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12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS.

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Presentation on theme: "12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS."— Presentation transcript:

1 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

2 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS In the beginning … Economics How to allocate scarce resources with unlimited wants or desires. Resources Labor Land/Natural Resources Capital Entrepreneurship

3 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Opportunity Costs & Marginal Analysis Opportunity Costs The cost of doing the next best option. Marginal The cost or benefit of the next one EX If one candy bar costs $2 and two bars cost $3, the Marginal Costs of 1 st bar is $2 and the MC of the 2 nd bar is $1. Basis of economic study.

4 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Production Possibility Frontier W Y X Z GoodAGoodA Good B Measures different combinations of production X & Y are equally efficient, on the PPF curve W is inefficient, Not all resources In use – a recession Z is beyond capacity, borrowing or running a deficit

5 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Trade Advantages Example: Country A 60 Pizzas 80 Hot Dogs Country B 40 Pizzas 20 Hot Dogs

6 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Absolute Advantage Who can produce the most? Pizzas: Country A – 60 Country B – 40 Hot Dogs: Country A – 80 Country B – 20 Country A b/c 60 > 40. Country A b/c 80 > 20.

7 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Comparative Advantage Who gives up the least to produce? (items produced/items no longer produced) Pizzas: Country A – (60 Pizzas/80 HD) = 0.75 Country B – (40 Pizzas/20 HD) = 1.50 Hot Dogs: Country A – (80 HD/60 Pizzas) = 1.33 Country B – (20 HD/40 Pizzas) = 0.50 Country B b/c 2.00 > Country A b/c 1.33 > 0.50 NB There is always comparative advantages for both countries even when one country has an absolute advantage in both products

8 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Supply and Demand S D Quantity Price P Q

9 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Demand Movement along the curve Change in Price Curve Shift Change in Determinants Income Substitutes Complements Number Consumers Consumer Tastes Consumer Expectations

10 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Supply Movement along the curve Change in price Curve shift Change in Determinants Costs of inputs Number sellers Change in technology Taxes Producer expectations

11 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Supply & Demand Substitutes Complements Normal goods Inferior goods

12 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Equilibrium S D Quantity Price P Q surplus shortage P +1 P -1

13 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Price Floors & Ceilings S D Quantity Price QDQD QSQS Price Floor Price Ceiling PfPf PcPc Deadweight Loss (DWL)

14 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Equilibrium S D Quantity Price P Q Consumer Surplus Producer Surplus Total Welfare is the sum of Consumer & Producer Surpluses

15 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Elasticity Measures change in QUANTITY caused by small changes in PRICE = %ΔQ / %ΔP Midpoint Formula = (Q 1 -Q 2 )/((Q 1 +Q 2 )/2) (P 1 -P 2 )/(( P 1+P 2 )/2)

16 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Elasticity Perfectly Elastic E D = Elastic 1 < E D < Unit Elastic E D = 1 Inelastic 0 < E D < 1 Perfectly Inelastic E D = 0

17 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Determinants of Elasticity Substitutes Income Time

18 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Total Revenue (TR) Method Elastic Price & TR move in opposite direction P TR Inelastic Price & TR move in the same direction P TR TR = P * Q ….do not compare P & Q !!!

19 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Types of Elasticity Income elasticity %ΔQ / %Δ Income Negative number for Inferior Goods Cross elasticity % Δ Q Good A / % Δ P Good B Negative number for Complementary Goods

20 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Elasticity & Taxes Government Revenue ConsumptionTaxes paid By Consumer Taxes Paid by Supplier Perfectly Elastic LeastMost0 %100 % Elastic Inelastic Perfectly InelasticMostZero100 %0 %

21 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Changing Elasticities Inelastic – A large change in price… … leads to a small change in quantity Elastic – A small change in price… … leads to a large change in quantity Price Quantity

22 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Graphing Tax Revenue S D Quantity Price P Q PTPT QTQT Tax Revenue STST Tax shifts supply Curve – Price up & Quantity down

23 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Firms, Markets & Costs Accounting π = TR – Explicit Costs Economic π = Acct π – Implicit Costs Implicit Costs are Opportunity costs Long-run has no fixed costs Sunk Costs Economies of Scale TC = TFC + TVC

24 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Total & Average Cost Graphs P QQ TC FC VC AFC AVC ATC MC

25 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Profits P Q MC MR ATC P1P1 Q1Q1 Π determined by MC = MR Π = (P-ATC)*Q NB Shut down price for business If Price < Minimum AVC

26 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Perfect Competition (profits) Industry Firm Price P1P1 P1P1 Q1Q1 q1q1 Quantity Profits MC ATC D=MR=AR=P S D S2S2 Q2Q2 P2P2 D2D2 q2q2 New firms enter b/c profits, Results in P, Industry Q, Firm q, & π = 0

27 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Perfect Competition (losses) Industry Firm Price P1P1 P1P1 Q1Q1 q1q1 Quantity S D MC ATC D=P=MR=AR Losses D2D2 P2P2 S2S2 Q2Q2 q2q2 Firms leave b/c losses, results in P, Industry Q, Firm q, & π = 0

28 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Monopoly MC ATC Quantity D MR Price Q P Πmax set by MC=MR Monopoly P set by demand Curve point above MC=MR Socially optimal allocation or allocative efficiency at MC = D Fair return Price ATC=P (0 economic profit) Deadweight loss (DWL) Difference between Monopoly P & Socially optimal P

29 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Monopolistic Competition P Q MC ATC P Q Excess Capacity MR Equilibrium at zero economic profits ATC tangent to D

30 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Monopolistic Competition P Q MC ATC P Q MR Economic profit will cause firms to enter, with more firms in the market, consumers have more choice & demand for the company decrease ATC < D DD2D2 P2P2

31 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Monopolistic Competition P Q MCATC P Q MR Economic losses will cause firms to exit which will increase demand for companies still in business ATC > D D D2D2 P2P2

32 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Oligopoly Barriers to entry May or may not have differentiation 4 Firm ratio Prisoners dilemma Dominant Strategy One choice is always better Nash Equilibrium Each player know options of opponent – no need to change Jack Confess Dont Confess Jill Confess Dont Confess 10 year Free 20 years 1 years

33 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Oligopoly: Incentive to Collude Game theory applied Oligopolists have a strong incentive to collude and raise their prices. However, each firm also has an incentive to cheat by lowering price because the demand curve facing each firm is more elastic than the market demand curve. This conflict makes collusive agreements difficult to maintain.

34 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Factor Economics Demand for inputs Labor Resources MRP = Marginal Revenue Product MR for factor markets = ΔTR / ΔQ MRC = Marginal Revenue Cost MC for factor markets = ΔTC / ΔQ

35 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Factor Economics If MRP > MRC Increase Production If MRP = MRC Max profits Stop (ideal) Production If MRP < MRC Decrease production

36 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Factor Economics Marginal Productivity / Least Cost MP A / P A = MP B / P B Firms produce at a level where all costs are minimized Derived Demand Demand for products creates or affects the demand for resources such as labor

37 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Factors & Distribution Marginal Productivity Theory of Income Distribution Income allocated by how much production is created Theory may lead to Income inequality Market Imperfections

38 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Types of Goods Rivals in Consumption Yes No Excludable Private Goods Natural Monopoly Common Resources Public Goods

39 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Negative Externalities Supply Failure Suppliers do not have to pay the full value Will supply more b/c costs paid by others Costs affect supply Taxes raise price to public equilibrium P2P2 P1P1 P Private Value Social Cost Private Cost Q1Q1 Q2Q2 Q Externality Cost

40 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Positive Externalities Demand Failure Public not willing to pay full value Benefits or subsidies needed to induce suppliers to supply at lower price levels Benefits affect demand Subsidies absorb costs creating public equilibrium P2P2 P1P1 P Private Value Private Cost Public Cost Q1Q1 Q2Q2 Q External Benefit

41 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Income Inequality Lorenz Curve Measures ratio between richest & poorest quintiles. Gini Index Measures among of distribution Increasing numbers (ranges from 0.0 to 1.0) means less equality

42 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS Miscellaneous Taxes Progressive Increasing Marginal Rates Proportional Regressive Decreasing Marginal Rates Moral Hazard Taking higher risks b/c of insurance or government bail- outs Adverse Selection Signaling Only those who need product would buy it (insurance)


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