Transcript AP_Micro_Review

AP MICRO
ECONOMICS
EXAM REVIEW
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
P
r
i
c
e
Supply
Pe
Demand
Qe
Quantity
A change in Demand versus a change in
the Quantity Demanded
Change in Demand
√ Moves the curve
•Income
•Future Expectations
•# of Buyers
Change in Quantity
Demanded
√ Moves Along the SAME
curve
• Caused only by Price
change.
•Consumer Information
•Taste and Preference
•Substitutes and Complements
A change in Supply versus a change in
the Quantity Supplied
Change in Supply
Change in Quantity
Supplied
√ Moves the curve
•Costs of Production
•Future Expectations
•# of Sellers
√ Moves Along the SAME
curve
• Caused only by Price
change.
•Taxes and Subsidies
•Prices of goods using same resources
•Time period of production
Consumer and Producer Surplus
√ The value in excess of the purchase price
√ The income the firm gets in excess of its marginal costs
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,
Marginal Utility is zero.
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
change in total utility so it is
negative when Total Utility
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
Surplus
S
P1
Pc
Shortage
Qe
D
Q
Elasticity
DEMAND Ed
CROSS
INCOME
=
% change in Qd
% change in P
E c = %  Quantity of X
% Price of Y
E i = %  Quantity
% Income
Average Product, AP, and
Marginal Product, MP
Total Product, TP
Law of Diminishing Returns
Total Product
Quantity of Labor
Average
Product
Quantity of Labor
Marginal
Product
RELATIONSHIP
ECONOMIC INTERPRETATION
MR = MC
The firm has chosen the output that
maximizes profits.
P > ATC
Firm is earning Economic Profits
P = ATC
Firm is earning NORMAL PROFIT
(Break-Even Point) (EP = 0)
P < ATC;
P > AVC
Loss Minimization
P = AVC
SHUTDOWN POINT (firm cannot
cover its AVC
P < AVC
Firm does not produce
PURE COMPETITION
MONOPOLY
P = MR
The firm’s DEMAND CURVE is
infinitely ELASTIC
MR = MC
The firms maximizes profit.
P= ATC
Long Run (NORMAL PROFITS)
PRODUCTIVE EFFICIENCY
P = min ATC
Firm is forced to operate with
maximum productive efficiency.
(Least-Cost Method Production)
P > MR
The firm’s DEMAND CURVE is
relatively INELASTIC.
MR = MC
The firms maximizes profit.
P > ATC
Long Run ECONOMIC PROFITS.
PRODUCTIVE INEFFICIENCY
P > min ATC
Firm is not forced to operate with
maximum productive efficiency.
(Least-Cost Method Production
not necessary)
ALLOCATIVE INEFFICIENCY
P > MC
There is an
UNDERALLOCATION of
resources.
ALLOCATIVE EFFICIENCY
P = MC
There is an optimal allocation of
resources.
Pure Competition
P
S P
MR=D=AR=P2
p2
MR=D=AR=P
p
e
D2
D
q q2
Q
Q
e
The Market
Individual firm
Firm showing Economic Profit
P
MC
MR=MC
MR=D=AR=P
ATC
$131
Economic Profit
Per unit
profit
$97.78
AVC
A
T
C
Q1
Total
Revenue
Q
P
Firm showing Economic Loss
MR=MC
$81
Per unit
loss
MC
ATC
MR=D=AR=P
AVC
Economic Loss
A
T
C
Total
Revenue
Q2
Q
Firm showing Shutdown position
P
MC
ATC
AVC
$71
MR=D=AR=P
At no level of output does
the firm cover the Average
Variable Costs.
Q
Long-run Equilibrium
For A Competitive Firm
Price
MC
ATC
MR=D=AR=P
Pe
Price = MC = MR = Minimum ATC
(normal profit)
Qe
Quantity
Competitive Firm Supply Curve
P
MC
Breakeven point—
normal profit
MR5
ATC
MR4
MR3
AVC
MR2
Shutdown point
MR1
Q
Single Price Profit-Maximizing
Monopoly
MC
P
Pe
ATC
Economic
Profit
ATC
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?
P
Price and Costs
MR = MC
Fair-Return Price
Pm
Socially-Optimum
Price
ATC
MC
Pf
Pr
D
MR
Qm
Qf
Qr
Q
P
Pm
Deadweight loss under monopoly
MC
(= S under perfect competition)
Consumer
surplus
Deadweight
loss
b
(c)MR=MC
a
Ppc
Producer
surplus
O
Deadweight Loss
c
(a)P=MC Purely
Competitive price
AR = D
MR
Qm
(b)Pm Monopolist
price
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
Normal
Profit
Only
ATC
P3
= AC3
D
MR
Q3
Quantity
Using Game Theory
• Game theory can be used to describe a game
when:
– There are rules which govern actions;
– There are two or more players;
– There are choices of action where strategy
matters;
– The game has one or more outcomes;
– The outcome depends on the strategies chosen
by all players, i.e., there is strategic interaction.
Advertising Game
COMPANY Y
Don’t Adv.
COMPANY X
Advertise
Don’t Adv.
10,10
2,15
Advertise
15,2
7,7
Dominant strategies: Strategy 1 dominates Strategy
2 if every payoff from 2 is dominated by the respective
payoff from 1.
Nash equilibrium: a set of strategies, one for each
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.
MRP = MP x P
Marginal Revenue Product equals the
Marginal Product times the Price.
√ The MRP curve is the resource
demand curve.
√ Location of curve depends on the
productivity and the price of the
product.
Optimum Combination Of Resources
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
S
Wage Rate (dollars)
Includes
Normal
Profit
$6
Wc
D = MRP
( mrp’s)
Wc
NonLabor
Costs
S = MRC
($6)
Labor
Costs
d = mrp
(1000)
(5)
Quantity of Labor
Quantity of Labor
Labor Market
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
Tax equity: The fairness of
a tax system.
Tax efficiency: How a tax
system maintains the
incentives to be productive.
Two Principles of Tax Equity
 Benefits received principle: states
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
those who can afford to pay more
taxes than others should be required
to do so.
Three Tax Structures
$ Progressive tax: collects a higher
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
St
S
P2
P1
a
b
CONSUMER’S SHARE
PRODUCER’S SHARE
c
Efficiency
Loss
D
O
Q2 Q1
Q
Cumulative
% of Income
The Lorenz Curve
100
Line of
Perfect
Equality
Degree of
Inequality
0
100
Cumulative % of families