AP Microeconomics - ALL TERMS (Units 1-6)

How do you calculate marginal revenue product?

MRP = Marginal Product (MP) × Marginal Revenue (MR)

What does a firm’s decision to hire a factor of production not depend on?

The average product of the factor input

What are the factors of production

land, labor, and capital

Which of the following will occur in a given labor market when the wage rate rises?

The quantity of labor supplied will increase.

Suppose the demand for automobiles increases. Which of the following explains what happens in the labor market for automobile workers?

The demand for automobile workers increases resulting in higher wages and employment.

Which of the following will result in a decrease in the supply of labor?

An increase in the preference for leisure

A firm is currently producing 3,000 units of output daily by employing 20 units of labor at a price of $100 per unit and 40 units of capital at a price of $40 per unit. The marginal product of the last unit of labor employed is 50, and the marginal product of the last unit of capital employed is 30. In order to minimize its production costs, the firm should do which of the following?

Responses

Employ less labor and more capital because the marginal product per dollar spent on labor is less than the marginal product per dollar spent on capital.

In comparison to a firm in a perfectly competitive labor market, a firm in a monopsonistic labor market typically will hire

fewer workers and pay a lower wage

how to calculate marginal factor cost

ΔTFC / ΔQ

derived demand

demand for factors of production (land, labor, capital) because of a change in the (product) market. (Demand for steel increases because of a demand increase for cars.)

marginal product of labor

change in output associated with adding an additional worker

value of the marginal product (VMP)

marginal product of an input multiplied by the price of the output it produces (slopes downward due to diminishing MP)

marginal profit

vmp-wage

The labor-leisure trade-off

people work because they need to earn a living (they have other interests, obligations, and goal)

substitution effect

occurs when laborers work more hours at higher wages, substiting labor for lesiure (oppurtunity cost of enjoying more leisure means giving up more income)

income effect

occurs when laborers work fewer hours at higher wages, using their additional income to demand more leisure

leisure

normal good meaning that as income increases, workers may use their additional income to demand more leisure

backward bending labor supply curve

occurs when workers value additional leisure more than additional income (offset substitution effect)

what are the changes in the supply of labor?

other employment oppurtunities, the changing composition of the workforce, immigration and migration,

other employment oppurtunites

if a firm offers higher wages, more workers will be willing to work there. Decrease in competition wages increase in supply of firm

the changing composition of the workforce

many more women being employed than a generation ago

immigration and migration

increase supply of (inexpensive) labor

How does the market for labor reach equilibirum

wages = price at which workers are willing to “rent” their time to employers

what does an increase in demand result in?

shortage

what does an increase in supply result in?

surplus

outsourcing of labor

occurs when a firm shifts jobs to an outside company, usually overseas, where the cost of labor is lower

what does outsourcing do in the LR?

benefits domestion consumers & producers since it lowers costs and prices, which enhances social welfare

monopsony

situation in which there is only one buyer (market power, can pay workers less)

economic rent

difference between what a factor of production earns and what it could earn in the next best alternative

how do you decide if you should use more land labor or capital?

divide the VMP, MP, or MRP by the wage or price(use less of the factor with the smallest bang per buck and more of the factor with the largest)

Marginal product

this refers to the change in output as a result of additional labor or units.

Marginal Revenue

this is an increase in total revenue generated by increase in production. Marginal revenue can be generated by producing one more unit of output or selling an additional unit of a good.

MRP vs VMP

MRP is MRxMP and VMP is PxMP

Marginal revenue product

This is an increase in a firm's revenue resulting from adding one more resource unit called the marginal product.

Marginal Resource cost

The amount the total cost of employing a resource increases when a firm employs 1 additional unit of the resource

Where should a firm produce?

where MRP = MRC or as close to it as possible

how do you find MRC?

constant cost (wage or rent)

Why is supply and MRC seperate in a monopsony?

when the firm increases the wage for one worker, they need to increase the wage for all workers) ( when looking at a table for a monopsony, the wage of the max worker is what all workers earn)

How do monopsonies compare to perfect competition?

they hire less workers and pay less

How do you find the quantity and wage in a monopsony?

find where MRC=MRP and bring down to supply because thats how much you have to pay that number of workers

Where is demand and supply from?

demand = firm

supply = individual

When does demand shift?

If something impacted the MRP

What is a monopoly `

1 seller of a product with no substitutes . They have extremely high barriers to entry and are the price makers. They have higher prices and less output than competitive markets

What conditions enable a monopoly?

firm has something unique to sell, it must have a way to prevent competitors from entering the market (patents or deals with the government)

Monopoly power

a measure of monopolies ability to set the price of a g/s

barriers to entry

restrictions that make it difficult for new firms to enter a market (set apart monoploies from regular firms and allow them to enjoy long run economic profits)

What are the natural barriers?

control of resources, problems in raising capital, economies of scale

control of resources

if you have control of a scarce resource, other companies will not be able to find enough of it to compete. extremely effective but difficult

problems in raising capital

monopolies have grown over an extended period and the chance of a new company successfully competing against a monopoly is low

economies of scale

LRATC falls as production expands. create massive cost advantages for a single large firm, making it inefficient for multiple smaller firms to compete,

natural monopoly

occurs when a single large firm has lower costs than any particular smaller competitor

government created barriers

can be intentional or unintentional. Consists of licensing(Creates corruption), patents, and copyright laws (government ensurance that nobody else can copy without permission of creator (stronger incentives for innovation))

price maker

some control over the price it charges

Why is the demand curve downward sloping? (monopoly)

limits monopolists ability to make a profit (many different price-output combos)

Profit maximizing rule for monopolies

MR=MC quantity brought up to demand.

locating profit

difference between the price and atc*Q

why can a monopoly earn longrun profits?

high barriers to entry, such as patents, control over resources, or economies of scale, that prevent other firms from entering the market and competing away those profits

problems of a monopoly

inefficient level of output (charges too much and produces too little & creates DWL, CS is transferred to the monopoly), few choices (restrict options & pay more for what you want, great for company, bad for consumers), encourage firms to lobby for government protection (rent seeking)

rent seeking

occurs when resources are used to secure monopoly rights through the political process (lobbying)

solutions to a monopoly

breaking up the monopoly (eliminating DWL & restricting efficiency, promoting competition, antitrust laws (prevent monopoly protections), reducing trade barriers, regulating markets (policymakers create a more efficient outcome and maximize society’s welfare by regulating monopolists’ prices)

why are natural monopolies permitted to exist?

because they have such high fixed/upfront costs it makes more sense to have 1 firm to give us g/s

Why are demand and MR separate?

to sell an additional unit, the price must be lowered on all units sold, not just the last one. 

where is revenue maximizing qunaity?

when MR intersects the x-axis

why are there profits in the long run for monopolists?

because they have barriers to entry which allows them to have long-run economic profits. Along with that they are the only firm in the industry which allows them to set price and still ensure customers will buy their products.

Per unit subsidies

decrease in MC and atc. Every time the firm makes the g/s they get a subsidy

lump sum subsidy

decrease ATC (fixed costs). one-time payment from the government to make something (could make whatever quantity they want)

allocatively efficient

MC = Demand (where DWL points) (where perfectly competitve firms produce) ( socially optimal) (total welfare max)

Fair return

ATC = Demand (firms break even or have 0 economic profit)

productively efficient

ATC = MC (TC are the lowest)

lump sum tax

increased fixed cost, leaving the profit-maximizing quantity and price unchanged because it doesn't affect marginal cost (MC); however, it reduces the monopolist's total profits (or increases losses) by the tax amount, shifting the Average Total Cost (ATC) curve up

per unit tax

added cost for each unit produced, shifting the Marginal Cost (MC) and ATC curve upward, leading to reduced output, a higher price for consumers, and a larger deadweight loss, making the monopoly even less efficient, though the tax burden is shared between consumers and producers depending on demand elasticity, with consumers paying more if demand is inelastic

what does a monopoly look like

what does a natural monopoly look like

what does a LR competitive monopoly look like

price discrimination

occurs when a firm sells the same g/s at different prices to different groups of customrs (allows firm to make more money by dividing their customers into ateleast 2 groups (must be a price maker))

distinguishing groups of buyers

generate additional revenues by charging more to customers with inelastic demand and less to customers with elastic demand (price sensitive vs willing to pay full price)

Why do you need to prevent resale when trying to price discriminate?

prevent customers who recieved a discount to sell it to another customer willing to pay full price

perfect price discrimination

occurs when a firm sells the same g/s at a unique price to every customer (difficult, not price discrimination acts as a lost oppurunity for revnue)

is there DWL in perfect price discrimination?

no!

is there consumer surplus in price discrimination?

no

total welfare

sum of consumer surplus (the extra benefit consumers get from paying less than they're willing to) and producer surplus (the extra benefit producers get from selling for more than their minimum cost) in a market, representing the total economic benefit or well-being generated from all market transactions, maximized at allocative efficiency

monopolistic competition

is a type of market structure characterized by low barriers to entry, many different firms, and product differentiation

product differentiation

the process firms use to make a product more attractive to potential customers

how much market power do monopolistically competitive firms have?

small amount

how do firms product differentiate?

by style/type (mall stores are tailored to certain groups), location (convience builds pricing power) and quality (fast food vs luxury)

What are some overall monopolistic competition characteristics?

demand is relatively elastic. The firm earning a profit, experiencing a loss, or breaking even is a function of other firms exiting/entering the market

monopolistic competition in the SR

if P>ATC there is a profit, if P<ATC therer is a SR loss

monopolistic competition in the LR

when firms can easily enter/exit a market profit will be 0. In the LR, they will always earn 0 economic profit.

Why are they earning 0 economic profit in the LR of a monopolistically competitive market?

If firms are making losses, some will exit, shifting the demand curve for remaining firms to the right until profits are restored; if they're making profits, new firms enter, shifting demand left until profits disappear. 

Markup

difference between the price the firm charges and the MC of production (only possible when firm enjoys some market power)

What is the difference in prices in mono comp vs perfect comp?

P=ATC is higher in monopolistic competition than in perfect competition; therefore, monopolistic competition produces higher prices

excess capacity

occurs when a firm produces at an output level smaller than the output level needed to minimize ATC

Why can governments not regulate in monopolistic competition?

many firms sell differentiated but similar products (like restaurants or clothing), allowing for easy entry/exit, competition, and consumer choice, which naturally limits excessive pricing or market power, making deep intervention unnecessary and potentially stifling the innovation and variety that benefit consumers

How does product differntiation impact a firm?

significant differentiation increase price, large amounts of excess capacity, and pretty inelastic demand. Less product differentiation does the opposite.

Why do firms advertise?

to increase demand (highlight important info about the g/s, make more people want the product, increase market power & prices)

How does advertising work in monopolistic competition?

it is widespread and the gains go directly to the firm paying for it.

How does advertising work as a monopoly?

does not have to advertise because consumer choices are already limited. Monopolies only really advertise to inform consumers about products & simulate demand (only beneficial if it can cover costs)

What are the negative effects of advertising?

it increase costs (increase ATC & MC) and can be deceitful.

How do you show advertising on a graph?

shift MR and Demand to the right (becomes more inelastic as well). Increase ATC and MC. Can lead to SR profits

Why is product differentiation necessary for monopolistic competition?

how firms gain some control over their prices and a competitive advantage in a market with many sellers