What it covers: The foundational toolkit of economics — scarcity, opportunity cost, the production possibilities curve, comparative advantage, and the basics of supply and demand.
Exam weight: About 12–17% of the AP Microeconomics exam.
The big question: Given that resources are scarce, how do individuals, firms, and societies decide what to produce, and how does trade based on comparative advantage make everyone better off?
Recurring themes: Trade-offs, opportunity cost, marginal analysis, and how markets use prices to allocate scarce resources.
Key topics at a glance
Scarcity & Opportunity Cost
Resources are limited, wants are unlimited. Every choice has an opportunity cost — the value of the next-best alternative given up.
Economic Systems
Every system answers: what, how, and for whom to produce. Market economies use prices; command economies use central planning; most real economies are mixed.
Production Possibilities Curve
Models scarcity, trade-offs, and efficiency. Points inside = inefficient. Points outside = unattainable. A bowed-out curve shows increasing opportunity cost.
Comparative Advantage & Trade
Absolute advantage = fewer resources used. Comparative advantage = lower opportunity cost — this is what drives mutually beneficial specialization and trade.
Demand
Law of demand: price ↑, quantity demanded ↓. The demand curve shifts with income, related-good prices, tastes, number of buyers, and expectations.
Supply
Law of supply: price ↑, quantity supplied ↑. The supply curve shifts with input prices, technology, number of sellers, taxes/subsidies, and expectations.
A demand shift moves price and quantity in the same direction. A supply shift moves them in opposite directions.
The key terms you must know
Scarcity — limited resources relative to unlimited wants; the basic economic problem.
Opportunity cost — the value of the next-best alternative given up when making a choice.
Production possibilities curve (PPC) — shows the maximum attainable combinations of two goods given current resources and technology.
Absolute advantage — producing more output, or using fewer resources, than another producer.
Comparative advantage — producing a good at a lower opportunity cost; the true basis for beneficial trade.
Law of demand — price and quantity demanded move in opposite directions, all else equal.
Law of supply — price and quantity supplied move in the same direction, all else equal.
Market equilibrium — the price and quantity where quantity demanded equals quantity supplied.
Surplus / shortage — imbalances above/below equilibrium price that push price back toward equilibrium.
Key themes to remember
Every choice has a cost. Opportunity cost is the single most tested idea in Unit 1 — and it recurs in every later unit.
Comparative advantage, not absolute advantage, drives trade. A producer can be worse at everything and still have a comparative advantage in something.
Prices are signals. Surpluses push prices down; shortages push prices up — markets self-correct toward equilibrium without anyone planning it.
Curve shifts vs. movements along a curve are different. A change in the good's own price moves you along the curve; everything else shifts the curve.
Efficiency means being on the PPC, not inside it. Growth means shifting the whole curve outward.
Common exam traps
Don't confuse demand with quantity demanded. Demand is the whole curve; quantity demanded is one point on it. Only the good's own price changes quantity demanded.
Absolute advantage ≠ comparative advantage. A country with absolute advantage in everything can still benefit from trade if it specializes based on comparative advantage.
A shift vs. a movement. "Price of the good changes" → movement along the curve. "Anything else changes" → the curve itself shifts.
Increasing opportunity cost is why the PPC bows outward, not the other way around. Resources aren't perfectly adaptable between uses.
Surplus and shortage are temporary. They exist only away from equilibrium and trigger price changes that eliminate them — don't describe them as permanent.
A simultaneous shift in both supply and demand makes the effect on price OR quantity (not both) ambiguous without more information — know which variable becomes uncertain in each case.