Table of Contents
Introduction
1 The AP Tests in Microeconomics and Macroeconomics 3
Introduction 3
Microeconomics, Macroeconomics, or Both? 3
The Tests: What Topics Will You See? 4
Multiple-Choice Questions 5
Free-Response Questions 7
Practice, Practice, Practice: Online Resources 11
Microeconomics Pretest 12
Pretest AP Score Estimate 23
Macroeconomics Pretest 31
Pretest AP Score Estimate 38
2 The Discipline of Economics 47
What Is Economics? 47
Macroeconomics vs. Microeconomics 48
Positive vs. Normative Economics 48
Resources 48
Opportunity Cost 49
Production Possibilities Frontier 50
Comparative Advantage 54
Summary 57
Terms 58
Multiple-Choice Review Questions 59
Free-Response Review Questions 61
3 Economic Systems 65
The Fundamental Economic Questions 65
Economic Systems 66
The Circular Flow Diagram 70
Summary 71
Terms 71
Multiple-Choice Review Questions 72
Free-Response Review Questions 74
4 Demand and Supply: The Basics 77
Introduction 77
Demand and the Law of Demand 77
Supply and the Law of Supply 82
Market Equilibrium: Supply and Demand Together 87
Effects of Supply and Demand Shifts on Price and Quantity 90
Summary 91
Terms 92
Multiple-Choice Review Questions 94
Free-Response Review Questions 95
Microeconomics
Barron's Essential 5 101
5 Elasticity, Taxation, and Consumer Choice 103
Introduction 103
Elasticity of Demand 103
Total Revenues Test to Determine Elasticity 105
Perfect Elasticity 105
Elasticity Along a Demand Curve 106
Cross-Price Elasticity of Demand 108
Income Elasticity of Demand 108
Price Elasticity of Supply 109
Consumer and Producer Surpluses 109
Impact of Taxes on Consumer and Producer Surpluses 114
Trade, Tariffs, and Quotas 117
Consumer Choice Theory 121
The Utility-Maximization Rule 122
Summary 124
Terms 125
Formulas 126
Multiple-Choice Review Questions 127
Free-Response Review Questions 130
6 Costs of Production 137
Introduction 137
Short Run vs. Long Run 137
The Production Function 137
Calculating Costs 141
Taxes and Shifting Cost Curves 143
Stages of the Long Run Average Total Cost Curve 146
Returns to Scale 147
Economic vs. Accounting Profit 147
Summary 149
Terms 149
Formulas 150
Multiple-Choice Review Questions 151
Free-Response Review Questions 154
7 Perfect Competition 157
Introduction to Market Structures 157
Profit-Maximizing Level of Output 157
Perfect Competition 158
The Shut-Down Rule 161
Perfect Competition in the Long Run 163
Summary 166
Terms 166
Formulas 167
Multiple-Choice Review Questions 168
Free-Response Review Question 169
Monopoly 171
Introduction 171
The Nature of a Monopoly 172
A Monopolist's Demand Curve 173
Graphing a Monopoly 173
Interpreting a Monopoly Graph 175
Price Discrimination 175
Price Discrimination Shown Graphically 177
Natural Monopolies and Regulation of Monopolies 178
Terms 179
Formulas 179
Multiple-Choice Review Questions 180
Free-Response Review Questions 182
9 Imperfect Competition: Monopolistic Competition and Oligopoly 185
Introduction 185
Efficiency and Monopolistic Competition 188
Interpreting a Monopolistic Competition Graph 189
Introduction to Oligopoly 190
It's Game Time: Modeling Oligopoly with Game Theory 191
Nash Equilibrium and the Prisoner's Dilemma 191
Terms 194
Formulas 194
Multiple-Choice Review Questions 195
Free-Response Review Questions 197
10 Resource Markets with Applications to Labor 201
Introduction to Factor Markets 201
Key Concepts of Factor Markets 201
Marginal Revenue Product (MRP) and Marginal Factor Cost (MFC) 202
The Three Shifters of Resource Demand 203
Perfectly Competitive Labor Market 204
Monopsony 205
Least-Cost Rule 206
Summary 207
Terms 207
Formulas 208
Multiple-Choice Review Questions 209
Free-Response Review Questions 211
11 Government and Public Sector: Market Failure, Externalities, Public Goods, Efficiency 215
Introduction 215
Market Failure and Externalities 215
Marginal Social Benefit (MSB) = Marginal Social Cost (MSC) 215
Positive Externalities 216
Negative Externalities 217
Public vs. Private Goods 219
The Distribution of Income 219
Types of Taxes 221
Summary 222
Terms 222
Formulas 223
Multiple-Choice Review Questions 224
Free-Response Review Question 226
Key Microeconomics Graphs 228
Microeconomics Practice Test 239
Macroeconomics
Barron's Essential 5 267
12 The National Economic Accounts 269
The Accounts 269
Gross Domestic Product 269
The Expenditure Approach 270
The Income Approach 272
The Value-Added Approach 273
Real GDP 273
The Underground Economy 274
Other Things Not Counted in GDP 275
Per Capita GDP 276
Limitations of GDP 276
Summary 276
Terms 277
Formulas 277
Multiple-Choice Review Questions 278
Free-Response Review Questions 280
13 Inflation and Unemployment 283
The Twin Evils 283
Inflation 283
Unemployment 287
Summary 289
Terms 289
Formulas 290
Multiple-Choice Review Questions 291
Free-Response Review Questions 293
14 Money and Banking 295
M1 and M2 295
Fiat Money 296
The Functions of Money 297
The Federal Reserve System 297
The Money Expansion Process 300
Policy Tools of the Federal Reserve 302
Summary 304
Terms 305
Formulas 305
Multiple-Choice Review Questions 306
Free-Response Review Questions 308
15 Monetary Theory 311
The Equation of Exchange 311
The Loanable Funds Market 313
The Money Market 317
Summary 320
Terms 320
Formulas 320
Multiple-Choice Review Questions 321
Free-Response Review Questions 323
16 Aggregate Supply and Aggregate Demand 325
Business Cycles 325
Long-Run Aggregate Supply 326
Short-Run Aggregate Supply 327
Aggregate Demand 331
Using the Aggregate Supply/Aggregate Demand Model 334
Economic Growth 339
Summary 340
Terms 340
Multiple-Choice Review Questions 342
Free-Response Review Questions 345
17 Monetary Policy 349
Monetary Policy Defined 349
Monetary Policy in Theory 350
Monetary Policy in Practice 353
The Phillips Curve 354
Summary 357
Terms 358
Mulitple-Choice Review Questions 359
Free-Response Review Questions 361
18 Fiscal Policy 365
Fiscal Policy Defined 365
Fiscal Policy in Theory 365
Fiscal Policy in Practice 369
Crowding Out 369
Government Spending and Tax Multipliers 370
Automatic Stabilizers 373
The National Debt and Deficits 373
Summary 375
Terms 376
Formulas 376
Multiple-Choice Review Questions 377
Free-Response Review Questions 379
19 International Trade and Finance 383
The Balance of Trade 383
Trade Restrictions 384
The Balance of Payments 386
Exchange Rates 387
Monetary and Fiscal Policy in an Open Economy 391
Summary 392
Terms 393
Formulas 393
Multiple-Choice Review Questions 394
Free-Response Review Questions 396
The Big 5 Graphs of Macroeconomics in Action 399
Macroeconomics Practice Test 405
Index 427
