Transcript Law for Business

AP Economics
Mr. Bernstein
Micro Graphs Review
May 2014
AP Economics
Mr. Bernstein
The Production Possibilities Curve
2
AP Economics
Mr. Bernstein
Economic Growth
• Concave due to “Law of increasing opportunity costs”
3
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Mr. Bernstein
Circular Flow Diagram
4
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Mr. Bernstein
Expanded Circular Flow Diagram
5
AP Economics
Mr. Bernstein
Demand Curves
• A Shift in Demand is different from movement along
the Demand Curve!!
6
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Mr. Bernstein
Supply Curves
• A Shift in Supply is different from movement along
the Supply Curve!!
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AP Economics
Mr. Bernstein
Equilibrium
• Price is the adjustment mechanism: falls when
there is a surplus, rises when there is a shortage
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AP Economics
Mr. Bernstein
Simultaneous Shifts of Supply and Demand Curves
• Example: Demand for Justin Beiber tickets decreases and Supply decreases
• Equilibrium Price is ambiguous but Quantity change decreases (awww…)
• Know all four possible combinations
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AP Economics
Mr. Bernstein
Elasticity along the Demand Curve
• Consumers are less price sensitive on inexpensive items
• TR begins to fall as prices rise and Elasticity grows
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Mr. Bernstein
Consumer Surplus and Producer Surplus
• CS is the difference between what a consumer is willing to pay for a good or service
and what they actually have to pay
• PS is the difference between what a producer must receive to sell a unit and the
actual price they receive
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AP Economics
Mr. Bernstein
Deadweight Loss Example: The Effect of Taxes
Dead Weight Loss
P
S1
S
CS
T
T
D
D
PS
D
Qt
Q
• Excise tax causes lower Q, efficiency loss
Q
12
AP Economics
Mr. Bernstein
Price Ceilings
• Price ceiling is below equilibrium, creates shortage
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Mr. Bernstein
Price Floor
• Price floor is above equilibrium; creates surplus
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Mr. Bernstein
Quotas (Quantity Controls)
• Examples: limits, licenses; creates price “wedge”
15
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Mr. Bernstein
Firm’s Cost Curves: Swoosh, Smirk and Smile
• The MC curve intersects the U-shaped AC and AVC
curves at their minimum points
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Mr. Bernstein
Perfectly Competitive Firm
$
• Produce at MR=MC
• Profit = MR – ATC
• In this case, zero
economic profit…
• This is long-run
equilibrium…
• Profit or loss if P > or < ATC
MC
ATC
MR D.AR.P!
Q*
Output
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AP Economics
Mr. Bernstein
The Short-Run Shut-Down Decision
• Shut down when P < AVC
$
MC
P=ATC
ATC
AVC
P=MR=d=AR
Shut-down
Price
Q*
Output
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AP Economics
Mr. Bernstein
Long Run Average Costs
• U-shaped LRATC is a series of U-shaped SRATCs – one
for each level of fixed costs
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Mr. Bernstein
Adjustment toward Long-Run Equil (Perf Comp)
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Mr. Bernstein
Classic Monopoly Graph
• Q at MR=MC; lower Q and higher P than Perfect Competition;
long-run economic profit exists due to barriers to entry
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Mr. Bernstein
Monopoly Reduces Societal Welfare
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Mr. Bernstein
Price Regulation Restores Consumer Surplus
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Mr. Bernstein
Monopolists will use Price Discrimination
• Without competition, they take advantage of differing elasticities
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Mr. Bernstein
Game Theory
• Each player competes
to maximize individual
payoffs and ignores the
effects of his/her action
on the payoffs received
by the rival
• But Oligopolies engage
in tacit collusion, tit for tat
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Mr. Bernstein
Monopolistic Competition in the Long Run
• Adjusts to normal profit, as in Perfect Competition
• P*=ATC, tangent to ATC (not at minimum…)
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AP Economics
Mr. Bernstein
Factor Market: Labor
• Value of W* = MRPL; (MC = W)
Wage
Market Labor
Supply
W*
Market Labor
Demand
Q
27
AP Economics
Mr. Bernstein
Imperfect Competition in the Labor Market
• Hire where
Wage
MPRL = MFCL
• Monopsony pays
W* < MRPL
Remember, whether
Perfect or Imperfect
Markets, firms hire
where MRPL = MFCL
MFCL
Labor Supply
W*
MRPL
E*
Quantity of Labor (workers)
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AP Economics
Mr. Bernstein
Equilibrium in the Market for Land and Capital
• Supply curve for Land is very steep (inelastic)
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Mr. Bernstein
Positive Externalities: MSB > MPB
• Market underproduces Price, MSB
vs. socially optimal outcome
• Deadweight loss
Popt
• Policy to eliminate:
Pmkt
Subsidy
Pcons
S
Subsidy
MPB
Qmkt
Qopt
MSB
Qty
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AP Economics
Mr. Bernstein
Negative Externalities: MSC > MPC
Price, MSC
• Market overproduces
vs. socially optimal outcome
• Deadweight loss
• Policy to eliminate:
Popt
Per unit tax
Pmkt
• Lump-sum tax does Pfirm
not affect MC so does not
Qopt
affect Q
MSC
MPC
Tax
D
Qmkt
Electricity
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