AP_Micro_Review - AP MICRO AP ECONOMICS ECONOMICS EXAM REVIEW EXAM Production Possibility Curve A R o b o t s B C F W D E Shoes Land Labor Capital and

AP_Micro_Review - AP MICRO AP ECONOMICS ECONOMICS EXAM...

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Unformatted text preview: AP MICRO AP ECONOMICS ECONOMICS EXAM REVIEW EXAM Production Possibility Curve A R o b o t s B C F W D E Shoes Land, Labor, Capital and Entrepreneurship Resource or factor Market Resource Money Payments Businesses Households Money Payments Product Market Goods and Services Land, Labor, Capital & Entrepreneruial Ability to bs and govt Resource Money Payments paid by bs. and govt Bs. Taxes Businesses Taxes Households Government Subsidy Transfers Money Payments for goods and services from government and households Goods and Services for Households and Government Allocative Efficiency P MC MB Qop Q Market Equilibrium Market P r i c e Supply Pe Demand Qe Quantity A change in Demand versus a change in the Quantity Demanded the Change in Demand Change in Quantity Change Demanded Demanded √ Moves the curve •Income •Future Expectations •# of Buyers √ Moves Along the SAME Moves SAME curve curve • Caused only by Price change. change. •Consumer Information •Taste and Preference •Substitues and Complements A change in Supply versus a change in the Quantity Supplied the Change in Supply Change in Quantity Change Supplied Supplied √ Moves the curve •Costs of Production •Future Expectations •# of Sellers √ Moves Along the SAME Moves SAME curve curve • Caused only by Price change. change. •Taxes and Subsidies •Prices of goods using same resources •Time period of production Consumer and Producer Surplus Consumer √ The value in excess of the purchase price The √ The income the firm gets in excess of its marginal costs The P S CS P1 PS D Qe Q T o t a l U t i l i t y TU When Total Utility is at its peak, When Marginal Utility is zero. Marginal Unit Consumed M a r g I n a l U t I l I t y Marginal Utility Unit Consumed Marginal Utility reflects the Marginal change in total utility so it is negative when Total Utility declines. declines. Marginal Utility diminishes with increased MU consumption, is zero where total utility is at a maximum, and is negative when Total Utility declines. P Pf Price Floor and Price Ceiling Price Surplus S P1 Pc Shortage Qe D Q Elasticity DEMAND Ed = % change in Qd DEMAND % change in P CROSS E c = % ∆ Quantity of X %∆ Price of Y INCOME E i = % ∆ Quantity %∆ Income Average Product, AP, and Marginal Product, MP Total Product, TP Law of Diminishing Returns Law Total Product Quantity of Labor Average Product Quantity of Labor Marginal Product RELATIONSHIP RELATIONSHIP ECONOMIC INTERPRETATION MR = MC The firm has chosen the output that The maximizes profits. maximizes P > ATC ATC Firm is earning Economic Profits P = ATC Firm is earning NORMAL PROFIT Firm P < ATC; P > AVC Loss Minimization Even Point) (EP = 0) P = AVC AVC SHUTDOWN POINT (firm cannot SHUTDOWN cover its AVC cover P < AVC Firm does not produce (Break- PURE COMPETITION PURE MONOPOLY P = MR The firm’s DEMAND CURVE is The infinitely ELASTIC MR = MC The firms maximizes profit. The P= ATC Long Run (NORMAL PROFITS) PRODUCTIVE EFFICIENCY PRODUCTIVE P = min ATC Firm is forced to operate with maximum productive efficiency. maximum (Least-Cost Method Production) P > MR The firm’s DEMAND CURVE is The relatively INELASTIC. relatively MR = MC MR The firms maximizes profit. The P > ATC Long Run ECONOMIC PROFITS. Long PRODUCTIVE INEFFICIENCY PRODUCTIVE P > min ATC Firm is not forced to operate with maximum productive efficiency. maximum (Least-Cost Method Production not necessary) necessary) ALLOCATIVE INEFFICIENCY P > MC MC There is an UNDERALLOCATION of resources. resources. ALLOCATIVE EFFICIENCY P = MC There is an optimal allocation of There resources. resources. Pure Competition P SP MR=D=AR=P2 p2 pe MR=D=AR=P D2 D qe q2 Q The Market The Q Individual firm Firm showing Economic Profit P MR=MC $131 Economic Profit $97.78 MC MC MR=D=AR=P ATC Per unit Per profit profit Total Total Revenue Revenue AVC A T C Q1 Q P Firm showing Economic Loss MR=MC $81 Per unit Per loss loss MC ATC ATC MR=D=AR=P AVC Economic Loss A T C Total Total Revenue Revenue Q2 Q Firm showing Shutdown position P MC ATC ATC AVC $71 MR=D=AR=P At no level of output does At the firm cover the Average Variable Costs. Average Q Price Long-run Equilibrium Long-run For A Competitive Firm For MC ATC MR=D=AR=P Pe Price = MC = MR = Minimum ATC (normal profit) Qe Quantity Competitive Firm Supply Curve P Breakeven point— normal profit MC ATC ATC AVC MR5 MR4 MR3 MR2 Shutdown point MR1 Q Single Price Profit-Maximizing Monopoly Monopoly MC P Pe ATC ATC Economic Economic Profit Profit MR=MC D Qe MR Q PRICE DISCRIMINATION Price and Costs P A perfectly discriminating monopolist has MR=D, producing more product and more profit! MC ATC MR=D Q1 Q2 D Q Dilemma of Regulation:Which Price? Price and Costs P MR = MC Fair-Return Price Pm Socially-Optimum Price ATC Pf MC Pr D MR Qm Qf Qr Q P Deadweight loss under monopoly MC (= S under perfect competition) (= Consumer Consumer surplus Pm Deadweight loss b (c)R=MC a Ppc Producer surplus c Qm (b)Pm Monopolist price price (a)P=MC Purely (a)P=MC Competitive price Competitive AR = D MR O Deadweight Loss Qpc Q Price and Costs PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC Expect New Competitors ATC P1 AC1 Short-Run Economic Profits D MR Q1 Quantity PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Price and Costs MC ATC AC2 P2 Short-Run Economic Losses D MR Q2 Quantity Price and Costs PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Long-Run Equilibrium MC P3 = AC 3 Normal Profit Only ATC D MR Q3 Quantity Using Game Theory Using • Game theory can be used to describe a game Game when: when: – There are rules which govern actions; There actions – There are two or more players; There players – There are choices of action where strategy There strategy matters; matters; – The game has one or more outcomes; The outcomes; – The outcome depends on the strategies chosen The by all players, i.e., there is strategic interaction. strategic Advertising Game Advertising COMPANY Y COMPANY COMPANY X Don’t Adv. Advertise Don’t Adv. 10,10 10,10 15,2 15,2 Advertise 2,15 2,15 7,7 7,7 • Dominant strategies: Strategy 1 dominates Strategy Strategy 2 if every payoff from 2 is dominated by the respective payoff from 1. payoff Nash equilibrium: a set of strategies, one for each Nash player, such that no player has an incentive (in terms of improving his own payoff) to deviate from his strategy, i.e., each player can do no better given what the opposing player(s) does. the MRP = MP x P MRP Marginal Revenue Product equals the Marginal Marginal Product times the Price. Marginal √ The MRP curve is the resource demand curve. demand √ Location of curve depends on the productivity and the price of the productivity price product. Optimum Combination Of Resources Optimum Least-Cost Combination of Resources MP of Labor MP of Capital Price of Labor Price of Capital MPL PL MPC = PC Profit-Maximizing Combination MRPL MRPC PL PC 1 Purely Competitive Labor Market Equilibrium Wage Rate (dollars) S $6 Wc D = MRP (Σ mrp’s) Wc NonLabor Costs Includes Normal Profit S = MRC ($6) Labor Costs d = mrp (1000) Quantity of Labor Labor Market (5) Quantity of Labor Individual Firm Monopsonistic Labor Market Wage Rate (dollars) MRC Wc Wm S The competitive solution would result in a higher wage and greater employment. MRP Qm Qc Quantity of Labor Spillover Costs And Benefits P S=MSC Spillover costs S=MPC D=MB Overallocation 0 Q0 Qe Q Spillover Costs And Benefits P S=MC Spillover Benefits D=MSB D=MPB Underallocation 0 Qe Q0 Q Two Goals for Tax Systems Two Tax equity: The fairness of equity a tax system. Tax efficiency: How a tax efficiency system maintains the incentives to be productive. Two Principles of Tax Equity Two Benefits received principle: states Benefits that a fair tax is one that taxes people in proportion to the benefits they receive when government spends those tax revenues. Ability-to-pay principle: states that Ability-to-pay those who can afford to pay more taxes than others should be required to do so. Three Tax Structures Three $ Progressive tax: collects a higher Progressive percentage of high incomes than of low incomes. $ Regressive tax: collects a higher percentage of low incomes than of high incomes. $ Proportional tax: collects the same percentage of income, no matter what the income. P Efficiency Loss of a tax Efficiency St S P2 P1 a CONSUMER’S SHARE b PRODUCER’S SHARE c Efficiency Efficiency Loss Loss D O Q2 Q1 Q Cumulative Cumulative % of Income of The Lorenz Curve 100 Line of Line Perfect Equality Equality Degree of Degree Inequality Inequality 0 100 Cumulative % of families Cumulative ...
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