Micro Test Prep
Your query requests comprehensive, organized notes covering all content discussed for the upcoming test, drawn directly from the sources.
The test focuses heavily on the four market structures, their corresponding graphs, cost concepts, and specific implications of government intervention and efficiency.
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## đź“š Comprehensive Microeconomics Test Review Notes
### I. Test Format and Strategy
* Test Composition: There are 14 questions total [1].
* Difficulty Split: Approximately 9 or 10 of the questions are considered "pretty straightforward" [1].
* Time Management: The test is a "tale of two tests" [1].
* Easy questions should be completed quickly (e.g., in about 20 seconds) [1, 2]. The 9 easy questions should take about 6 or 7 minutes [1].
* This saves time to "double check your math and think through the more complex ones" [1, 2].
* Calculators: A calculator is recommended, although no math requires one, because it might save 20 seconds on the multiple choice section, which you may "really want" [3, 4].
* Answering Questions (Short Answer/FRQ Style):
When asked to explain a concept, use *"boring econ language,"** focusing on curves and shifts, not real-world scenarios [5-7].
Example: Instead of saying a firm can "come up with a tasty new flavor," say they can *"differentiate their product and move their demand curve higher or shift their demand curve outward"** [5, 7].
Example: Instead of saying a subsidy had no effect because the monopolist controls the market, say the *"government subsidy didn't move marginal cost"** [5, 7].
* Study Focus: The most critical skill is the ability to "instantly graph all four market structures, making a profit, making a loss, breaking even" [8]. Understanding how the graph works (the "why") takes an 81 and pushes it into a 94 [9].
### II. Core Content: Market Structures (The 4 Graphs)
The basics of the market structures and their graphs should be "completely second nature" to you [2, 4].
| Structure | Sellers | Product | Entry/Exit | Pricing Power | Core Graph/Curve |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Perfect Competition | Many [10] | Identical [10] | Easy [10] | Price Taker [10, 11] | Mr. DARP (flat demand/MR curve) [12] |
| Monopoly | One [10] | Unique [10] | High Barriers [10] | Price Maker [10, 13] | Downward sloping D and separate MR curve [14] |
| Monopolistic Competition | Many [10] | Differentiated [10] | Easy [10] | Limited Price Maker [10] | Downward sloping D, tangent to ATC in LR [15, 16] |
| Oligopoly | Few [13] | Varies [13] | High Barriers [13] | Interdependent Pricing [13, 17] | Kinked Demand Curve [17, 18] |
#### A. Monopoly
* Profit Maximization / Loss Minimization: Firms produce at the quantity ($Q_{MAX}$) where Marginal Revenue (MR) equals Marginal Cost (MC) [14, 19]. The price is determined by tracing $Q_{MAX}$ up to the Demand (D) curve [14, 19].
* Loss Minimizing: This is the same as profit maximizing, but the Average Total Cost (ATC) curve is above the demand curve at $Q_{MAX}$, resulting in the smallest possible loss [14, 17, 20, 21].
* Long Run Status: Every monopoly graph is considered to be in the long run because nothing forces the monopolist to change, and they can maintain profits forever [22, 23].
* Efficiency & DWL: Monopolies have Deadweight Loss (DWL) because they produce less than the allocatively efficient/socially optimal point (where MC hits D) [24-26]. DWL is the loss of social welfare [26]. The monopolist keeps the price artificially high [15].
#### B. Monopoly: Government Intervention
| Intervention | Curve Shift | Effect on $Q_{MAX}$ and Price |
| :--- | :--- | :--- |
| Lump Sum Tax/Subsidy | Shifts ATC only (Tax $\uparrow$, Subsidy $\downarrow$) [11, 27-31] | No change to $Q_{MAX}$ or price [11, 27, 31, 32]. Only eats into or increases profits [27-30]. |
| Per-Unit Tax/Subsidy | Shifts MC and ATC (Tax $\uparrow$, Subsidy $\downarrow$) [11, 27, 28, 32, 33] | Moves $Q_{MAX}$ and price [27, 32]. Tax: $Q_{MAX} \downarrow$, Price $\uparrow$ [11, 27, 33]. Subsidy: $Q_{MAX} \uparrow$, Price $\downarrow$ [11, 28, 32]. |
#### C. Monopoly: Price Discrimination (PD)
* Goal: To convert Consumer Surplus (CS) into profit [26].
* Definition: You should be able to define PD and explain how it changes the graph [34, 35].
* Perfect Price Discrimination (First-Degree PD): The firm charges each customer the maximum they are willing to pay [31, 34].
The *Demand curve becomes the Marginal Revenue curve** ($\mathbf{P = D = MR}$) [31, 36, 37].
Result: The firm produces at the *Socially Optimal Point** (where D=MC) [31, 38, 39].
Outcome: *NO Consumer Surplus (CS=0)** and NO Deadweight Loss (DWL=0) [31].
#### D. Perfect Competition
* Firm's Price Curve (Mr. DARP): The horizontal price line is equal to Demand (D), Marginal Revenue (MR), Average Revenue (AR), and Price (P) [11, 12, 40].
* Short Run: The firm produces where MR = MC [41]. You must know how to show [41, 42]:
* Profit: Price > ATC [41].
* Break Even: Price = minimum ATC (Zero economic profit) [42, 43].
* Operating at a Loss: Price is between ATC and Average Variable Cost (AVC) (covering fixed costs) [42, 43].
* Shutdown Point: Price drops below AVC (production should drop to zero) [42, 43].
* Long Run Equilibrium: If firms are making a profit, others will enter, increasing supply and lowering the price [40, 41, 44]. This continues until Market Price = Minimum ATC, resulting in zero economic profit (breaking even) [40, 41, 44].
* Demand Relationship: Demand is downward sloping for the competitive Industry [45, 46]. Demand is perfectly elastic (flat) for the competitive Firm [45, 46].
* Efficiency: Perfect competition does not have deadweight loss because it is driven by pure market forces and is efficient [24, 25, 44].
* Graphing Note: You should be prepared to draw the Average Variable Cost (AVC) curve for perfect competition [43, 47].
#### E. Monopolistic Competition
* Short Run: The graph looks like a monopoly [48, 49]. If the firm is earning a profit or a loss, you know it is in the short run [48, 49].
* Long Run: Due to easy entry, firms enter, driving economic profit to zero [16, 48, 49]. Graphically, the demand curve shifts until it is tangent to the ATC curve [15, 16].
* Profit Strategy: Firms can differentiate their product (innovate) to shift their demand curve outward/higher and briefly regain profit [5, 7, 17, 48].
* Efficiency: Monopolistic competition results in Deadweight Loss (DWL). This DWL occurs because product differentiation makes perfect efficiency impossible [16, 24, 35].
#### F. Oligopoly
* Interdependence: In an oligopoly, competitors mean everything and drive market outcomes through interdependent pricing; market forces mean nothing [50, 51].
* Kinked Demand Curve: The demand curve is very elastic up top and very inelastic on the bottom [18, 52].
* Above the Kink (Elastic): If the firm raises its price, quantity consumed drops significantly because customers switch to competitors [18, 52-54].
* Below the Kink (Inelastic): If the firm cuts its price, competitors price match immediately, resulting in little gain in quantity (setting off a price war) [53-55].
* DWL: While technical cost curves (ATC, MC) exist, in this market, DWL is not usually a concern because the focus is on interdependent pricing, not consumer or general market forces [50, 51].
### III. Cost, Product, and Efficiency Concepts
* Long Run Definition: A time period long enough for all costs to be variable [56, 57]. This definition is key, regardless of the actual time span [57].
* Calculating Marginal Cost (MC): You must be able to calculate MC using Total Variable Cost (TVC) [58, 59]:
* $TVC = \text{Average Variable Cost (AVC)} \times \text{Quantity}$ [58, 60].
* $MC = \text{Change in TVC}$ [59].
* Production Function (Total Product/Marginal Product/Average Product):
When *Total Product is at its maximum, Marginal Product is zero** [61, 62].
When Total Product is rising, Marginal Product is *not necessarily** rising (it can shrink) [61, 63].
If *Marginal Product is greater than Average Product**, the Average Product is rising [61, 64].
* Diminishing Marginal Returns: Sets in at the point where Marginal Product starts to dip (e.g., Point C on a product curve graph) [65, 66].
* Economies and Diseconomies of Scale:
* Economies of Scale: Occur when productivity is flat or declining, meaning that for every dollar put in, you are getting at least that dollar back [67, 68].
* Diseconomies of Scale: Start when resource costs (like labor) become greater than the marginal product they provide [67, 69].
* Efficiency:
* Allocative Efficiency (or Socially Optimal Point): Occurs where Marginal Cost (MC) hits Demand (D) [24-26, 70]. This is making what is best for society [70].
* Productive Efficiency: Making what makes the most sense for the producer [70].
* **Profit Types:** Accounting profit is always going to be higher than economic profit [70, 71]. Normal profit will not be on the test [49, 61].
### IV. Price Controls
* Price Ceiling at Socially Optimal Point: If a price ceiling is set at the socially optimal price (where MC hits D), the monopolist will be forced to charge that lower price [72, 73].
* The monopolist will produce where MR = MC at the new ceiling price [72, 73].
Result: The firm will charge the socially optimal *price** but will not produce the socially optimal quantity [72-74].
* The firm may still earn a profit, but if the socially optimal price is below the firm's Average Total Cost, the ceiling could force the firm to take a loss and exit the business [72, 74].