AP MICRO 3-6 Unit Review

Explain the shut down rule

When your price is lower than the AVC, a firm should shut down. this is because now your costs are higher than the fixed costs which is harmful.

If the price is higher than the AVC but lower than the ATC, should a firm still shut down?

No, becuase at least some of the fixed costs are getting covered. They are still making losses in the SR, but eventually firms will leave because they are seeking profit elsewhere. Once firms leave, this creates less competition which would shift the curves to LR equilibrium where they are making normal profit.

What is the equation for Marginal Product

change in TP / change in inputs

When MC is below ATC…

MC pulls ATC down when

When MC is above ATC…

MC pulls ATC up

Define economies of scale

bigger = cheaper; as firms expand, their ATC decreases because mass production is cheaper De

Define diseconomies of scale

As firms get bigger their ATC increases

Accounting Profit

TR - explicit costs

Economic Profit

TR - (Explicit costs - Implicit costs )

Characteristics of Perfect Competition

Price takers, no barriers to entry, small firms, identical products, efficient in the LR, normal profit in the LR

If a firm is making profit in the SR what will happen in the LR?

More firms will enter to make profit, supply shifts right, and price goes down to the min. ATC

If a firm is making losses in the SR what will happen in the LR?

Firms will exit, supply shifts left, price moves up to min. ATC

What is allocatively efficient?

Firms are producing the exact amount Society needs (socially optimal) —> Price = MC

What is productively efficient?

Firms are producing at the lowest possible cost. P = min. ATC

Are perfectively competitive firms efficient in the LR?

yes, p = MC and p = min ATC

List the characteristics of a Monopoly

1 large firm, High Barriers to entry, differentiated products, Demand is greater than MR, Price makers

Are Monopolies efficient?

No they are inefficient becuase they charge a higher price, produce at a higher cost, and don’t produce enough. So they are neither productively efficient or allocatively efficient.

define natural Monopoly

it is natural for only one firm to produce because they can do it at the lowest cost (economies of scale)What re the

What are the 2 ways the government can regulate monopolies?

1) Setting a price ceiling at the SO

2) Fair Return Price ( P = min. ATC)

How is the perfectly price discriminating graph different from a regular monopoly graph?

Demand = MR because you can charge each person differently

What are the characteristics of a monopolistic competition?

Low barriers to entry, some control over price, differentiated products, large number of sellers, a lot of non price competition

Is the monopoly graph and the monopolistic graph the same?

In the short run yes. In the Long run though, the ATC becomes tangent to the demand curve If

If a monopolistic competiition is making profit in the SR, what will happen in the LR?

Profit seeking firms will enter because of low barriers to entry. The demand for each firm will fall until it is tangent to the ATC.

If a monopolistic competiition is making losses in the SR, what will happen in the LR?

Profit seeking firms will exit. The demand for the remaining firms will increase until it is tangent to the ATC.

Are Monopolistic competitions efficient?

No, they do not produce at SO nor do they produce at min. ATC

What is excess Capacity

Something that Monopolistic competitions have in the long run because they choose to maximize profit instead of producing at the lowest cost.

List the characteristics of an oligopoly

few larger firms, mutually interdependent, Price makers, High barriers to entry, identical or differentiated products

If a regular unregulated monopoly started perfectly price discriminating. what would happen to consumer surplus and dead weight loss?

They would equal zero b/c socially optimal and it all turns into producer surplus

what are barriers to entry

1) High start up costs

2) control over key resources

3) government barriers

Do monopolistic competitions experience economies of scale at their profit max. quantity?

Yes, because the ATC is falling which means they can produce more for a lower cost

Define derived demand

the demand for labor is determined by the demand for the product

a market controlled by only 1 buyer is called a…

monopsony

chracteristics of a perfectively competitive labor market

workers have identical skills, wage takers, many small firms are hiring what

what are the shifters for the demand for labor?

1) change in demand for the product

2) change in productivity

3) technological advancements

what are the shifters of the supply of labor?

1) # of qualified workers

2) government regulations

3) cultural expectations

what is the equation for MRP

MP * P or change in TR/ change in inputs

what is the least cost rule?

MPx/Px = MPy/Py

If the government sets a binding min. wage, would the MRP of the last worker increase, decrease, or stay the same?

The MRP would increase. Since they now have a higher min. wage, firms will have to fire workers with lower MRP’s.

chracteristics of a monopsony

one firm is hiring the workers, wage makers, workers are relatively immobile

monopolistically competitive firms experience what in the Long run?

Economies of scale bc the price equals the ATC