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INTRODUCTION

The AP Program offers two separate exams in economics: one in microeconomics and one in macroeconomics. Each exam is intended for qualified students who wish to complete studies in secondary school equivalent to a one-semester college introductory course. Each exam presumes at least one semester of college-level preparation. Students may take one or both exams in a given year. A separate score is reported for each.

The material included in the Course Descriptions and in the two exams has been selected by economists who serve as members of the AP Macroeconomics Development Committee and AP Microeconomics Development Committee. In establishing the courses and exams, the committees surveyed the economics departments of more than 200 institutions receiving the most AP scores in economics. Using the information obtained about the content of typical introductory college courses, the committees developed the course outlines and had the multiplechoice questions covering the outlines pretested on college students enrolled in the appropriate economics courses. The AP Course Descriptions and exams are thus representative of college courses and are, therefore, considered appropriate for the measurement of skills and knowledge in the fields of introductory microeconomics and macroeconomics. Inclusion of the content, ideas, and values expressed in the material is not intended as an endorsement of them by the College Board or ETS.

I. Basic E conomic C oncepts

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. T he N ature and Functions of Product M arkets

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 M arkets

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. M arket Failure and the R ole 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.