AP Microeconomics Unit Review

==Unit 1== ==: Introduction to Economics==

@@1.1 : Scarcity@@

• Economics : study of scarcity and choice
• Individual choice : given scarcity, individuals make decisions about what to do and not to do
• Scarcity : unlimited wants, limited resources (example : land)
• Positive statement : true statement (what is)
• Normative statement : opinionated statement  (what should be)

@@1.2: Resource Allocation and Economic Systems@@

• Market economy : individual producers and consumers decide what/how/and for whom to produce (limited government intervention)
• Command economy : publicly owned, a central authority will make decisions for production and consumption (has government intervention)
• Property rights : establish ownership and grants individuals the right to trade goods/services with each other
• Resources : anything that can be used to produce something else
• Factors of production :
    * land (natural resources),
    * labor (the effort of workers),
    * capital (all manufactured resources),
    * entrepreneurship (risk taking, innovation, and organization)
• Opportunity cost : value of the next-best alternative that you give up to make another choice
• Microeconomics : individuals/households/firms making decisions and how those decisions interact (ex : college vs. a job)
• Macroeconomics : behavior of the economy as a whole (ex: employment)

@@1.3: Production Possibilities Curve@@

• Production possibilities curve (PPC) : illustrates the trade-offs that faces an economy, compares only two goods
• Trade-offs : giving up something for something else
• If the PPC is linear, it has a constant opportunity cost, if it is curved, it has increasing opportunity costs
• Economic growth : a sustained rise in aggregate output and an increase in standard of living (causes are developments in technology, or an increase in resources)
• Productive efficiency : lowest cost possible on the PPC
• Allocative efficiency : the economy allocates resources so consumers are well off as possible, producing what is demanded
• \

@@1.4: Comparative Advantage and Trade@@

• Trade : people split up the work, and provide each other with a good in return for another
• Comparative advantage : lower opportunity cost in the production of a good (you cannot have a comparative advantage in both goods)
• Absolute advantage : higher output

@@1.5: Cost-Benefit Analysis@@

• Terms of Trade : the rate at which one good can be exchanged for another (if the price of a good obtained from trade is less than the opportunity cost of producing it, trade is beneficial)
• Capital goods: goods that make consumer goods (ex. machinery)
• Consumer goods : goods that are consumed (ex. food)

@@1.6: Marginal Analysis and Consumer Choice@@

• Utility : the measure of personal satisfaction (util is a unit of utility)
• Marginal utility : the change in total utility by consumer one additional unit of that good/service
• Principle of diminishing marginal utility : additional units of a good/service add less total utility than the previous units do
• Marginal utility per dollar : MUgood/Pgood (marginal utility of one unit of the good / price of one unit of the good)
• Optimal consumption rule : to maximize utility, marginal utility per dollar spend on each good = service in consumption bundle, MUc/Pc = MUt/Pt

==Unit 2==  ==: Supply and Demand==

@@2.1: Demand@@

• Demand is downwards sloping
• Law of demand : As price increases, demand decreases, and as price decreases, demand increases
• Movement along the curve : change in price
• Shifters of demand :
    * Tastes,
    * related goods (substitutes + complements),
    * income (normal + inferior goods),
    * (# of) buyers,
    * expectation of future prices
    * (TRIBE)
• Substitution effect : as the price of a good increases, consumers substitute the good with another that is cheaper
• Substitutes : good/service that can be used in place of another, when price of one increases, consumers will buy more of the other (ex. coffee and tea)
• Complements : goods/services that are consumed together (ex. hamburgers and buns)
• Income effect : as income increases, people will buy more of normal goods, and less of inferior goods
• Normal good : increase in demand when consumer’s income increases (ex. oreos)
• Inferior good : increase in demand when consumer’s income decreases (ex. off brand oreos)

@@2.2 : Supply@@

• Supply is upwards sloping
• Law of supply : as price increases, quantity supplied also increases
• Movement along the curve : change in price
• Shifters of supply :
    * input prices,
    * (price of) related goods/services,
    * (producer) expectations
    * , number of producers
    * , technology
    * (I-RENT)

@@2.3: Price Elasticity of Demand@@

• Equation : %∆Qd/%∆P
    * 0 = perfectly elastic,
• Midpoint formula : Qd2-Qd1/(Q2d+Qd1)/2 , replace with Qd with price for price
• Inelastic demand : TR correlates direct with price
• Elastic demand = TR correlates inversely with price

@@2.4: Price Elasticity of Supply@@

• Equation : %∆Qs/%∆P
• 0 = perfectly elastic,
• Inelastic : unable to respond to price change
• Elastic : short run
• Extremely elastic : long run

@@2.5: Other Elasticities@@

• Cross price elasticity of demand : %∆Qd of Good A/%∆P of good B
• negative = compliments, positive = substitutes
• Income elasticity of demand : %∆Qd/%∆income
• \
    > 1 = income elastic, <1 = income inelastic, negative = inferior, positive = normal

@@2.6: Market Equilibrium and Consumer and Producer Surplus@@

• Equilibrium : occurs when no one is better off doing something else
• Equilibrium = Qs=Qd
• 
• Price below the equilibrium is shortage
• Consumer surplus : price consumers are willing to pay - actual price
• Producer surplus : actual price -price the producer is willing to sell for

• Demand increase : price and quantity increase
• 
• Demand decrease : price and quantity decrease

• Supply increase : price decreases, quantity increases

• Supply decrease : price increases, quantity decreases

• Double shift : either price or quantity will be unknown
• Deadweight loss (DWL) : transactions that should occur, but don’t because of government intervention (calculate the area = triangle formula, ½(base x height)

• \

@@2.7: Market Disequilibrium and Changes in Equilibrium + 2.8: The Effects of Government Intervention in Markets@@

• Shortage : Qs < Qd, price is lower than equilibrium
• Surplus : Qs > Qd, price is above equilibrium
• Price floor : minimum price a supplier can charge, price is set above equilibrium (causes shortage)
• Price ceiling : maximum price a supplier can charge, price is set below equilibrium (causes surplus)

• Double shift rule : when supply and demand both shift, either price or quantity will be unknown

• Quota : upper limit of a quantity that can be bought or sold (known as quantity control)
• License : gives an owner the right to supply a good/service
• Demand price : the price at which consumers will demand that quantity
• Supply price : the price at which producers will supply that quantity
• Quota rent : difference between demand price and supply price

@@2.9: International Trade and Public Policy@@

• Tariffs : tax placed on a good that is imported or exported
• Import quota : restriction on the quantity of a good that can be imported

==Unit 3:== ==Production, Cost, and the Perfect Competition Model==

@@3.1: The Production Function@@

• Production function : relation between the quantity of inputs a firm uses and the quantity of output it produces
• Fixed input : an input whose quantity doesn’t change
• Variable input : an input whose quantity can change
• Long run : time period in which all inputs can be variable
• Short run : time period in which at least 1 input is fixed
• Marginal product : change in overall output when input changes
• Marginal product of labor (MPL) : ∆Q/∆L
• Diminishing marginal returns : as input increases, the output of each input will be less than the previous input
• Output : quantity produced
• Rental rate : price of capital
• Capital : goods that are used to produce goods/services

@@3.2: Short-Run Production Costs@@

• Fixed cost : cost that doesn’t change with amount of output produced (ex. oven)
• Variable cost : cost that changes with amount of output produced
• Total cost : fixed cost + variable cost
• Marginal cost : cost difference of one additional unit of output (∆TC/∆Q)
• Average fixed cost (AFC) : FC/Q
• Average variable cost (AVC) : VC/Q
• Average total cost (ATC) : TC/Q

@@3.3: Long-Run Production Costs@@

• Long run average total cost (LRATC) : same as short run ATC, but bigger
• Economies of scale : LRATC declines as output increases
• Diseconomies of scale : LRATC increaess as output increases
• Constant returns to scale : output increase directly in proportion to an increase in all inputs (ex. input doubles, output also doubles)

@@3.4: Types of Profit@@

• Economic profit : revenue - explicit cost - implicit cost, or accounting profit - implicit cost
• Accounting profit : revenue - explicit cost
• Implicit cost : not an actual cost, a cost that you could’ve been earning (ex. if you own a restaurant, the implicit cost would be the salary you would have earned as being a chef working in a different restaurant)

@@3.5: Profit Maximization@@

• MR = MC
• If you cannot have MR=MC, MR>MC

@@3.6: Firms’ Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market@@

Short Run:

• Shutdown rule : as long as P > AVC, continue to produce
• If AVC > P : shutdown
• Firms can make profit or losses

Long Run :

• Exit rule : if P < ATC, exit the market
• Firms make normal profit ($0), unless monopoly or oligopoly

@@3.7: Perfect Competition@@

• Many firms, identical products, low/no barriers to advertisement
• Price takers
• Long run will have normal profit
• Short run can have either profit or loss

==Unit 4:== ==Imperfect Competition==

@@4.1: Introduction to Imperfectly Competitive Markets@@

• Common barriers to entry : control of scarce resources, legal barriers, high startup costs

@@4.2: Monopoly@@

• Only producer of a good, has no close substitutes
• Downwards sloping demand curve
• Quantity is produced : @ MR = MC
• Price is : MR=MC, up to demand
• Supply curve : where MC > AVC
• Allocatively efficient due to them producing at MR=MC
• Productively inefficient because they don’t produce at the minimum of the ATC
• Natural monopoly : has large fixed costs, and long economies of scale, has downward sloping ATC curve
• Natural monopoly production point : MR=MC
• Government will correct by forcing them to set price : @ ATC=D

@@4.3: Price Discrmination@@

• To be able to price discriminate, you need market power
• Imperfect price discrimination : chargine consumers different prices based on the buyer’s willingness to pay
• Perfect price discrimnation : charges all consumers the maximum they are willing to pay, no deadweight loss, produce @ P=MC
• Example : resellers, coupons, bulk buying (costco), etc.

@@4.4: Monopolistic Competition@@

Characteristics

• Combines features of both a monopoly and perfect competition
• Many sellers and differentiated products
• Will use advertising to make demand more inelastic + differentiate product
• Makes profit in short run, normal profit in long run
• Allocatively inefficient (P does not equal MC)
• Productively inefficient (does not produce @ minimum of ATC, until long run)
• Downwards sloping demand curve
• Produce at MR = MC, price is MR = MC up to demand

Long Run

• Normal profit in long run
• Short run profits will attract new firms to join, which decreases the demand until the demand Curve is tangent to ATC, causing normal profits in long run
• In long run, they produce in region where economies of scales exist, because they produce in declining portion of ATC

@@4.5: Oligopoly and Game Theory@@

Oligopoly Characteristics

• Small number of firms, standard or differentiated product
• Interdependent : all the actions that a firm takes will affect the other firms in the oligopoly (if They ask why the market is an oligopoly, say it’s because they’re interdependent)
• Cartels : a group that agrees to control the price and output of a product (often form in oligopoly)
• Collusion : working together to maximize profit
• Graph is almost identical to monopoly (you will never be asked to draw them)
• Also produce same quantity and price of monopoly

Game Theory

• Payoff matrix : represents the payoff to each player to show combinations of given strategies

• Dominant strategy : the strategy that has a better payoff regardless of what strategy the opponent chooses
• Nash equilibrium : point where both players can do no better than the other given the choice of their opponent

==Unit 5: Factor Markets==

@@5.1: Introduction of Factor Markets@@

• Derived demand : the demand from a resource is derived by product demand
• Marginal revenue product (MRP) : the additional revenue that is generated by an additional resource/worker
• Marginal factor cost (MFC) : the additional cost of an additional resource/worker
• Least cost rule : marginal product of labor/price of labor = marginal product of capital/price of capital (MPL/PL=MPK/PK)
• Buy more of the one with a higher sum, and less of the one with a smaller sum (to explain, as you increase, diminishing marginal returns kicks in)
• 

@@5.2: Changes in Factor Demand and Factor Supply@@

• Shifters of demand for labor
    * Change in demand for the product
    * Change in the productivity of the resource
    * Change in price of substitutes and complements
• Shifters of supply for labor
    * # of qualified workers (ex. immigrants)
    * Government regulation
    * Leisure (causes supply to shift to left)

@@5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets@@

• Market curve : standard supply and demand curve
• Equilibrium wage in the market : establishes the wage that firms will pay workers
• MRP=MRC!!!!
• will not hire if MRC>MRP

@@5.4: Monopsonistic Markets@@

• Many sellers, one buyer
• Monopsonies pay a lower wage and hire less than perfect competition
• MRP=MFC
• MFC > supply
• example of imperfect competition
• 

==Unit 6: Market Failure and the Role of Government==

@@6.1: Socially Efficient and Inefficient Market Outcomes@@

• Socially efficiency is when resources are allocated effectively
• MSB=MSC !!
• Allocatively Efficient Points
    * Perfectly competitive market : S=D, MB=MC
    * Perfectly competitive firm : P=MC
    * Perfectly competitive labor market : W=MRP (total economic surplus : MSC=MSB)
• Causes of Market Failure
    * Market power (imperfectly competitive markets)
    * Asymmetric information (lack of info provided by buyers and sellers)
    * Positive and negative externalities
    * Insufficient production of public goods
• Government policies used to get rid of DWL
    * Taxes
    * Subsidies
    * Reguations
    * Public prodivions
• Market failure : exists when firms produce @ MPC=MPC, S=D
• The government tries to get them to produce @ MSC =MSB

@@6.2: Externalities@@

• Externality : when external cost/benefit is placed on members of society who did not pay for them
• MSB does not equal MSC
• Negative externality : when someone uses a product, it decreases the benefit of others (ex. smoking), MSC > MPC (correct with per unit tax)

• Positive externality : when one uses a product, others benefit  (ex. education) MSC < MPC (correct with subsidy)

@@6.3: Public and Private Goods@@

• Rivalrous good : if someone consumers a product, others cannot
    * Rivalrous : food, shoes, etc
    * Nonrivalrous : national defense, fireworks, etc
    * Somewhere in middle : schools, roads, etc
• Excludable good : non payers can be prevented from enjoying the benefits
    * Excludable : food, school, etc
    * Nonexcludable : national defense, air, etc
• Public goods : underproduced due to freeloader problem
• Examples : national defense, law enforcement, etc
• Freeloader problem : people can enjoy the benefit of a good/service without paying
• Government will provide subsidies to producers
• Private goods : goods produced by private markets, can be excludable

@@6.4: The Effects of Government Intervention in Different Market Structures@@

• Causes of inefficient markets
    * Market power
    * Externalities
    * Nonrival and nonexcludable goods (public goods)
• Forms of government intervention
    * Taxes
    * Subsidies
    * Price floors/ceilings
    * Regulation
• Per unit subsidy : gives benefits per unit
    * Perfect competition : MC, ATC, AVC decreases, price doesn’t change (price taker)
    * Monopolistic competition : MC, ATC, price decreases (price maker @ MR=MC)
• Lump sum subsidy : gives benefit no matter how many units
• Taxes will always shift supply curve to the left in long run, profits decrease
• Per unit tax : increase MC, ATC, and AVC
    * Perfect competition : MC, ATC, AVC increases, price doesn’t change (price taker)
    * Monopolistic competition : MC, ATC, price increases (price maker @ MR=MC)
• Lump sum tax : only increase ATC
• won’t change output level

• Non price regulation : works like taxes, they ensure competition/environmental protection/health and safety
• Antitrust policy : promote competition and prevents monopolies
• Antitrust laws
    * Lawsuits
    * Price controls
    * Subsidies
• Price ceiling : sets minimum price
    * Perfect competition : causes shortage
    * Monopolistic competition : becomes MR curve, price and output decreases
• Price floor : sets maximum price
    * Perfect competition : leads to surplus
    * Monopsony : wages go up and workers go up

6.5: Inequality

• Income distribution : measures % of income that goes to individuals in different percentiles/brackets
• In a system with perfectly equality : everyone would receive equal shares of income
• Income : wages, rent, interest, profit
• Lorenz curve : measures the distribution of income equality  (you want to be as close of possible to the perfect equality line as possible)
• 
• Gini coefficient : A/(A+B)
    * Closer to 0, more equality
    * Closer to 1, the more inequality
• Causes of income inequality
    * Supply + demand in labor market
    * Human capital
    * Discrimination
    * Inheritance
    * Bargaining power
    * Etc
• Policies to address inequality
    * Taxes + transfers
    * Minimum wage laws
    * Anti-poverty program
    * Income protection program
    * Scholarships
• Taxes :
    * Proportional : everyone pays the same percentage of their income (no impact on income distribution)
    * Progressive : taxes are higher % on people earning a higher income (reduces income inequality)
    * Regressive : taxes are lower % on people earning a higher income (increases income inequality)