AP MICRO ECONOMICS EXAM REVIEW

1. AP MICROECONOMICS EXAM REVIEW

2. Production Possibility Curve A B R o b o t s C W F D E Shoes

3. Land, Labor, Capital & Entrepreneruial Ability to bs and govt Resource Money Payments paid by bs. and govt Bs. Taxes Taxes Businesses Households Government Subsidy Transfers Money Payments for goods and services from government and households Goods and Services for Households and Government

4. Allocative Efficiency P MC MB Q Qop

5. Market Equilibrium P r i c e Supply Pe • Demand Qe • Quantity

6. A change in Demand versus a change in the Quantity Demanded • Change in Demand • √ Moves the curve • Income • Future Expectations • # of Buyers • Consumer Information • Taste and Preference • Substitues and Complements Change in Quantity Demanded √ Moves Along the SAME curve • Caused only by Price change.

7. A change in Supply versus a change in the Quantity Supplied • Change in Supply • √ Moves the curve • Costs of Production • Future Expectations • # of Sellers • Taxes and Subsidies • Prices of goods using same resources • Time period of production Change in Quantity Supplied √ Moves Along the SAME curve • Caused only by Price change.

8. Qe Consumer and Producer Surplus √ The value in excess of the purchase price √ The income the firm gets in excess of its marginal costs P S CS P1 PS D Q

9. Marginal Utility To t a l U t i l i t y TU When Total Utility is at its peak, Marginal Utility is zero. Marginal Utility reflects the change in total utility so it is negative when Total Utility declines. Unit Consumed M a r g I n a l U t I l I t y Marginal Utility diminishes with increased consumption, is zero where total utility is at a maximum, and is negative when Total Utility declines. MU Unit Consumed

10. Qe Price Floor and Price Ceiling P S Surplus Pf P1 Pc Shortage D Q

11. Elasticity E i = %  Quantity % Income Ed = % change in Qd % change in P DEMAND E c = %  Quantity of X % Price of Y CROSS INCOME

12. Quantity of Labor Law of Diminishing Returns Total Product Total Product, TP Average Product, AP, and Marginal Product, MP Average Product Marginal Product Quantity of Labor

13. RELATIONSHIP ECONOMIC INTERPRETATION MR = MC The firm has chosen the output that maximizes profits. P > ATC Firm is earning Economic Profits P = ATC Firm is earning NORMAL PROFIT (Break-Even Point) (EP = 0) P < ATC; P > AVC Loss Minimization P = AVC SHUTDOWN POINT (firm cannot cover its AVC P < AVC Firm does not produce

14. MONOPOLY P > MR The firm’s DEMAND CURVE is relatively INELASTIC. MR = MC  The firms maximizes profit. P > ATC  Long Run ECONOMIC PROFITS. PRODUCTIVE INEFFICIENCY P > min ATC  Firm is not forced to operate with maximum productive efficiency.  (Least-Cost Method Production not necessary) ALLOCATIVE INEFFICIENCY  P > MC  There is an UNDERALLOCATION of resources. PURE COMPETITION P = MR The firm’s DEMAND CURVE is infinitely ELASTIC MR = MC  The firms maximizes profit. P= ATC Long Run (NORMAL PROFITS) PRODUCTIVE EFFICIENCY P = min ATC  Firm is forced to operate with maximum productive efficiency. (Least-Cost Method Production) ALLOCATIVE EFFICIENCY P = MC There is an optimal allocation of resources.

15. Pure Competition P P S MR=D=AR=P2 p2 MR=D=AR=P pe D2 D qe q2 Q Q The Market Individual firm

16. MR=D=AR=P $131 ATC Per unit profit $97.78 Total Revenue ATC Firm showing Economic Profit MC P MR=MC Economic Profit AVC Q Q1

17. Per unit loss MR=D=AR=P Total Revenue ATC Firm showing Economic Loss P ATC MC MR=MC Economic Loss $81 AVC Q Q2

18. MR=D=AR=P ATC Firm showing Shutdown position P MC AVC $71 At no level of output does the firm cover the Average Variable Costs. Q

19. Long-run Equilibrium For A Competitive Firm MC Price ATC MR=D=AR=P Pe Price = MC = MR = Minimum ATC (normal profit) Qe Quantity

20. MR5 Breakeven point— normal profit ATC MR4 MR3 AVC MR2 Shutdown point MR1 Competitive Firm Supply Curve MC P Q

21. MR=MC Single Price Profit-Maximizing Monopoly MC P ATC Economic Profit Pe ATC D Q MR Qm

22. PRICE DISCRIMINATION A perfectly discriminating monopolist has MR=D, producing more product and more profit! MC P ATC Price and Costs MR=D D Q Q1 Q2

23. Dilemma of Regulation:Which Price? P MR = MC Fair-Return Price Pm Socially-Optimum Price Price and Costs ATC Pf MC Pr D MR Q Qm Qf Qr

24. Consumer surplus Deadweight loss under monopoly P MC (= S under perfect competition) Deadweight loss Deadweight Loss (c)R=MC (b)Pm Monopolist price (a)P=MC Purely Competitive price b Pm a Ppc Producer surplus c AR = D MR O Qm Qpc Q

25. PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC Expect New Competitors ATC P1 Price and Costs AC1 Short-Run Economic Profits D MR Q1 Quantity

26. PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC ATC AC2 P2 Price and Costs Short-Run Economic Losses D MR Q2 Quantity

27. PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC Long-Run Equilibrium Normal Profit Only ATC P3 = AC3 Price and Costs D MR Q3 Quantity

28. Game theory can be used to describe a game when: There are rules which govern actions; There are two or more players; There are choices of action where strategy matters; The game has one or more outcomes; The outcome depends on the strategies chosen by all players, i.e., there is strategic interaction. Using Game Theory

29. Advertising Game Dominant strategies: Strategy 1 dominates Strategy 2 if every payoff from 2 is dominated by the respective payoff from 1. Nash equilibrium: a set of strategies, one for each player, such that no player has an incentive (in terms of improving his own payoff) to deviate from his strategy, i.e., each player can do no better given what the opposing player(s) does.

30. MRP = MP x P Marginal Revenue Product equals the Marginal Product times the Price. √ The MRP curve is the resource demand curve. √ Location of curve depends on the productivity and the price of the product.

31. MRPC MRPL 1 PC PL Optimum Combination Of Resources Least-Cost Combination of Resources MP of Capital MP of Labor Price of Labor Price of Capital MPC MPL = PC PL Profit-Maximizing Combination

32. Purely Competitive Labor Market Equilibrium Non- Labor Costs Wage Rate (dollars) Quantity of Labor Quantity of Labor S Includes Normal Profit S = MRC ($6) Wc Wc $6 Labor Costs D = MRP ( mrp’s) d = mrp (1000) (5) Individual Firm Labor Market

33. Monopsonistic Labor Market MRC S The competitive solution would result in a higher wage and greater employment. Wage Rate (dollars) Wc Wm MRP Qm Qc Quantity of Labor

34. Spillover Costs And Benefits P S=MSC Spillover costs S=MPC D=MB Overallocation Q Q0 Qe 0

35. Spillover Costs And Benefits P S=MC Spillover Benefits D=MSB D=MPB Underallocation Q Qe Q0 0

36. Tax equity: The fairness of a tax system. Tax efficiency: How a tax system maintains the incentives to be productive. Two Goals for Tax Systems

37. Two Principles of Tax Equity • Benefits received principle: states that a fair tax is one that taxes people in proportion to the benefits they receive when government spends those tax revenues. • Ability-to-pay principle: states that those who can afford to pay more taxes than others should be required to do so.

38. Three Tax Structures • Progressive tax: collects a higher percentage of high incomes than of low incomes. • Regressive tax: collects a higher percentage of low incomes than of high incomes. • Proportional tax: collects the same percentage of income, no matter what the income.

39. CONSUMER’S SHARE PRODUCER’S SHARE Efficiency Loss of a tax P St S a P2 Efficiency Loss b P1 c D O Q Q2 Q1

40. Cumulative % of Income The Lorenz Curve 100 Line of Perfect Equality Degree of Inequality 100 0 Cumulative % of families