AP Micro Final Exam Review

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AP Micro Final Exam Review

  1. 1. REVIEWFINAL EXAM
  2. 2. PRICE ELASTICITY OF DEMANDThe Price-Elasticity Coefficient and Formula Percentage change in quantity demanded of product X Ed = Percentage change in price of product XOr equivalently… change in quantity demanded of X Ed = Original quantity demanded of X  Change in price of X Original price of X
  3. 3. PRICE ELASTICITY OF DEMANDExtreme CasesPerfectly Inelastic Demand P D1 Ed = 0 0 QPerfectly Elastic Demand P D2 Ed =  0 Q
  4. 4. PRICE ELASTICITY & TOTAL REVENUE When prices are So is total revenue low,P TR D Q Quantity Demanded
  5. 5. PRICE ELASTICITY & TOTAL REVENUE Total revenue rises with price to aP point... TR D Q Quantity Demanded
  6. 6. PRICE ELASTICITY & TOTAL REVENUE Total revenue rises then declines with price to aP point... TR D Q Quantity Demanded
  7. 7. PRICE ELASTICITY & TOTAL REVENUE Total revenue rises then declines with price to aP point... TR D Q Quantity Demanded
  8. 8. PRICE ELASTICITY & TOTAL REVENUE Total revenue rises then declines with price to aP point... TR Total Revenue Test D Q Quantity Demanded
  9. 9. PRICE ELASTICITY & TOTAL REVENUE Total revenue rises then declines with price to aP point... TR Inelastic Demand D Inelastic Demand Q Quantity Demanded
  10. 10. PRICE ELASTICITY & TOTAL REVENUE Total revenue rises then declines with price to aP point... TR Elastic Demand Inelastic Demand D Elastic Inelastic Demand Demand Q Quantity Demanded
  11. 11. PRICE ELASTICITY & TOTAL REVENUE Total revenue rises then declines with price to aP point... TR Elastic Unit Elastic Demand Inelastic Demand D Elastic Inelastic Demand Demand Q Quantity Demanded
  12. 12. ECONOMIC COSTS Profits to an Profits to an Economist Accountant TEconomic (opportunity) Costs Economic O Profit T A Accounting L Profit Implicit costs (including a R normal profit) E V Explicit Accounting E Costs N costs (explicit U costs only) E
  13. 13. SHORT-RUN PRODUCTION RELATIONSHIPSLaw of Diminishing Returns Total Product, TP Total Product Increasing MarginalAverage Product, AP, and Quantity of Labor Marginal Product, MP Returns Average Product Marginal Quantity of Labor Product
  14. 14. SHORT-RUN PRODUCTION RELATIONSHIPSLaw of Diminishing Returns Total Product, TP Total Product Diminishing MarginalAverage Product, AP, and Quantity of Labor Returns Marginal Product, MP Average Product Marginal Quantity of Labor Product
  15. 15. SHORT-RUN PRODUCTION RELATIONSHIPSLaw of Diminishing Returns Total Product, TP Total Product Negative MarginalAverage Product, AP, and Quantity of Labor Marginal Product, MP Returns Average Product Marginal Quantity of Labor Product
  16. 16. UTILITY MAXIMIZING COMBINATIONAlgebraic Restatement of the Utility Maximization RuleMU of product A MU of product B Price of A = Price of B 8 Utils 16 Utils $1 = $2
  17. 17. PRODUCTIVITY AND COST CURVES Average product and marginal product AP MP Quantity of labor MC Costs (dollars) AVC Quantity of output
  18. 18. LONG-RUN PRODUCTION COSTSUnit Costs Output
  19. 19. LONG-RUN PRODUCTION COSTSUnit Costs Output
  20. 20. LONG-RUN PRODUCTION COSTS The long-run ATC just “envelopes” all of the short-run ATC curves.Unit Costs Output
  21. 21. LONG-RUN PRODUCTION COSTSUnit Costs long-run ATC Output
  22. 22. ECONOMIES AND DISECONOMIES OF SCALE•Labor Specialization•Managerial Specialization•Efficient Capital• Other FactorsDiseconomies of ScaleConstant Returns to Scale graphically presented...
  23. 23. ECONOMIES AND DISECONOMIES OF SCALE Economies of scaleUnit Costs long-run ATC Output
  24. 24. ATC decreases as ATC is constant as Output increases Output increases Economies Constant returns of scale to scaleUnit Costs long-run ATC Output
  25. 25. ATC decreases as ATC is constant as ATC increases as Output increases Output increases Output increases Economies Constant returns Diseconomies of scale to scale of scaleUnit Costs long-run ATC Output
  26. 26. MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position $200 Economic Profit MC 150 Cost and Revenue $131.00 MR ATC 100 AVC $97.78 50 0 1 2 3 4 5 6 7 8 9 10
  27. 27. MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position $200 Economic Profit MC 150 Cost and Revenue $131.00 MRMR = MC ATC 100 AVCOptimum $97.78Solution 50 0 1 2 3 4 5 6 7 8 9 10
  28. 28. MARGINAL REVENUE-MARGINAL COST APPROACH Short-Run Shut Down Point $200 MC 150 Cost and Revenue ATC 100 AVC $71.00 MR 50 Minimum AVC is the Shut-Down Point 0 1 2 3 4 5 6 7 8 9 10
  29. 29. SHORT-RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” its Price from the Industry Equilibrium S= MCs P P Economic ATC Profit S=MC$111 D $111 AVC D 8 Q 8000 Q Firm Industry (price taker)
  30. 30. SHORT-RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” its Price from the Industry Equilibrium S= MCs P P Economic ATC Profit S=MC$111 How about the D $111 long-run? AVC D 8 Q 8000 Q Firm Industry (price taker)
  31. 31. PROFIT MAXIMIZATION IN THE LONG RUNTemporary profits and the reestablishmentof long-run equilibrium S1 P P MC ATC$60 $60 50 50 40 MR 40 D1 100 Q 100,000 Q Firm Industry (price taker)
  32. 32. PROFIT MAXIMIZATION IN THE LONG RUNAn increase in demand increases profits… Economic S1 P Profits P MC ATC$60 $60 50 50 40 MR 40 D2 D1 100 Q 100,000 Q Firm Industry (price taker)
  33. 33. PROFIT MAXIMIZATION IN THE LONG RUNNew competitors increase supply, and lowerprices decrease economic profits. Zero Economic S1 P P S2 Profits MC ATC$60 $60 50 50 40 MR 40 D2 D1 100 Q 100,000 Q Firm Industry (price taker)
  34. 34. PROFIT MAXIMIZATION IN THE LONG RUNDecreases in demand, losses, and thereestablishment of long-run equilibrium S1 P P MC ATC$60 MR $60 50 50 40 40 D1 100 Q 100,000 Q Firm Industry (price taker)
  35. 35. PROFIT MAXIMIZATION IN THE LONG RUNA decrease in demand creates losses… Economic S1 P Losses P MC ATC$60 MR $60 50 50 40 40 D1 D2 100 Q 100,000 Q Firm Industry (price taker)
  36. 36. PROFIT MAXIMIZATION IN THE LONG RUNCompetitors with losses decrease supply, andprices return to zero economic profits.S3 Return to Zero S1 P Economic Profits P MC ATC$60 MR $60 50 50 40 40 D1 D2 100 Q 100,000 Q Firm Industry (price taker)
  37. 37. MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position $200 Economic Loss MC 150 Cost and Revenue ATC 100 AVC $91.67 $81.00 MR 50 0 1 2 3 4 5 6 7 8 9 10
  38. 38. MONOPOLY REVENUES & COSTS Elastic $200 150 Dollars 200 50 MR D Q T 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $750 Dollars 500 TR 250 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
  39. 39. MONOPOLY REVENUES & COSTS Elastic Inelastic $200 150 Inelastic Dollars Portion 200 MR is NegativeA Monopolist will 50 MR Dalways operate on Qthe Elastic Portion 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18of the Demand $750Curve Dollars 500 TR 250 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
  40. 40. OUTPUT AND PRICE DETERMINATIONProfit Maximization Under Monopoly Remember the MR=MC Rule? 200 175 Profit Per UnitPrice, costs, and revenue 150 MC $122 125 $94 100 Profit ATC 75 D 50 25 MR = MC MR Q 0 1 2 3 4 5 6 7 8 9 10
  41. 41. OUTPUT AND PRICE DETERMINATIONProfit Maximization Under Monopoly 200 175 Profit Per UnitPrice, costs, and revenue 150 MC $122 125 $94 100 Profit ATC 75 D 50 25 MR = MC MR Q 0 1 2 3 4 5 6 7 8 9 10
  42. 42. OUTPUT AND PRICE DETERMINATION Loss Minimization Under Monopoly 200 Loss Since Pm exceeds AVC, Per Unit 175 the firm will producePrice, costs, and revenue 150 MC A ATC 125 Loss Pm AVC 100 V 75 D 50 25 MR = MC MR Q 0 1 2 3 4 5 6 7 8 9 10 Qm
  43. 43. OUTPUT AND PRICE DETERMINATION Loss Minimization Under Monopoly 200 Loss Per Unit What are the 175Price, costs, and revenue 150 MC Economic Effects AVC A Pm125 Loss ATC of Monopoly? V 100 75 D 50 25 MR = MC MR Q 0 1 2 3 4 5 6 7 8 9 10 Qm
  44. 44. INEFFICIENCY OF PURE MONOPOLY P An industry in pure competition S = MC sells where supply and demand are equal At MR=MC A monopolist will sell less units at aPm higher price than inPc competition D MR Q Qm Qc
  45. 45. INEFFICIENCY OF PURE MONOPOLY P S = MC At MR=MC A monopolist will sell less units at aPm higher price than inPc competition Monopoly pricing effectivelycreates an income transfer from buyers to the seller! D MR Q Qm Qc
  46. 46. REGULATED MONOPOLY P Dilemma of Regulation MR = MC Which Price? Fair-Return PricePrice and Costs Pm Socially-Optimum Price Pf ATC Pr MC D MR Qm Qf Qr Q
  47. 47. MONOPOLISTIC COMPETITION AND EFFICIENCY Long-Run Equilibrium MC Price is Not = Minimum ATC ATC P3 = A3Price and Costs Price  MC D MR Q3 Quantity
  48. 48. MONOPOLISTIC COMPETITION AND EFFICIENCY• Not Productively Efficient  Minimum ATC• Not Allocatively Efficient Price  MC• Excess Capacity Graphically…
  49. 49. OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy High Low A $12 B $15 HighUptown’s Price Strategy $12 $6 C $6 D $8 Low $15 $8
  50. 50. OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy High Low A $12 B $15 Greatest Combined High ProfitUptown’s Price Strategy $12 $6 C $6 D $8 Low $15 $8
  51. 51. OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy High Low A $12 B $15 Independent Actions High StimulateUptown’s Price Strategy $12 $6 Response C $6 D $8 Low $15 $8
  52. 52. OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy High Low A $12 B $15 Independent Actions High StimulateUptown’s Price Strategy $12 $6 Response Gravitating C $6 D $8 to the Low Worst Case $15 $8
  53. 53. OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy High Low Collusion A $12 B $15 Invites a Different High Solution.Uptown’s Price Strategy $12 $6 C $6 D $8 Low $15 $8
  54. 54. OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy High Low Collusion A $12 B $15 Invites a Different High Solution.Uptown’s Price Strategy $12 $6 C $6 D $8 Low $15 $8
  55. 55. OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy High Low Collusion A $12 B $15 Invites a Different High Solution.Uptown’s Price Strategy $12 $6 But, the incentive to cheat C $6 D $8 is very real. Low $15 $8
  56. 56. PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM S Includes Normal ProfitWage Rate (dollars) Non- Labor Costs S = MRC Wc $10 Wc ($10) Labor D = MRP Costs ( mrp’s) d = mrp (1000) (5) Quantity of Labor Quantity of Labor Labor Market Individual Firm
  57. 57. PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM S Includes Normal Marginal Resource ProfitWage Rate (dollars) Cost (MRC) will be Non- Labor Wc constant and W Costs to $10 equal c S = MRC ($10) resource price (the wage rate) D = MRP Labor Costs ( mrp’s) d = mrp (1000) (5) Quantity of Labor Quantity of Labor Labor Market Individual Firm
  58. 58. MONOPSONISTIC LABOR MARKET SWage Rate (dollars) In monopsony MRC lies above the supply curve. Quantity of Labor
  59. 59. MONOPSONISTIC LABOR MARKET MRC SWage Rate (dollars) MRP = MRC Wm MRP Qm units of labor hired Qm Quantity of Labor
  60. 60. MONOPSONISTIC LABOR MARKET MRC S The competitiveWage Rate (dollars) solution would result in a higher Wc wage and greater Wm employment. MRP Qm Qc Quantity of Labor
  61. 61. OPTIMAL AMOUNT OF A PUBLIC GOOD P$9 S 7 Yields the optimum amount of the public good 5 MB = MC 3 1 DC Q 0 1 2 3 4 5
  62. 62. THE LORENZ CURVE 100 Lorenz Curve (actual distribution) 80 Perfect EqualityPercent of Income 60 Lorenz curve after taxes and Area between 40 transfers the lines shows the degree of income inequality 20 Complete Inequality 0 20 40 60 80 100 Percent of Families

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