AP Microeconomics Exam Review Flashcards

Flashcards covering key concepts for the AP Microeconomics exam.

Where should a firm produce in a product market?

Where Marginal Revenue (MR) equals Marginal Cost (MC)

Where should resources be hired in a resource market?

Where Marginal Revenue Product (MRP) equals Marginal Resource Cost (MRC) or Marginal Factor Cost (MFC)

Where is the socially optimal level considering externalities?

Where Marginal Social Benefit (MSB) equals Marginal Social Cost (MSC)

What does SPITE and GOTPEN stand for?

Factors that shift demand and supply curves (excluding price)

What is the Utility Maximization Rule?

MUx/Px = MUy/Py (Consumer's budget should be spent to meet this formula)

What is the Least Cost Rule?

MPL/PL = MPR/PR (Business budget should be spent to hire resources to meet this formula)

What is Normal Profit?

Zero economic profit

What is the Allocative Efficiency condition?

P = MC (or D=MC for Monopoly); also D=S for competitive markets

What is Productive Efficiency?

P = Min ATC

What is a Fair Return?

P = ATC (Zero Economic Profit)

What is the only thing that changes in Perfect Competition(constant cost industry) going from Long-Run to Long-Run?

Quantity in the Industry.

In Imperfect Competition, what happens when MR = 0 ?

Total Revenue is maximized

What range of the demand curve do monopolies produce?

Elastic Range

What does it mean for firms, in an Oligopoly, to be 'Mutually Interdependent'?

Firms' decisions significantly affect each other.

In Perfect Competition, what is the firm?

A 'Price Taker'

In a perfectly competitive labor market, what is the firm/worker?

A 'Wage Taker'

For a Perfectly Competitive firm, if given Average Revenue(AR) but not Price or MR, what should you remember?

MR = D = AR = P

When graphing a perfectly competitive firm (side by side), what should you make sure to do?

Make sure your dots go all the way over from industry to firm

How do you know there is an externality?

By comparing Private to Social (MSB > or < MPB) or (MSC > or < MPC)

How do you know it’s a market failure?

At Q free market compare MSC to MSB (MSC > or < MSB)

How many cost curves does Production externality have?

2

How many benefit curves does Consumption externality have?

2

What does a Negative externality do to production?

Always produces too much (Q free market > Q socially optimal)

What does a Positive externality do to production?

Always produces too little (Q free market < Q socially optimal)

What is a solution for negative externalities?

Per unit tax (decreases output to MSB = MSC Qty) or Govt. regulation

What is a solution for positive externalities?

Per unit subsidy (increases output to MSB = MSC Qty)

Which way does Deadweight loss always point?

To the socially optimal point (MSB = MSC)

What is another name for the Resource market?

Factor market

What does a Lump Sum Tax/Subsidy affect?

Affects ATC, but NOT MC, therefore does not affect Qty

What does a Per Unit Tax/Subsidy affect?

Affects MC and ATC, and therefore quantity (output).

In Absolute/Comparative Advantage, can you have Absolute Advantage in both?

Yes (Input has a lower number, Output has a higher number)

In Absolute/Comparative Advantage, can you have Comparative Advantage in both?

No, ONLY 1 thing per person.

How do you calculate output and input?

Output – O:OO (Other goes over), Input – I:OU (Other goes under)

What is Accounting Profit?

Total Revenue – Explicit Costs

What is Economic Profit?

Total Revenue – Explicit Costs – Implicit Costs

What do we know about accounting profit if a firm is earning zero economic profit?

It is positive.

What is the Law of Diminishing Marginal Returns?

As variable resources (workers) are added to fixed resources (ovens, machinery, tools, factory size, etc.), the additional output produced from each additional worker will eventually fall.

Can Diminishing Marginal Returns occur in the Long Run?

No, because resources are not fixed in the Long Run

What is the Shut Down Rule?

P < AVC (P < Min AVC)

What is Constant Returns to Scale?

Double inputs, get double the output

What is Increasing Returns to Scale?

Double inputs, get MORE than double the output

What is Decreasing Returns to Scale?

Double inputs, get LESS than double the output

What is Economies of Scale?

Long Run ATC decreases as you produce more (Q increases) because of mass production techniques

What is Constant Returns to Scale?

Long Run ATC is as low as it can get (stays flat as you produce more)

What is Diseconomies of Scale?

Long Run ATC increases as Q output increases because the firm gets too big and too difficult to manage

How do you determine if a firm is experiencing economies of scale?

Look to see what is happening with LRATC at the profit maximizing quantity, if the LRATC is falling, then the firm is experiencing economies of scale.

What is the formula for Price Elasticity of Demand?

% change in QTY demanded / % change in price

What is the formula for Price Elasticity of Supply?

% change in Qty supplied / % change in price

How do you determine what Elasticity of Supply or Demand are?

Answer > 1 = elastic, answer < 1 = inelastic, answer = 1 is unit elastic

What is the formula for Cross Price Elasticity?

% change in Qty of product A / % change in price of product B

How do you determine substitutes or Compliments from Cross Price Elasticity?

If the answer is positive = substitutes, if negative = complements

What is the formula for Income Elasticity?

% change in Qty / % change in Income

How do you determine normal or inferior goods from Income Elasticity?

If the answer is positive = normal goods, if negative = inferior goods

To which point does the Deadweight Loss – Imaginary point?

Socially optimal point

What happens at the Socially Optimal Output in a Natural Monopoly?

ATC is still falling

What happens if the government requires natural monopoly to produce at socially optimal level?

Company will have a loss and government will need to subsidize

What are the characteristics of a Price Discriminating monopoly?

Charge every person up to their demand curve,Several prices, More profit, No consumer surplus, No deadweight loss, and Higher quantity = socially optimal quantity

What is a characteristic of Monopolistic Competition in the Long Run?

0 Economic Profit (normal profit)

What is Excess capacity (Monopolistic Competition)?

Gap between the minimum ATC output and the profit maximizing output

What is a key characteristic of Game Theory (Oligopoly)?

Few firms and the firms are “mutually interdependent”

How to tell if the market structure is a Oligopoly?

There are only 2 firms and the firms are mutually interdependent.

What is a Dominant Strategy in game theory?

Best move to make regardless of what your opponent does

What is a Nash Equilibrium in game theory?

The optimal outcome that will occur when both firms make decisions simultaneously and have no incentive to change

How do you find the Nash Equilibrium?

Take the quadrant(s) that has two tick marks after you have figured out the dominant strategy(ies)

List two characteristics of Public Goods.

1) Non Exclusion – Can’t keep others from using it, 2) Non-rivalrous (shared consumption) – If I’m using something, doesn’t hurt your use of it

Why are Public Goods a “market failure”?

Private market will not produce enough private goods due to the “free rider problem.” This is when people benefit without paying

What is a Progressive Tax?

Takes more from the rich – as you make more $, pay a higher % of income in taxes

What is a Regressive Tax?

Hurts the poor – As you make more $, pay a lower % of income in taxes

What is a Proportional Tax?

As you make more $, pay the same % of income in taxes

Assuming a product is sold in a perfectly competitive product market, what is the formula for MRP?

MP x P where P is the price of the product sold

Assuming a product is sold in a market other than perfect competition, what is the formula for MRP?

MP x MR

What does the long run supply curve look like in a constant cost industry?

Horizontal

What does the long run supply curve look like in an increasing cost industry?

Upward sloping (firms bidding up prices)

What is the definition of sunk costs?

Costs that already happened and you can’t get it back. Costs in the past should not affect what you do in the future. You should only consider the marginal benefit and marginal cost of the future decision

Define Economic Rent

The portion of a resource’s earnings that exceed the resource’s opportunity cost