AP Micro Test Review Units 1-6

(1.1) Scarcity

There are unlimited wants with limited resources

(1.1) Microeconomics vs Macroeconomics

Small-scale businesses or households vs. large multinational firms

(1.1) Opportunity Costs and Trade-offs

The second-best option of what is being given up

EVERY opportunity cost that there is when making a decision

(1.2) Three Economic Questions

What is going to be produced?

How will it be produced?

How will output be distributed?

(1.2) Command, Market, and Mixed Economies

Full government decisions in an economy

Market where all decisions are made by privately-owned businesses

Market combining government decisions and public decisions

(1.3) Efficiency and Opportunity Cost

People/firms want the highest efficiency and the lowest opportunity cost

(1.3) Law of Increasing Opportunity Costs

As the production of goods increases, opportunity costs will increase

(1.3) Shifters of the PPC

Change in resource quantity/quality

Change in technology

Change in trade

(1.3) Capital Goods and Future Growth

Things/products that make the consumer goods

If capital goods are increased, there is an increase in products, efficiency, and size (facility)

(1.4) Absolute Advantage

The firm that is able to produce more at a higher efficiency and lower cost

(1.4) Comparative Advantage

The producer that has the lowest opportunity cost

(1.4) Terms of Trade

(Price of exports/Price of imports)*100

A higher percentage means that a country has the ability to import more goods

(1.5) Explicit and Implicit Costs

Traditional out-of-pocket cost

Opportunity cost of making a decision

(1.5) Total Utility and Marginal Utility

Satisfaction you get out of buying something

Change in total utility per additional unit

(1.6) Law of Diminishing Marginal Utility

As consumption increases, there is less enjoyment or satisfaction per unit

(1.6) Sunk Costs

Money or time that is spent that cannot be gained back. Lost resources

(1.6) Utility Maximizing Rule

Allocating money so the last dollar spent on separate things equals the same amount of marginal utility

(2.1) Property Rights

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

(2.1) Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

(2.1) Substitution Effect

the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes

(2.1) Income Effect

the change in consumption resulting from a change in real income

(2.1) Quantity Demanded vs. Demand

Quantity demanded is the amount consumers are able and willing to purchase at each specific price.

Demand is the entire schedule. A change in price changes Quantity Demanded not Demand

(2.1) Shifters in Demand

Tastes and Preferences

Number of Consumers

Price of Related Goods

Income

Future Expectations

(2.2) Law of Supply

Producers offer more of a good as its price increases and less as its price falls

(2.2) Quantity Supplied vs. Supply

When the price of a good changes, and all other factors are held constant, the supply curve is held constant; we simply observe the producer moving along the fixed supply curve. If one of the external factors change, the entire supply curve shifts to the left or right

(2.2/2.3) Shifters of Supply

Price of resources

Number of producers

Technology

Taxes and subsidies

Expectations

(2.3) Elastic

Describes demand that is very sensitive to a change in price

(2.3) Inelastic

Describes demand that is not very sensitive to a change in price

(2.3) Unit Elastic

when the percentage change in price and quantity demanded are the same

(2.3) Total Revenue Test

A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes.

(2.5) Income Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

(2.5) Cross-Price Elasticity of Demand

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

(2.6) Price System

A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices.

(2.6) Resource Allocation

Assigning available resources, or factors of production, to specific uses chosen among many possible and competing alternatives. It involves answering "What to produce" and "How to produce".

(2.7) Shortage

A situation in which quantity demanded is greater than quantity supplied

(Qd>Qs)

(2.7) Surplus

A situation in which quantity supplied is greater than quantity demanded

(Qs>Qd)

(2.8) Price Floors

Government imposed limits on how low a price can be charged

Price is set above equilibrium

(2.8) Price Ceilings

Are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them.

Price is set below equilibrium

(2.8) Deadweight Loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

(2.8) Taxes and Subsidies

A per unit tax is treated by firms as an additional cost of production and would therefore decrease the supply cure, or shift it leftward

A per unit subsidy lowers the per unit cost of production and therefore shifts the supply curve rightward

(2.8) Incidence of Taxes

How the burden of the tax is shared among consumers and producers

(2.9) Autarky vs Trade

a situation in which a country does not trade with other countries vs international trade

(2.9) Tariffs and Quotas

both benefit domestically made products because they reduce foreign competition, either by taxing OR limiting the number of imports/exports

(3.1) Law of Diminishing Marginal Returns

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

(3.1) Total Product

total output produced by the firm

(3.1) Marginal Product

extra output due to the addition of one more unit of input

(3.1) Average Product

the average amount produced by each unit of a variable factor of production

total products/units of labor

(3.2) Total Cost

fixed costs plus variable costs

(3.2) Variable Cost

a cost that rises or falls depending on how much is produced

(3.2) Fixed Cost

a cost that does not change as output is increased or decreased

(3.2) ATC

average total cost

TC/Q

(3.2) AVC

average variable cost

VC/Q

(3.2) AFC

average fixed cost

FC/q

(3.2) MC

marginal Cost

change in TC/change in Q

(3.2) Cost Curves

are economic models and they are used to measure the cost against the output

(3.3) Increasing Returns to Scale

when long-run average total cost declines as output increases

(3.3) Decreasing Returns to Scale

when long-run average total cost increases as output increases

(3.3) Constant Returns to Scale

when long-run average total cost is constant as output increases

(3.3) Economies and Diseconomies of Scale

are any decreases in the long-run average costs that come about when a firm alters all of its factors of production in order to increase its scale of output.

(3.3) Efficient Scale

the quantity of output that minimizes average total cost

(3.4) Economic Profit

total revenue minus total cost, including both explicit and implicit costs

(3.4) Accounting Profit

total revenue minus total explicit cost

(3.4) Normal Profit

the accounting profit earned when all resources earn their opportunity cost

(3.5) Profit Maximizing Rule

All firms maximize profit by producing where MR = MC

(3.6) Economic Loss

the situation in which a firm's total revenue is less than its total cost, including all implicit costs

an economic profit that is less than zero

(3.6) Shutdown Rule

in the short run, the firm should continue to produce if total revenue exceeds total variable costs; otherwise, it should shut down

(3.7) Barriers to Entry

factors that make it difficult and costly for an organization to enter a particular task environment or industry

(3.7) Market Power

the ability of a company to change prices and output like a monopolist

(3.7) Price Takers

buyers and sellers must accept the price the market determines

(3.7) Allocative Efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

(3.7) Productive Efficiency

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.

(3.7) Constant Cost Industry

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

(3.7) Increasing Cost Industry

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward

(3.7) Decreasing Cost Industry

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

(4.1) Monopoly

the exclusive possession or control of the supply or trade in a commodity or service by one firm

(4.1) Oligopoly

a state of limited competition, in which a market is shared by a small number of producers or sellers.

(4.1) Monopolistic Competition

a market structure in which many companies sell products that are similar but not identical

(4.1) Price Maker

a firm that does not have to consider competitors when setting the prices of its products

(4.1) Marginal Revenue Less than Demand

(4.1) Elastic and Inelastic Range of Demand

Price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price--measures how sensitive consumer demand is to change in price.

0 = Perfectly Inelastic (vertical line)

<1 = Relatively Inelastic

1 = Unit Elastic (45 degree downward slope)

>1 = Relatively Elastic

>1000000 = Perfectly Elastic (horizontal line)

(4.2) Natural Monopoly

a market that runs most efficiently when one large firm supplies all of the output

(4.2) Inefficiency

getting less output from inputs that, if devoted to some other activity, would produce more output

(4.3) Conditions of Price Discrimination

monopoly power, market segregation, no resale

(4.3) Effects of Price Discrimination

It can increase the monopolist's profits.

It can reduce deadweight loss.

(4.4) Non-Price Competition

a way to attract customers through style, service, or location, but not a lower price

(4.4) Differentiated Products

Products distinguished from similar products by characteristics like quality, design, location, and method of promotion.

(4.5) Interdependence

A relationship between countries in which they rely on one another for resources, goods, or services

(4.5) Collusion

secret agreement or cooperation

(4.5) Cartels

Unions of independent businesses in order to regulate production, prices, and the marketing of goods.

(4.5) Dominant Strategy

a strategy that is the best for a firm, no matter what strategies other firms use

(4.5) Nash Equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

(5.1) Factors of Production

Land, labor, and capital; the three groups of resources that are used to make all goods and services

(5.1) Factor Payments

the income people receive for supplying factors of production, such as land, labor, or capital

(5.1) Supply for labor

different quantities of individuals that are willing and able to sell their labor at different wages

(5.1) Demand for Labor

the quantities of labor employers are willing and able to hire at alternative wage rates in a given time period

(5.2) Derived Demand

Business demand that ultimately comes from (derives from) the demand for consumer goods.

(5.2) Determinants of Demand

Factors other than price that determine the quantities demanded of a good or service

(5.2) Determinants of Supply

Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.

(5.3) Marginal Revenue Product

The change in total revenue when an additional unit of a resource is employed, other things constant

(5.3) Marginal Factor Cost

The additional cost of employing an additional unit of a factor of production