AP Micro

Command Economy

state or government choses how to distribute G&S

Market (Capitalist) Economy

individual firms and consumers chose how G&S distributed

prices determines who gets goods

Utility Maximization Formula

(marginal utility of good x / price of good x) = (marginal utility of good y / price of good y)

Shifters of Demand

(R) Related Goods: substitutes (POS) & compliments (NEG)

(I) Income: normal good (POS) & inferior good (NEG)

(C) Number of Consumers (POS)

(E) Expectation of Future Price (POS)

(T) Tastes/Preferences (POS)

Shifters of Supply

(R) Related Goods in Production: sub (NEG) & comp (POS)

(I) Input Prices (NEG)

(P) Number of Producers (POS)

(E) Expectations of Future Price: SR (NEG) & LR (POS)

(T) Technology (POS)

(T) Tax (NEG) & Subsidy (POS)

What happens to Price and Quantity when S & D shift together?

Price INDETERMINATE

Quantity DETERMINANT

What happens to Price and Quantity when S & D shift opositely?

Price DETERMINANT

Quantity INDETERMINATE

D↑, S↑

P indeterminate

Q↑

D↓, S↓

P indeterminate

Q↓

D↑, S↓

P↑

Q indeterminate

D↓, S↑

P↓

Q indeterminate

Percent Change

(new - old / old) *100

Price Elasticity of Demand (PED)

% change in QD / % change in P

Elastic: PED > |1|

Inelastic: PED < |1|

Unit Elastic: PED = |1|

Perfectly Inelastic: PED = 0

Perfectly Elastic: PED = ∞

Total Revenue Test

If Price and TR direct: DEMAND INELASTIC

If Price and TR inverse: DEMAND ELASTIC

Price Elasticity of Supply (PES)

% change in QS / % change in P

Elastic: PES > |1|

Inelastic: PES < |1|

Unit Elastic: PES = |1|

Perfectly Inelastic: PES = 0

Perfectly Elastic: PES = ∞

Cross-Prices Elasticity (XED)

% change in QD of good A / % change in P of good B

Substitues: XED is POS(+)

Compliments: XED is NEG(-)

Income Elasticity (YED)

% change in QD / % change in Y

Normal Good: YED is POS(+)

Inferior Good: YED is NEG(-)

Elasticity of demand when MR is positive

Elastic

Elasticity of demand when MR is negative

Inelastic

Consumer Surplus

Willingness to pay - price

Producer Surplus

Price - willingness to pay (cost)

Tax Incidence (Burden of Tax)

Demand MORE Inelastic than Supply: Consumers pay more

Supply MORE Inelastic than Demand: Producers pay more

Relationship of Marginal and Average Product

AP < MP, AP↑

AP > MP, AP↓

AP = MP, AP max.

Accounting Profit

Total Revenue - Explicit Cost

Economic Profit

Total Revenue - (Explicit + Implicit Costs)

Normal Profit

Economic Profit = 0

Profit Maximization

MR = MC

Total Revenue Maximized when MR =

MR = 0

Short Run Shut Down Rule

MR < AVC, shutdown

Long Run Exit Market Rule

MR < ATC, leave market

Perfect Competition Characteristics

-Many firms

-identical products

-low barriers to entry

-price takers

-LR normal profit

-alloc. eff. & prod. eff. in the LR

Constant Cost Industry

From LR to dif. LR, equil. price stays the same

Increasing Cost Industy

From LR to dif. LR, equil. price increases

Allocative Efficiency

socially optimal quantity of goods produced

P = MC

Productive Efficiency

goods produced at lowest possible cost/using all resources eff

P = min. ATC

Monopoly Characteristics

-one firm

-unique product

-high barriers to entry

-price makers

-LR positive profit

-inefficient

Regulation for Natural Monopoly

1) Price ceiling @ Fair Return (normal profit) D = ATC

2) Subsidize for Socially Optimal Price (alloc. eff.) D = MC

Price Discrimination in terms of efficiency

Makes ALLOC. eff. but NOT PROD. eff

Monopolistic Competition Characteristics

-many firms

-differentiated products

-low barriers to entry

-some price control

-LR normal profit

-inefficient

-excess capacity

Requirements for Price Discrimination

1) Market power/control over price

2) Able to segment the market/divide up ppl to know what to change

3) Prevent resale

Excess Capacity

when a firm CAN produce at a lower cost but it holds back production to maximize profit

Oligopoly Characteristics

-few firms

-identical + differentiated products

-high barriers to entry

-price makers

-LR positve profit

-inefficient

-Interdependent

Nash Equilibrium

outcome where both firms have no incentive to change

Best Outcome

outcome with highest joint profit

Cartel/Overt Collusion

oligopoly firms openly join and collude to restrict output and act like a monopoly, illegal

Tacit Collusion & Price Leadership

unspoken understanding that firms will act together

Per Unit Tax Affects on Mkt. Structures

shift MC + AVC + ATC UP --> Equil. Quantity LEFT

Lump Sum Tax Affects on Mkt. Structures

shift only ATC UP --> Equil. Quantity Stays SAME

Who are sellers and buyers in factor market?

Buyers: Firms demanding

Sellers: Households supplying

Marginal Factor Cost (MFC)

the cost paid by the firm to hire an additional worker/resource

change in total cost / change in inputs

*supply curve

Marginal Revenue Product (MRP)

MP * MR = MRP

the revenue a firm gains when it hires an additional worker/resource

change in TR / change in inputs

*demand curve

Total Factor Cost

# of workers * wage rate

Profit Maximizing Quantity of Workers

MRP = MFC

Determinants of MRP/Factor Demand

1) Derived Demand (POS)

2) Productivity (POS)

3) Output Price (POS)

Determinants of MFC

(O) Number of Options (NEG)

(L) Leisure Time (NEG)

(D) Distribution of Age

(I) Immigration (POS)

(E) Education/Time in School

Perfectly Competitive Labor Market Characteristics

-many small firms hiring

-many people applying w/ identical skills

-firms wage takers

-wage constant

Least Cost Rule (for perfect comp labor mkt)

c = capital

l = labor

MPc/Pc = MPl/Pl

like marginal analysis

Monopsony Labor Market Characteristics

-one firm hiring

-workers relatively immobile

-firm is wage maker

-wage must inc. to hire additional workers

-W < MRP --> mkt. failure

-hire FEWER workers than P.C.

-pay LOWER wages than P.C.

Value of the Marginal Product (VMP)

*only perfect comp.

VMPl = MPl * P

Public Sector

part of the economy that is primarily controlled by the government

Private Sector

part of the economy that is primarily controlled by private individuals and companies that seek profit

Pure Public Goods

-non-excludable

-non-rivalry

-Exg: National Defense

-suffers free rider problem

Private Good

-excludable

-rivalry

-Exg: orange

Artificially Scarce Good

-excludable

-non-rivalry

-Exg: Netflix

Common Resource

-non-excludable

-rivalry

-pond for fishing

-suffers tragedy of the commons

Market Failures

1) Public Goods

2) Externalities

3) Monopolies

4) Income Inequality

Antitrust laws/policies

PREVENT monopolies and PROMOTE competition

GINI Coefficient

*reference graph

A / A+B

closer to 0 the more equal aka lower number better