12 PM – May 17 th , 2012 AP Microeconomics Test Review RMCE/HWRHS
Mar 26, 2015
12 PM – May 17th, 2012AP Microeconomics Test Review
RMCE/HWRHS
12 PM – May 17th, 2012AP Microeconomics Test Review
RMCE/HWRHS
In the beginning …Economics
How to allocate scarce resources with unlimited wants or desires.
ResourcesLaborLand/Natural ResourcesCapitalEntrepreneurship
12 PM – May 17th, 2012AP Microeconomics Test Review
RMCE/HWRHS
Opportunity Costs & Marginal Analysis
Opportunity CostsThe cost of doing the next best option.
MarginalThe cost or benefit of “the next one” EX If one candy bar costs $2 and two bars cost $3, the
Marginal Costs of 1st bar is $2 and the MC of the 2nd bar is $1.
Basis of economic study.
12 PM – May 17th, 2012AP Microeconomics Test Review
RMCE/HWRHS
Production Possibility Frontier
W
Y
X
Z
GoodA
Good B
Measures different combinations of production
X & Y are equallyefficient, on the PPF curve
W is inefficient,Not all resourcesIn use – a recession
Z is beyond capacity,borrowing or runninga deficit
12 PM – May 17th, 2012AP Microeconomics Test Review
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Trade Advantages
Example:
Country A60 Pizzas80 Hot Dogs
Country B40 Pizzas 20 Hot Dogs
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Absolute AdvantageWho can produce the most?
Pizzas:Country A – 60Country B – 40
Hot Dogs:Country A – 80Country B – 20
Country A b/c60 > 40.
Country A b/c80 > 20.
12 PM – May 17th, 2012AP Microeconomics Test Review
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Comparative AdvantageWho gives up the least to produce?
(items produced/items no longer produced)
Pizzas:Country A – (60 Pizzas/80 HD) = 0.75Country B – (40 Pizzas/20 HD) = 1.50
Hot Dogs:Country A – (80 HD/60 Pizzas) = 1.33Country B – (20 HD/40 Pizzas) = 0.50
Country B b/c2.00 > 0.75.
Country A b/c1.33 > 0.50
NB There is always comparative advantages for both countries even when one country has an absolute advantage in both products
12 PM – May 17th, 2012AP Microeconomics Test Review
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Supply and Demand
S
D
Quantity
Price
P
Q
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DemandMovement along the curve
Change in Price
Curve ShiftChange in Determinants Income Substitutes Complements Number Consumers Consumer Tastes Consumer Expectations
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SupplyMovement along the curve
Change in price
Curve shiftChange in Determinants Costs of inputs Number sellers Change in technology Taxes Producer expectations
12 PM – May 17th, 2012AP Microeconomics Test Review
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Supply & DemandSubstitutes
Complements
Normal goods
Inferior goods
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Equilibrium
S
D
Quantity
Price
P
Q
surplus
shortage
P+1
P-1
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Price Floors & Ceilings
S
D
Quantity
Price
QD QS
Price Floor
Price Ceiling
Pf
Pc
DeadweightLoss (DWL)
12 PM – May 17th, 2012AP Microeconomics Test Review
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Equilibrium
S
D
Quantity
Price
P
Q
Consumer Surplus
Producer Surplus
Total Welfare is the sum of Consumer & Producer Surpluses
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ElasticityMeasures change in QUANTITY caused by small changes in PRICE
= %ΔQ / %ΔP
Midpoint Formula =(Q1-Q2)/((Q1+Q2)/2)
(P1-P2)/((P1+P2)/2)
12 PM – May 17th, 2012AP Microeconomics Test Review
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ElasticityPerfectly Elastic
ED = ∞
Elastic 1 < ED < ∞
Unit Elastic ED = 1
Inelastic 0 < ED < 1
Perfectly Inelastic ED = 0
12 PM – May 17th, 2012AP Microeconomics Test Review
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Determinants of Elasticity
Substitutes
Income
Time
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Total Revenue (TR) MethodElastic
Price & TR move in opposite direction P TR P TR
Inelastic Price & TR move in the same direction P TR P TR
TR = P * Q ….do not compare P & Q !!!
12 PM – May 17th, 2012AP Microeconomics Test Review
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Types of ElasticityIncome elasticity
%ΔQ / %Δ IncomeNegative number for Inferior Goods
Cross elasticity% Δ Q Good A / % Δ P Good BNegative number for Complementary Goods
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Elasticity & TaxesGovernmentRevenue
Consumption Taxes paidBy Consumer
Taxes Paid by Supplier
PerfectlyElastic
Least Most 0 % 100 %
Elastic
Inelastic
PerfectlyInelastic Most Zero 100 % 0 %
12 PM – May 17th, 2012AP Microeconomics Test Review
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Changing Elasticities
Inelastic – A large change in price…
… leads to a small change in quantity
Elastic – A small change in price…… leads to a large change in quantity
23
10
13
4 5 11 14
Price
Quantity
12 PM – May 17th, 2012AP Microeconomics Test Review
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Graphing Tax Revenue
S
D
Quantity
Price
P
Q
PT
QT
Tax Revenue
ST
Tax shifts supply Curve – Price up & Quantity down
12 PM – May 17th, 2012AP Microeconomics Test Review
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Firms, Markets & Costs
Accounting π = TR – Explicit CostsEconomic π = Acct π – Implicit Costs
Implicit Costs are Opportunity costsLong-run has no fixed costs
Sunk CostsEconomies of ScaleTC = TFC + TVC
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Total & Average Cost Graphs
P
Q Q
TC
FC
VC
AFC
AVC
ATC
MC
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Profits
P
Q
MC
MR
ATC
P1
Q1
Π determined byMC = MR
Π = (P-ATC)*Q
NB Shut down price for business If Price < Minimum AVC
12 PM – May 17th, 2012AP Microeconomics Test Review
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Perfect Competition (profits)
Industry Firm
PricePrice
P1 P1
Q1 q1Quantity Quantity
Profits MC
ATC
D=MR=AR=P
S
D
S2
Q2
P2 D2
q2
New firms enter b/c profits, Results in P, Industry Q, Firm q, & π = 0
12 PM – May 17th, 2012AP Microeconomics Test Review
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Perfect Competition (losses)
Industry Firm
PricePrice
P1 P1
Q1 q1Quantity Quantity
S
D
MC
ATC
D=P=MR=AR
Losses
D2P2
S2
Q2 q2
Firms leave b/c losses, results in P , Industry Q , Firm q , & π = 0
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Monopoly
MC
ATC
Quantity
D
MR
Price
Q
P
Πmax set by MC=MR
Monopoly P set by demand Curve point above MC=MR
Socially optimal allocation or allocative efficiency at MC = D
Fair return Price ATC=P(0 economic profit)
Deadweight loss (DWL)Difference between Monopoly P & Socially optimal P
12 PM – May 17th, 2012AP Microeconomics Test Review
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Monopolistic Competition
P
Q
MC
ATC
P
QExcess Capacity
MR
Equilibrium atzero economicprofits
ATC tangent to D
12 PM – May 17th, 2012AP Microeconomics Test Review
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Monopolistic Competition
P
Q
MC
ATC
P
Q
MR
Economic profit willcause firms to enter,with more firms inthe market, consumershave more choice &demand for the company decrease
ATC < D
DD2
P2
12 PM – May 17th, 2012AP Microeconomics Test Review
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Monopolistic Competition
P
Q
MC ATC
P
Q
MR
Economic losses willcause firms to exit which will increase demand for companiesstill in business
ATC > D
D
D2
P2
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OligopolyBarriers to entryMay or may not have differentiation
4 Firm ratio Prisoner’s dilemmaDominant Strategy
One choice is always better
Nash Equilibrium Each player know options of
opponent – no need to change
Jack
Confess Don’t Confess
Ji llC
onfe
ss
Don
’t C
onfe
ss
10 year
10 year
Free
Free
20 years
20 years 1 years
1 years
12 PM – May 17th, 2012AP Microeconomics Test Review
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Oligopoly: Incentive to Collude
Game theory appliedOligopolists have a strong incentive to collude and raise their prices.
However, each firm also has an incentive to cheat by lowering price because the demand curve facing each firm is more elastic than the market demand curve.
This conflict makes collusive agreements difficult to maintain.
12 PM – May 17th, 2012AP Microeconomics Test Review
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Factor EconomicsDemand for inputs
LaborResources
MRP = Marginal Revenue ProductMR for factor markets= ΔTR / ΔQ
MRC = Marginal Revenue CostMC for factor markets= ΔTC / ΔQ
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Factor EconomicsIf MRP > MRC
Increase Production
If MRP = MRCMax profitsStop (ideal) Production
If MRP < MRCDecrease production
12 PM – May 17th, 2012AP Microeconomics Test Review
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Factor Economics
Marginal Productivity / Least CostMPA / PA = MPB / PB
Firms produce at a level where all costs are minimized
Derived DemandDemand for products creates or affects the
demand for resources such as labor
12 PM – May 17th, 2012AP Microeconomics Test Review
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Factors & Distribution
Marginal Productivity Theory of Income Distribution
Income allocated by how much production is created
Theory may lead to Income inequality Market Imperfections
12 PM – May 17th, 2012AP Microeconomics Test Review
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Types of Goods
Rivals in Consumption
Yes
Yes
No
No
Excludable
PrivateGoods
NaturalMonopoly
Common Resources
Public Goods
12 PM – May 17th, 2012AP Microeconomics Test Review
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Negative ExternalitiesSupply FailureSuppliers do not have to pay the full value Will supply more b/c
costs paid by others
Costs affect supplyTaxes raise price to public equilibrium
P2
P1
P
Private Value
Social Cost
Private Cost
Q1Q2 Q
Externality Cost
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Positive ExternalitiesDemand FailurePublic not willing to pay full value Benefits or subsidies needed to
induce suppliers to supply at lower price levels
Benefits affect demandSubsidies absorb costs creating public equilibrium
P2
P1
P
PrivateValue
Private Cost
PublicCost
Q1 Q2 Q
External Benefit
12 PM – May 17th, 2012AP Microeconomics Test Review
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Income Inequality
Lorenz Curve Measures ratio between
richest & poorest quintiles.
Gini Index Measures among of
distribution Increasing numbers
(ranges from 0.0 to 1.0) means less equality
12 PM – May 17th, 2012AP Microeconomics Test Review
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Miscellaneous
Taxes
Progressive Increasing Marginal Rates
Proportional
Regressive Decreasing Marginal Rates
Moral Hazard Taking higher risks b/c of
insurance or government bail-outs
Adverse Selection Signaling Only those who need product
would buy it (insurance)