AP Econ fortner final exam review

What is an opportunity cost?

- the next best alternative given up when a choice is made

What economic concept does the PPC illustrate?

- the opportunity costs

- shows alternative ways to use resources

Why is the curve bowed outward?

law of increasing opportunity costs

What moves (shifts) the curve outward?

trade, new source of resource, technology, education

What is comparative advantage?

the ability of one trading nation to produce something at a lower opportunity cost than that of another trading nation

What are the demand determinants?

Consumer Income, Tastes & Preferences, Expectations, Number of Buyers, Price of Related Goods

What are the supply determinants?

cost of inputs, government regulation, taxes and subsidies, number of producers, productivity, technology, expectations

When demand increases (DSPQ)

^ - ^ ^

When demand decreases (DSPQ)

V - V V

When supply increases (DSPQ)

- ^ V ^

When supply decreases (DSPQ)

- V ^ V

What is a price ceiling?

sets a legal maximum

What results in the market price celing?

binding prices causes quantity demanded to exceed quantity supplied results in a SHORTAGE

What is a price floor?

sets legal minimum

What results in the market price floor?

binding price floor causes quantity supplied to exceed quantity demanded resulting in a SURPLUS

What is a normal good?

goods that consumers demand more of when their incomes rise, people use this in their everyday life

What is an inferior good?

goods that consumers demand less of when their incomes rise, not a necesity

What is economic profit?

did we use resources well, firms total revenue minus all opportunity costs (explicit & implicit) of producing

What is the Law of Diminishing Returns?

how the marginal production of a factor of production starts to progressively decrease as the factor is increased

How do you identify the worker where diminishing returns occurs?

when marginal product begins to decrease

How do you identify the worker where negative returns occurs?

when marginal product turns to a negative number

What is an input? (consumer behavior and costs)

any resource used to create goods & services

What is an output? (consumer behavior and costs)

quantity and quality of goods or services produced in a given time period

What are the charcteristics of perfect competition?

large number of sellers, standardized product, easy entry and exit, price taker

What do the letters in MR DARP represent?

since the firm is a price taker, the firms demand curve is horizontal at the market price

Marginal revenue = demand

Average revenue = price

What is the Profit-maximizing rule of perfect competition?

MR = MC

Profit is maximized or loss minimized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

What is economic profit?

total revenue - explicit costs - implicit costs

What is economic loss?

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

What is zero economic profit?

normal profit, how well resources are being used relative to all possible options

What is shut-down profit?

when the marginal profit becomes negative

What are characteristics of monopoly?

single seller, no close substitutes, price maker, blocked entry, non-price competition

What is profit maximizing point of monopoly?

MR=MC, output is at that point & price is up demand curve

What is price discrimination?

charging people different prices

What criteria must be met in order for price discrimination to be effective?

1. seller should have power to control the price (be a monopolist)

2. firms must be able to seperate buyers on their WILLINGNESS to pay for the product or their elasticity of demand (high price for inelastic demand, low price for elasticity demand)

3. must not be able to resell the good

4. must have downward sloping demand curve

5. little to no cost difference

What is a cartel? Why do they not work?

oligopolists can increase their profits and they are hard to run because individual members may find it profitable to cheat on agreements

What is Game theory?

the pricing behavior of oligopolists, the output of an oligopolist (amount to produce)

How do you find the dominant strategy?

the best strategy for one player regardless of the strategy the other player follows

What is Nash Equilibrium? How do you find it?

- no incentive to choose another strategy, non-cooperative equilibrium

- its the one where the numbers are the same

What is excess capacity?

- Each firm has developed more production capability than is needed. Output is below the minimum ATC output rate

- could produce more but producing more is not achievable at this time

What is derived demand?

The demand for a factor of production used to produce another good or service

How do you find Marginal Revenue Product?

- MPP times price

- measures the additional revenue by adding one more unit of a resource

How do you determine the number of workers to hire?

its the profit maximizing resource employment, firm hires up to MRP=MRC, MRP=W

What is progressive tax?

A tax for which the percentage of income paid in taxes increases as income increases

What is regressive tax?

A tax for which the percentage of income paid in taxes decreases as income increases

What is proportional tax?

The percentage of tax remains the same.