units 1-6 econ final review

12th grade ap microeconomics

economics

- science of scarcity
- study of choices
- social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants

scarcity

the condition in which our wants are greater than our limited resources

positive statements

- facts
- avoids value judgements (what is)

normative statements

- opinions
- value judgements (what ought to be)

marginal

- additional
- additional benefit ≥ additional cost

economic assumptions

- society wants are unlimited but resources are limited (scarcity)
- every choice has a cost/trade-off
- maximizers
- MC = MB

trade offs

alternatives that we give up whenever we choose something else (opportunity cost)

opportunity cost

the most desirable alternative given up as a result of a decision (second best option)

product market

- firms sell
- households buy

factor/resource market

- firms buy
- households sell

factors of production

capital, land, labor, entrepreneurs

production possibilities curve/frontier

- shows alternative ways that an economy can use its scare resources
- demonstrates scarcity, tradeoffs, opportunity costs, and efficiency

production possibilities curve/frontier assumptions

- only two goods can be produced
- full employment of resources
- fixed resources (ceteris paribus)
- fixed technology

constant opportunity cost

resources are easily adaptable for producing either good

increasing opportunity cost

- resources are not easily adaptable to producing both goods
- as you produce more of any good, the opportunity cost will increase

shifters of production possibilities curve/frontier

- resource quantity or quality
- technology
- trade

productive efficiency

- products are being produced in the least costly way
- point on PPC

allocative efficiency

- products being produced are the ones most desired by society
- optimal point on PPC

per unit opportunity cost

opportunity cost/ units gained

absolute advantage

- producer that can produce the most output or requires the least amount of inputs/resources
- input: smallest #
- output: largest #

comparative advantage

- producer with the lowest (per unit) opportunity cost
- input: cross-add -> smallest #/ other goes under
- output: cross-add -> largest #/ other goes over

economic questions

- WHAT goods and services should be produced?
- HOW should these goods and services be produced?
- WHO consumes these goods and services

economic system

method used by a society to produce and distribute goods and services

command (centrally-planned) economy

gov owns resources and decides what to produce, how much, and who will receive it

capitalism/ free market system

- laissez faire: little gov involvement
- individuals own resources and determine the economic questions
- ppl can make profit = incentive to produce quality items efficiency
- wide variety of goods
- competition and self-interest regulate economy

invisible hand

society's goals will be met as individuals seek their own self-interest

demand

different quantities of goods that consumers are willing and able to buy at different prices

law of demand

- inverse relationship between price and quantity demanded
- occurs bc of substitution effect, income effect, and law of diminishing marginal utility

substitution effect

product price increases = consumer buys more of substitute product and less of that product (and vice versa)

income effect

produce price decreases = consumers buy more

law of diminishing marginal utility

consuming more units = additional satisfaction from each additional unit eventually decreases

utility

satisfaction

market demand

summation of the consumers' demand

shifters of demand

anything but price

substitutes

Px↑ = Dy↑ (direct relationship)

complements

Px↑ = Dy↓ (inverse relationship)

normal

income↑ = D↑ (direct relationship)
- goods you buy when you have money

inferior

income↑ = D↓ (inverse relationship)
- goods you buy when your poor

substitutes

- goods used in place of another
- ex: pepsi and coke

complements

- two goods that are bought and used together
- ex: skis and ski boots

supply

different quantities of a good that sellers are willing and able to sell (produce) at different prices

law of supply

direct/positive relationship between price and quantity supplied

shifters of supply

anything but price

subsidies

- gov payment that supports market
- supply of a good increases

consumer surplus

- difference between what you are willing to pay and what you actually pay
- CS = buyer's maximum - price

producer's surplus

- difference between the price the seller received and how much they were willing to sell it for
- PS = price - seller's minimum

unit elastic

consumer surplus and producer surplus is balanced

surplus

producers lower prices

shortage

producers raise prices

double shifts

either price or quantity will be indeterminate

elasticity of demand

- measurement of consumers responsiveness to a change in price
- helps firms determine prices and sales
- helps gov decide how to tax

inelastic demand

- not sensitive to price change
- ppl will continue to buy it regardless of price
- elasticity coefficient <1

elastic demand

- sensitive to price change
- price change = quantity demanded changes a lot

elastic demand

P↑ = TR↓ (inverse relationship)

inelastic demand

P↑ = TR↑ (direct relationship)

unit elastic

P↑ = TR—

elastic

positive marginal revenue

total revenue

price x quantity

elastic demand

P↑ = TR↓ (inverse relationship)
- total revenue test

inelastic demand

P↑ = TR↑ (direct relationship)
- total revenue test

price elasticity of supply

how sensitive producers are to a change in price

cross price elasticity of demand

- how sensitive a product is to a change in price of another good
- shows if goods are substitutes or complements

complements

coefficient = negative (shows inverse relationship)
- cross price elasticity

substitutes

coefficient = positive (shows direct relationship)
- cross price elasticity

income elasticity of demand

- how sensitive a product is to a change in income
- shows if goods are normal or inferior

inferior

coefficient = negative (shows inverse relationship)
- income elasticity

normal

coefficient = positive (shows direct relationship)
- income elasticity

price ceiling

maximum legal price a seller can charge

price floor

minimum legal price a seller can sell

excise tax

per unit tax on producers

MB = MC

when to stop consuming

utility maximization

accountants

explicit costs only

economists

explicit costs and implicit costs

explicit costs

- payments paid by firms for using the resources of others
- out of pocket costs
- ex: rent, wages, materials, electricity bills

implicit costs

- opportunity costs that firms "pay" for using their own resources
- ex: time

production

converting inputs into outputs

inputs

- resources used to make outputs
- also called factors

total physical product (TP)

total output or quantity produced

marginal product (MP)

- additional output generated by additional inputs (workers)
- ΔTP/ Δinput

average product (AP)

- output per unit of input
- TP/ units of labor

law of diminishing marginal returns

- as resources (workers) are added to fixed resources (machinery), the additional output produced from each new worker will eventually fall
- short run concept bc of fixed resources

stages of returns

- increasing marginal returns
- decreasing/diminishing marginal returns
- negative marginal returns

increasing marginal returns

- MP rising
- TP increasing at an increasing rate

decreasing/diminishing marginal returns

- MP falling
- TP increasing at a decreasing rate

negative marginal returns

- MP is negative
- TP decreasing

accounting profit

total revenue - accounting costs

economic profit

total revenue - economic costs

short run

period in which at least one resource is fixed

long run

- all resources are variable
- no fixed resources

total costs

- total fixed costs (FC)
- total variable costs (VC)
- total costs (TC)

per unit costs

- average fixed costs (AFC)
- average variable costs (AVC)
- average total costs (ATC)
- marginal cost (MC)

fixed costs

- costs for fixed resources that don't change with the amount produced
- ex: rent, insurance, managers, salaries

average fixed costs

fixed costs/ quantity

variable costs

- costs for variable resources that do change as more/less is produced
- ex: raw materials, labor, electricity

average variable costs

variable costs/ quantity

total cost

sum of fixed and variable costs

average total cost

total costs/ quantity

marginal cost

- additional costs of an additional output
- U-shaped bc of diminishing marginal returns

marginal cost

Δtotal costs/ Δquantity