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)
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@@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@@
Perfect Competition | Monopolistic Competition | Monopoly | Oligopoly | |
---|---|---|---|---|
# of firms | Many | Many | 1 | Few |
Type of product | Standard | Differentiated | Unique | Standard or different |
Price control | None | Little | Yes | Some |
Barriers to entry | None | None (few) | High | High |
- 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
Player B | |||
---|---|---|---|
Choice 1 | Choice 2 | ||
Player A | Choice 1 | A1,B1 | A2,B2 |
Choice 2 | A3,B3 | A4,B4 |
- 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)