1. A.P. Microeconomics Review
Units 1-6

2. Basic Economic Concepts
Unit 1
Basic Economic Concepts

3. How is Economics used? Positive vs. Normative
Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics.
These theories are then applied to fix problems or meet economic goals. This is called policy economics.
Positive vs. Normative
Positive Statements- Based on facts. Avoids value judgements (what is).
Normative Statements- Includes value judgements (what ought to be).

4. Would you see the movie three times?
Thinking at the Margin
# Times Watching Movie
Benefit
Cost
1st
$30
$10
2nd
$15
3rd $5
Total
$50
Would you see the movie three times?
Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3rd time.

5. 5 Key Economic Assumptions
Society’s wants are unlimited, but ALL resources are limited (scarcity).
Due to scarcity, choices must be made. Every choice has a cost (a trade-off).
Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.”
Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice
Real-life situations can be explained and analyzed through simplified models and graphs.

6. The Production Possibilities Curve (PPC) Using Economic Models…
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph 6

7. What is the Production Possibilities Curve?
A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources
This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources (Ceteris Paribus)
Fixed Technology 7

8. PRODUCTION POSSIBILITIES
How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 8 6 4 2
Impossible/Unattainable
(given current resources) A B G C
Bikes
Efficient D
Inefficient/ Unemployment E
Computers 8

9. Opportunity Cost 1. The opportunity cost of moving from a to b is…
Example:
1. The opportunity cost of moving from a to b is…
2 Bikes
2.The opportunity cost of moving from b to d is…
7 Bikes
3.The opportunity cost of moving from d to b is…
4 Computer
4.The opportunity cost of moving from f to c is…
0 Computers
5.What can you say about point G?
Unattainable 9

10. PER UNIT Opportunity Cost How much each marginal unit costs
Units Gained
Example:
1. The PER UNIT opportunity cost of moving from a to b is…
1 Bike
2.The PER UNIT opportunity cost of moving from b to c is…
1.5 (3/2) Bikes
3.The PER UNIT opportunity cost of moving from c to d is…
2 Bikes
4.The PER UNIT opportunity cost of moving from d to e is…
2.5 (5/2) Bikes
NOTICE: Increasing Opportunity Costs 10

11. 3 Shifters of the PPC Fixed Resources (4 Factors) Fixed Technology
PRODUCTION POSSIBILITIES
4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources (4 Factors)
Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade 11

12. What happens if there is an increase in population?
PRODUCTION POSSIBILITIES
What happens if there is an increase in population? Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Robots Q
Pizzas 12

13. What happens if there is an increase in population?
PRODUCTION POSSIBILITIES
What happens if there is an increase in population? Q A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ C’
Robots D’ E’ Q
Pizzas 13

14. Technology improvements in pizza ovens
PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Technology improvements in pizza ovens
Robots Q
Pizzas 14

15. New robot making technology
Question #1
New robot making technology Q
A shift only for Robots
Robots Q
Pizzas 15

16. Question #2 Decrease in the demand for pizza Q
The curve doesn’t shift!
A change in demand doesn’t shift the curve
Robots Q
Pizzas 16

17. Question #4 BP Oil Spill in the Gulf Q
Decrease in resources decrease production possibilities for both
Capital Goods (Guns) Q
Consumer Goods (Butter) 17

18. Question #5 Faster computer hardware Q
Quality of a resource improves shifting the curve outward
Capital Goods (Guns) Q
Consumer Goods (Butter) 18

19. Communism in the Long Run Free Markets in the Long Run
Connection to the PPC
Communism in the Long Run
Free Markets in the Long Run
CURRENT
CURVE
FUTURE
CURVE
FUTURE
CURVE
Capital Goods
CURRENT
CURVE
Capital Goods
Consumer goods
Consumer goods
Cuba
Puerto Rico 19

20. Unit 2
Supply and Demand

21. GRAPHING DEMAND Demand Schedule Price of Cereal $5 10 $4 20 $3 30 $2
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand o Q
Quantity of Cereal 21

22. Where do you get the Market Demand?
Billy
Jean
Other Individuals
Market
Price
Q Demd $5 1 $4 2 $3 3 $2 5 $1 7
Price
Q Demd $5 $4 1 $3 2 $2 3 $1 5
Price
Q Demd $5 9 $4 17 $3 25 $2 42 $1 68
Price
Q Demd $5 10 $4 20 $3 30 $2 50 $1 80 P P P P $3 $3 $3 $3 D D D D Q Q Q Q 3 2 25 30

23. What Causes a Shift in Demand?
5 Determinates (SHIFTERS) of Demand:
Tastes and Preferences
Number of Consumers
Price of Related Goods
Income
Future Expectations
Changes in PRICE don’t shift the curve. It only causes movement along the curve. 23 23

24. Prices of Related Goods
The demand curve for one good can be affected by a change in the price of ANOTHER related good.
Substitutes are goods used in place of one another.
If the price of one increases, the demand for the other will increase (or vice versa)
Ex: If price of Pepsi falls, demand for coke will…
2. Complements are two goods that are bought and used together.
If the price of one increase, the demand for the other will fall. (or vice versa)
Ex: If price of skis falls, demand for ski boots will... 24 24

25. Income
The incomes of consumer change the demand, but how depends on the type of good.
Normal Goods
As income increases, demand increases
As income falls, demand falls
Ex: Luxury cars, Sea Food, jewelry, homes
2. Inferior Goods
As income increases, demand falls
As income falls, demand increases
Ex: Top Romen, used cars, used cloths,
Spam-Inferior
Yachts- Normal
Off Brand Cereal-Inferior
McDonald’s-Inferior
Toilet Paper- Probably no connection to income (The point-some products are very reliant on income and others are not) 25 25

26. Change in Qd vs. Change in Demand
There are two ways to increase quantity from 10 to 20
Price of Cereal P
A to B is a change in quantity demand (due to a change in price)
A to C is a change in demand (shift in the curve) A C $3 $2 B D2 D1 o
Q Cereal
Quantity of Cereal

27. GRAPHING SUPPLY Supply Schedule Price of Cereal Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 o Q
Quantity of Cereal 27

28. 6 Determinants (SHIFTERS) of Supply
Prices/Availability of inputs (resources)
Number of Sellers
Technology
Government Action: Taxes & Subsidies
5. Opportunity Cost of Alternative Production
6. Expectations of Future Profit
Changes in PRICE don’t shift the curve. It only causes movement along the curve. 28 28

29. Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30
Supply and Demand are put together to determine equilibrium price and equilibrium quantity P
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
Equilibrium Price = $3 (Qd=Qs) D o Q
Equilibrium Quantity is 30 29

30. How much is the surplus at $4?
At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. P
Supply Schedule
Demand Schedule S $5 4 3 2 1
Surplus
(Qd<Qs) P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
How much is the surplus at $4?
Answer: 20 D o Q 30

31. How much is the shortage at $2?
At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. P
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
How much is the shortage at $2?
Answer: 30
Shortage
(Qd>Qs) D o Q 31

32. Supply and Demand Analysis
Easy as 1, 2, 3
Before the change:
Draw supply and demand
Label original equilibrium price and quantity
The change:
Did it affect supply or demand first?
Which determinant caused the shift?
Draw increase or decrease
After change:
Label new equilibrium?
What happens to Price? (increase or decrease)
What happens to Quantity? (increase or decrease)
Let’s Practice! 32

33. Double Shifts
Suppose the demand for sports cars fell at the same time as production technology improved.
Use S&D Analysis to show what will happen to PRICE and QUANTITY.
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate. 33

34. Voluntary Exchange Terms
Consumer Surplus is the difference between what you are willing to pay and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for.
PS = Price – Seller’s Minimum 34

35. Consumer and Producer’s Surplus
Calculate the area of:
Consumer Surplus
Producer Surplus
Total Surplus P
$10 8 6 $5 4 2 1 S CS
CS= $25
PS= $20
Total= $45 PS D 10 Q 35

36. Government Involvement
#1-Price Controls: Floors and Ceilings #2-Import Quotas #3-Subsidies #4-Excise Taxes 36

37. #1-PRICE CONTROLS
Who likes the idea of having a price ceiling on gas so prices will never go over $1 per gallon? 37

38. To have an effect, a price ceiling must be below equilibrium
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
To have an effect,
a price ceiling must be
below equilibrium P
Gasoline S $5 4 3 2 1
Does this policy help consumers?
Result: BLACK MARKETS
Price Ceiling
Shortage
(Qd>Qs) D o Q 38

39. To have an effect, a price floor must be above equilibrium
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
To have an effect,
a price floor must be
above equilibrium P
Corn S $ 4 3 2 1
Surplus
(Qd<Qs)
Price Floor
Does this policy help corn producers? D o Q 39

40. #2 Import Quotas A quota is a limit on number of exports.
The government sets the maximum amount that can come in the country.
Purpose:
To protect domestic producers from a cheaper world price.
To prevent domestic unemployment 40

41. International Trade and Quotas
Identify the following:
CS with no trade
PS with no trade
CS if we trade at world price (PW)
PS if we trade at world price (PW)
Amount we import at world price (PW)
If the government sets a quota on imports of Q4 - Q2, what happens to CS and PS?
1.H
2.TLI
3.HIJKLMNRS
4.T
5.Q5-Q1
6. CS gets smaller and PS gets bigger
This graphs show the domestic supply and demand for grain. The letters represent area.

42. #3 Subsidies The government just gives producers money.
The goal is for them to make more of the goods that the government thinks are important.
Ex:
Agriculture (to prevent famine)
Pharmaceutical Companies
Environmentally Safe Vehicles
FAFSA 42

43. Result of Subsidies to Corn Producers
Price of Corn S
SSubsidy
Price Down
Quantity Up
Everyone Wins, Right? Pe P1 D o Qe Q1 Q
Quantity of Corn 43

44. Excise Tax = A per unit tax on producers
#4 Excise Taxes
Excise Tax = A per unit tax on producers
For every unit made, the producer must pay $
NOT a Lump Sum (one time only)Tax
The goal is for them to make less of the goods that the government deems dangerous or unwanted.
Ex:
Cigarettes “sin tax”
Alcohol “sin tax”
Tariffs on imported goods
Environmentally Unsafe Products
Etc. 44

45. Government sets a $2 per unit tax on Cigarettes
Excise Taxes
Supply Schedule
Government sets a $2 per unit tax on Cigarettes P P Qs $5
140 $4
120 $3
100 $2 80 $1 60 S $5 4 3 2 1 D o Q 45

46. Government sets a $2 per unit tax on Cigarettes
Excise Taxes
Supply Schedule
Government sets a $2 per unit tax on Cigarettes P P Qs
$5 $7
140
$4 $6
120
$3 $5
100
$2 $4 80
$1 $3 60 S $5 4 3 2 1 D o Q 46

47. Tax is the vertical distance between supply curves
Excise Taxes
STax
Supply Schedule P P Qs
$5 $7
140
$4 $6
120
$3 $5
100
$2 $4 80
$1 $3 60 S $5 4 3 2 1
Tax is the vertical distance between supply curves D o Q 47

48. Identify the following:
Excise Taxes S
Identify the following:
Price before tax
Price consumers pay after tax
Price producers get after tax
Total tax revenue for the government before tax
Total tax revenue for the government after tax P S $5 4 3 2 1
1.$3
2.$4
3.$2
4.$0
5.$160 D o Q 48

49. Tax Practice CS Before Tax PS Before Tax CS After Tax PS After Tax
Tax Revenue for Government
Dead Weight Loss due to tax
Amount of tax revenue producers pay
1.ABCD
2.HFEG
3.A
4.G
5.BCHF
6.DE
7.HF 49

50. 4 Types of Elasticity Elasticity of Demand Elasticity of Supply
Cross-Price Elasticity (Subs vs. Comp)
Income Elasticity (Norm or Infer)

51. 1. Elasticity of Demand Elasticity of Demand-
Measurement of consumers responsiveness to a change in price.
What will happen if price increase? How much will it effect Quantity Demanded
Who cares?
Used by firms to help determine prices and sales
Used by the government to decide how to tax

52. Inelastic Demand
INelastic = Insensitive to a change in price.
If price increases, quantity demanded will fall a little
If price decreases, quantity demanded increases a little.
In other words, people will continue to buy it.
20% 5%
A INELASTIC demand curve is steep! (looks like an “I”)
Examples:
Gasoline
Milk
Diapers
Chewing Gum
Medical Care
Toilet paper

53. General Characteristics of INelastic Goods:
Inelastic Demand
General Characteristics of INelastic Goods:
Few Substitutes
Necessities
Small portion of income
Required now, rather than later
Elasticity coefficient less than 1
20% 5%

54. Elastic Demand An ELASTIC demand curve is flat!
Elastic = Sensitive to a change in price.
If price increases, quantity demanded will fall a lot
If price decreases, quantity demanded increases a lot.
In other words, the amount people buy is sensitive to price.
An ELASTIC demand curve is flat!
Examples:
Soda
Boats
Beef
Real Estate
Pizza
Gold

55. General Characteristics of Elastic Goods:
Elastic Demand
General Characteristics of Elastic Goods:
Many Substitutes
Luxuries
Large portion of income
Plenty of time to decide
Elasticity coefficient greater than 1