AP Microeconomics Final Exam Review

Opportunity cost

The next best alternative given when a choice is made.

PPC/PPF

Production Possibilities Curve/Frontier.

On the curve = efficient

Inside the curve = inefficient

Outside the curve = unattainable

Can move outward by either trade, a new source of a resource, or technology.

The Law of Increasing Opportunity Costs makes it possible for it to be bowed outward from the origin.

Comparative advantage

The ability of Trading Nation A to produce something at a lower opportunity cost than Trading Nation B

Demand Determinants

-Consumer Income

-Consumer Tastes & Preferences

-Expectations

-Number of Buyers (Population)

-Price of Related Goods

Supply Determinants

-Cost of Inputs

-Expectations

-Government Regulation

-Number of Sellers

-Productivity

-Taxes and Subsidies

-Technology

Ceilings

-Legal maximum on the price at which a good can be sold at

-Price set below market equilibrium makes it binding

-Causes a shortage

-Common for gas/apartments

Floors

-Legal minimum on the price at which a good can be sold at

-Price set above market equilibrium makes it binding

-Causes a surplus

-Used in minimum wages

Normal good

A good for which demand increases when income increases

EX: steak

Inferior good

A good for which demand increases when income decreases

EX: spam

Economic Profit

Calculated by:

Total Revenue - Explicit Costs - Implicit Costs

Law of Diminishing Marginal Returns

Three Stages:

1. Total Product ^ Marginal Product ^

2. Total Product ^ Marginal Product v

3. Total Product v Marginal Product v

Perfect Competition

-Large number of sellers

-Standardized products

-Easy entry/exit

-Price taker

MR DARP

In a perfectly competitive market:

Marginal Revenue = Demand = Average Revenue = Price

MR=MC

Where profit is maximized and loss is minimized in a perfectly competitive market AND in a monopoly

Economic Profit

In a perfectly competitive market:

P>ATC

Economic Loss

In a perfectly competitive market:

P<ATC

Zero Economic Profit

In a perfectly competitive market:

P=ATC

Shut-Down Point

In a perfectly competitive market:

P=AVC

Monopoly

-Single seller

-No close substitutes

-Price maker

-Blocked entry

-Non-price competition

Price Discrimination

-Charging different people different prices for the same good/service

-Must identify and separate consumers

-Buyers must not be able to resell goods to non-members

Cartel

An agreement that is difficult to maintain over time because individual members may find it profitable to cheat

Game Theory

Analyzes the pricing behavior of oligopolists

Nash Equilibrium

-all players choose their optimal actions given the actions of others

-non-cooperative equilibrium

Excess Capacity

Occurs in a Monopolistic Competitive Market when each firm has developed more production capability than is needed, and output is below the ATCmin

Derived Demand

-Occurs in a Factor Market

-The demand for a factor of production

-Derived from the demand for the goods/services it is used to produce

-EX: an increase in demand for new homes causes an increase in demand for new furniture causes an increase in demand for wool

Marginal Revenue Product

-Measure the value of what the next unit of a resource brings to a firm

-Is calculated by MPP x P

MRP=MRC or MRP=W

Hiring point for workers in a Factor Market

Lorenz Curve

-Graphically illustrates the degree of income inequality in a country

Gini Coefficient

Measures the inequality of income distribution

0=complete equality

1=complete inequality

Gini Ratio

Calculated by A/A+B

Progressive Tax

-Income ^ Average Tax Rate ^

-EX: US income tax

Regressive Tax

-Income ^ Average Tax Rate v

-EX: sales tax

Proportional Tax

-Constant tax regardless of income

-EX: flat tax

Positive Externality

-Gives additional benefit to society

-Resources under-allocated

-Not enough of a good thing

-Solutions: voucher/subsidy

Negative Externality

-Gives additional cost to society

-Resources over-allocated

-Too much of a bad thing

-Solutions: have costs internalized/impose a tax