AP microeconomics Semester Review

Intro unit : PRODUCTION POSSIBILITIES CURVE (PPC)   What is the PER UNIT opportunity cost of moving From point A to B? (remember: cost/gain) From point C to B? What does point D represent?   What does point E represent? What do points on the curve represent? Why does the PPC will shift: Remember: outward shift = economic growth; inward shift = decline

Marginal Utility (when you see MU, think “value of the product to the consumer”) Maximizing Utility: MU<MC = don’t MU>MC = do MU=MC – do and STOP (maximize utility here) If the marginal utility of an iphone is $200 and the price is $199, should a person purchase the phone?

Marginal utility if multiple items MU/P = MU/P If a consumer needs to chose between two items, a person must compare the marginal utility per price of each item (like a common denominator) Marginal utility per price = MU/P. Buy more of the item with the highest MU/P and less of the other item If MU/P of one item is = to that of the other item continue to purchase the same amount.

Multplie items: Marginal utility The marginal utility for a cake is 20 and the price of cake is $5.00. The Marginal utility for a cookie is 10 and the price is $5.00. If you are a utility maximizing consumer, what should you purchase? MU/P cake = 20/5 =4 MU/P cookie = 10/5 = 2 * Buy more cake !!!! The marginal utility of a shirt is 20 and the price is $10. The marginal utility of socks is 4 and the price is $2.00. If you are a utility maximizing consumer, what should you purchase? MU/P shirt = 20/10 = 2 MU/P socks = 4/2 = 2 Continue to buy same amount!!!!

Absolute Advantage: goes to the country that can more of the item Which country has the Absolute advantage in cloth? ______________ Which country has the absolute advantage is shoes? ___________

Per Unit cost = COST/GAIN The per unit cost of producing shoes in China is 1 s = 12/3 = 4 C The per unit cost of producing cloth in China is 1 c = ¼ S The per unit cost of producing shoes in India is 1 s = 5/2 C The per unit cost of producing cloth in India is 1c = 2/5 S

Who has the comparative advantage in shoes? Comparative Advantage: means specializing – the comparative advantage always goes to the person that can make an item at a LOWER PER UNIT cost China: 1S = 12/3 = 4c 1C = ¼ S India: 1S = 5/2= 2 ½ C 1c = 2/5 S Who has the comparative advantage in shoes? Who has the comparative advantage in cloth?

Unit 1: Price elasticity – used to determine if goods are elastic or inelastic Total revenue test: used to determine if goods are elastic or inelastic If price and TR go in same direction demand is INELASTIC If price and TR go in opposite directions demand is ELASTIC Perfectly elastic: horizontal line   Perfectly inelastic: vertical line; same Q demanded/supplied regardless of price

Demand Why does the demand curve will shift? Change in income Change in tastes/preferences Change in substitutes Change in complements Change in # of consumers Change in future expectations A change in PRICE of the item is only a movement along the demand curve (this is called a CHANGE IN QUANTITY DEMANDED)

SUPPLY Why does the supply curve shift??? Change in # of suppliers Change in # of resources Change in government policies Change in technology Change in cost of production A change in the PRICE of the item is only a movement along the supply curve ( this is called a CHANGE IN QUANTITY SUPPLIED)

Determining equilibrium price and quantity: remember all prices in a market economy are determined by the interaction of supply and demand Pens and pencils are substitute goods. If there is an increase in the demand for PENS, the price of PENCILS will ___________ and the quantity of PENCILS will __________ The price of wood used to make houses decreases. As a result, the price of a house will ______________ and the quantity of houses will ______________

* a DOUBLE shift will result in either P or Q being indeterminate The demand for a product increases and the supply increases by the same amount. As a result, the price of the product will _______ and the quantity of the product will  ______

Price floors : lowest legal price an item can sell for always ABOVE equilibrium price because the government thinks the equilibrium price is too low (example: minimum wage) Price floors always result in a SURPLUS of the item

Price Ceiling highest legal price an item can sell for; always BELOW equilibrium price because the government thinks the equilibrium price is too high (example: rent controls) Price ceilings always result in a SHORTAGE of the item

Unit 2 Marginal Product: stages of production # of workers Total product Marginal product 1 15 2 35 3 45 4 44 Which workers produced increasing returns? Which workers produced diminishing returns? Which worker produced negative returns?

Marginal Product: stages of production # of workers Total product Marginal product 1 15 2 35 20 3 45 10 4 44 -1 Which workers produced increasing returns? 1 and 2 Which workers produced diminishing returns? 3 Which worker produced negative returns? 4

SHORT RUN Costs Short run = PLANT SIZE IS FIXED

Long Run Costs Plant size is VARIABLE In the LONG RUN economies of scale can happen: Economics of scale – ATC decreases as firm gets bigger Diseconomies of scale – ATC increases as a firm gets bigger  

Profit Maximization in output market: MR<MC = don’t produce MR>MC = produce MR=MC – produce and stop (maximize production here) A firm’s marginal revenue of producing one more product is $50 and marginal cost is $30, if the firm is a profit maximizing firm, what should they do?

Assume the product in the above chart exists in a perfectly competitive market and sells for $10.00 each.     Total product Marginal product Total cost Marginal cost Total revenue Marginal revenue 2 1 10 17 3 27 4 43 5 73 6 113

Assume the product in the above chart exists in a perfectly competitive market and sells for $10.00 each.     Total product Marginal product Total cost Marginal cost Total revenue Marginal revenue 2 1 10 8 17 7 20 3 27 30 4 43 16 40 5 73 50 6 113 60 What Q should this firm produce? What is the profit at this Quantity?

PERFECTLY COMPETITIVE FIRMS THEY HAVE CONTROL OVER THE Q they produce, but not the PRICE – As a result, they are price takers Products are IDENTICAL If there is a change in the market price, the firm must adjust their Quantity To new MR =MC

What quantity will the firm produce. E Why What quantity will the firm produce? E Why? MR = MC What area on the graph shows the firm’s TR? AHEO What area on the graph shows the firm’s TC? BGEO Is this firm earning a profit or loss? PROFIT What area on the graph shows the profit/loss? AHGB

When should a firm SHUT DOWN? Shut down or not???

Perfectly competitive firms in the LONG RUN In the long run, PC firm’s will always be at a break even point (normal profit) this is due to the ease of entry into the market When PC firms make a profit, new firms will ENTER the market causing SUPPLY to INCREASE which leads to prices going down When PC firms have a loss, firms will LEAVE the market causing SUPPLY to DECREASE which leads to prices going up

Unit 3 MONOPOLIES: Unique product, Price makers, MR <DARP Why?? In order to sell more units, the firm must lower their price Q determined where MR=MC P determined by D=AR=P Monopolies will always price their item in the ELASTIC portion of the demand curve Why? They want their Total revenue to go up when they lower their price

Monopolies Monopolies in the LONG RUN always earn a PROFIT because they don’t face any competition due to high barriers to entry Single price monopolies: firms charge the same price to all customers Price discriminating monopolies: firms charge different prices for the same item

What Q will the firm produce? 8   WHY? MR = MC What P will the firm charge? $ 150   What is the firm’s TR? $150 X 8 = $ 1200   What is the firm’s TC? $ 175 X 8 = $1400  Does this firm have a profit or loss? LOSS   How much is the profit/loss? TR – TC = 1200- 1400 = - 200  What is the socially optimal Q? where S = D; 10 

MONOPOLISTIC COMPETION Try to DIFFERENIATE their products from the competition ; Price makers * graph looks just like monopoly graph In the LONG RUN, monopolistic competitive firms will break even: Why? Easy to enter this structure They do break even, but they are still NOT EFFICIENT  

OLIGOPOLIES: Few firms dominate the market, One firm’s actions impact the other firm’s actions Use a pay off matrix to show interdependency of firms In the LONG RUN – oligopolies will make a PROFIT; due to high barriers to entry

If yellow has a low price and white has a High price, what will be yellow’s profit? ___ White’s profit? ___________   If yellow and white both have a high price, What will be yellow’s profit? ________ White’s profit? _____________ At the Nash equilibrium, what will be Yellow’s profit? ________ white’s? _______ What is yellow’s dominant strategy? What is white’s dominant strategy?

* * * * If yellow has a low price and white has a High price, what will be yellow’s profit? $50 White’s profit? $ 160   If yellow and white both have a high price, What will be yellow’s profit? $100 White’s profit? $100  At the Nash equilibrium, what will be Yellow’s profit? $100 white’s? $100 What is yellow’s dominant strategy? HIGH  What is white’s dominant strategy? HIGH * * * *

Unit 4 Market Failures: imperfect information externalities public goods market power uneven distribution of wealth

How does the G correct for failures??? Positive externalities: SUBSIDIES Negative externalities: TAX Uneven distribution of wealth: PROGRESSIVE income taxes (wealthier people taxed at a high % rate)

To compensate for NEGATIVE externalities: Government issues a TAX What quantity will be produced without any Government intervention? What is the price consumers will pay before the tax? What is the price consumers will pay after the tax? What price do producers receive before the tax? What price do producers receive after the tax? What quantity will be produced after the tax? What is the dollar amount of the tax? How much of the tax do consumers pay? How much of the tax does the producer pay?

To compensate for NEGATIVE externalities: Government issues a TAX What quantity will be produced without any Government intervention? 200 What is the price consumers will pay before the tax? $10 What is the price consumers will pay after the tax? $12 What price do producers receive before the tax? $10 What price do producers receive after the tax? $ 8 What quantity will be produced after the tax? 100 What is the dollar amount of the tax? $4.00 How much of the tax do consumers pay?$2.00 How much of the tax does the producer pay?$2.00

Positive Externality

Negative Externality

Unit 5 Resource Market In the RESOURCE/FACTOR market, who/what demands? Who/what supplies? In the PRODUCT MARKET, who/what demands? Who/what supplies?

Demand and supply of labor Why does the Demand for labor shift??? Change in price of product Change in demand for product Change in substitute resources Change in productivity Why does the Supply of labor shift??? Change in # of workers Change in worker attitudes Change in Government regulations Shifting a curve on market labor graph 1. Decide which curve will shift 2. Shift the curve 3. Read the graph to determine wages and Q

The price of apples increase The price of apples increase. As a result, wages for apple pickers will _____________, and the Quantity of apple pickers will _________________ There is a decrease in the supply of teachers. As a result, wages for teachers will ______ and the Q of teachers will __________________

Profit Maximization in the Resource market: MRP<MFC don’t hire MRP>MFC hire MRP=MFC hire and stop (maximize profits here)

Assuming the firm in the above chart is a perfectly competitive firm that hires workers in a perfectly competitive labor market. The wage rate is $5 and the item sells for $10 each. # of workers Total product Marginal product Marginal revenue product (P X MP) Total cost Marginal factor cost 1 15 2 35 3 45 4 50 5 48

Assuming the firm in the above chart is a perfectly competitive firm that hires workers in a perfectly competitive labor market. The wage rate is $5 and the item sells for $10 each. # of workers Total product Marginal product Marginal revenue product (P X MP) Total cost Marginal factor cost 1 15 150 5 2 35 20 350 10 3 45 450 4 50 500 48 -2 480 25 According to the table above, how many workers should this firm hire? What will be the profit at this point?    

Profit Maximization in RESOURCE MARKET if hiring multiple INPUTS firms maximize utility just like consumers when they purchase things (if using multiple resources) MP (L) = MP (c ) W (L) W ( c) If the two resources are equal in their value, firm should stay put, if not equal, firm should hire more of the valuable resource and less of the least valuable resource. Price to hire one more baker is $20 at an MP of 40. The price to hire one more waitress is $10 at an MP of 30. If this firm is a profit maximizing firm, what should they do?