteristics of perfectly competitive factor markets.
2. Explain (using graphs where appropriate) the profit-maximizing behavior of firms buying labor (with other inputs fixed) in perfectly competitive markets.
3. Calculate (using data from a graph or table where appropriate) measures representing the profit-maximizing behavior of firms buying labor (with other inputs fixed) in perfectly competitive markets.

PRD-4.C.2
A typical firm hires labor in a perfectly competitive labor market as long as the marginal revenue product of labor is greater than the market wage.

PRD-4.C.3
To minimize costs or maximize profits, firms allocate inputs such that the last dollar spent on each input yields the same amount of marginal product.

PRD-4.C.4
Marginal revenue product of a factor of production is the change in total revenue divided by the change in that factor of production, which is also equal to the marginal physical product of that factor multiplied by the marginal revenue (MRP = MP \times MR). Firms in a perfectly competitive output market will have marginal revenue product of labor that is equal to the value of the marginal product of labor (VMPL = MPL \times P) because marginal revenue for each unit of output is equal to price.

1. Define (using graphs as appropriate) the characteristics of monopsonistic markets.
2. Explain (using graphs where appropriate) the profit-maximizing behavior of firms buying labor (with other inputs fixed) in monopsonistic markets.
3. Calculate (using data from a graph or table where appropriate) measures representing the profit-maximizing behavior of firms buying labor (with other inputs fixed) in monopsonistic markets.

PRD-4.D.2
When a typical firm hires additional workers in a monopsonistic labor market, the marginal factor (resource) cost is greater than the supply price of labor.

1. Define social efficiency.
2. Explain (using graphs where appropriate) why resource allocation in perfectly competitive markets is socially efficient.

POL-2.A.2
The market equilibrium quantity is equal to the socially optimal quantity only when all social benefits and costs are internalized by individuals in the market. Total economic surplus is maximized at that quantity. [See also PRD-3 and POL-3.]

POL-2.B.2
Rational agents make optimal decisions by equating private marginal benefits and private marginal costs that can result in market inefficiencies.

POL-2.B.3
Policymakers use cost-benefit analysis to evaluate different actions to reduce or eliminate market inefficiencies.

POL-2.B.4
Market inefficiencies can be eliminated by designing policies that equate marginal social benefit with marginal social cost.

1. Explain equilibrium allocations in imperfect markets relative to efficient allocations (using graphs where appropriate) and why these markets are inefficient.
2. Calculate (using graphs where appropriate) the deadweight loss resulting from the production of a non-efficient quantity.

POL-2.C.2
Producing any non-efficient quantity results in deadweight loss.

1. Define externalities.
2. Explain (using graphs where appropriate) how in the presence of externalities, private markets do not take into consideration social costs or social benefits.

POL-3.A.2
Externalities are either positive or negative and arise from lack of well-defined property rights and/or high transaction costs.

POL-3.A.3
In the presence of externalities, rational agents respond to private costs and benefits and not to external costs and benefits.

POL-3.A.4
Rational agents have the incentive to free ride when a good is non-excludable.

1. Define whether goods are rival and/or excludable.
2. Explain how the nature of rival and/or excludable goods influences the behavior of individuals and groups.

POL-3.C.2
Due to the free rider problem, private individuals usually lack the incentive to produce public goods, leaving government as the only producer.

POL-3.C.3
Governments sometimes choose to produce private goods, such as educational services, and to allow free access to them.

POL-3.C.4
Some natural resources are, by their nature, non-excludable and rival and therefore open access. Private individuals inefficiently overconsume such resources.

1. Define government policy interventions in imperfect markets.
2. Explain (using graphs where appropriate) how government policies can alter market outcomes in perfectly and imperfectly competitive markets.
3. Calculate (using data from a graph or table as appropriate) changes in market outcomes resulting from government policies in perfectly competitive and imperfectly competitive markets.

POL-4.A.2
Lump-sum taxes and lump-sum subsidies do not change either marginal cost or marginal benefit; only fixed costs will be affected.

POL-4.A.3
Binding price ceilings and floors affect prices and quantities differently depending on the market structures (perfect competition, monopoly, monopolistic competition, and monopsony) and the price elasticities of supply and demand.

POL-4.A.4
Government intervention in imperfect markets can increase efficiency if the policy correctly addresses the incentives that led to the market failure.

POL-4.A.5
Government can use price regulation to address inefficiency due to monopoly.

POL-4.A.6
A natural monopoly will require a lump-sum subsidy to produce at the allocatively efficient quantity.

POL-4.A.7
Governments use antitrust policy in an attempt to make markets more competitive.

[X] Exclusion:
A graph of inefficiency and policy due to collusion is beyond the scope of the course and the AP Exam.

POL-5.A.2
The Lorenz curve and Gini coefficient are used to represent the degree of inequality in distributions and to compare distributions across different countries, policies, or time periods.

Exclusion:
Drawing the Lorenz curve and calculating Gini coefficients are beyond the scope of the course and the AP Exam.

POL-5.B.2
Sources of income and wealth inequality include differences in tax structures (progressive and regressive tax structures), human capital, social capital, inheritance, effects of discrimination, access to financial markets, mobility, and bargaining power within economic and social units (firms, labor unions, and families).