Ap micro review

AP MICRO REVIEW


Q
%
d

%
P
PRICE ELASTICITY OF DEMAND
Commonly Expressed as…
The percentage change in quantity
P
The percentage change in price
P2
P1
Elasticity is .5
D
Q
Q1
Q2

PRICE ELASTICITY & TOTAL REVENUE
Total revenue rises
with price to a
point...
then declines
P
TR
Unit
Elastic
Elastic
Demand
Inelastic
Demand
D
Elastic
Demand
Inelastic
Demand
Q
Quantity Demanded

MU of product B
MU of product A
Price of A
Price of B
16 Utils
8 Utils
=
$1
$2
UTILITY MAXIMIZING COMBINATION
Algebraic Restatement of the
Utility Maximization Rule
=

SHORT-RUN COSTS GRAPHICALLY
MC
Plotting Average and
Marginal Costs
ATC
AVC
Costs (dollars)
AFC
Quantity

ECONOMIC COSTS
Economic
Profit
Accounting
Profit
Implicit costs
(including a
normal profit)
Accounting
costs (explicit
costs only)
Explicit
Costs
Profits to an
Economist
Profits to an
Accountant
T
O
T
A
L
R
E
V
E
N
U
E
Economic (opportunity) Costs

SHORT-RUN PRODUCTION
RELATIONSHIPS
Law of Diminishing Returns
Total Product
Total Product, TP
Increasing
Marginal
Returns
Quantity of Labor
Average Product, AP, and
Marginal Product, MP
Average
Product
Marginal
Product
Quantity of Labor

RELATIONSHIPS
Total Product
Total Product, TP
Diminishing
Marginal
Returns
Quantity of Labor
Average
Product
Marginal
Product
Quantity of Labor

RELATIONSHIPS
Total Product
Total Product, TP
Negative
Marginal
Returns
Quantity of Labor
Average
Product
Marginal
Product
Quantity of Labor

ECONOMIES AND
DISECONOMIES OF SCALE
Diseconomies
of scale
Constant returns
to scale
Economies
of scale
Unit Costs
long-run ATC
Output

MARGINAL REVENUE-MARGINAL COST APPROACH
Profit Maximization Position
$200
150
100
50
0
Economic Profit
MC
MR
$131.00
ATC
Cost and Revenue
AVC
$97.78
1 2 3 4 5 6 7 8 9 10

MR = MC
Optimum
Solution
Profit Maximization Position
$200
150
100
50
0
Economic Profit
MC
MR
$131.00
ATC
Cost and Revenue
AVC
$97.78
1 2 3 4 5 6 7 8 9 10

Loss Minimization Position
$200
150
100
50
0
Economic Loss
MC
ATC
Cost and Revenue
AVC
$91.67
MR
$81.00
1 2 3 4 5 6 7 8 9 10

Short-Run Shut Down Point
$200
150
100
50
0
MC
ATC
Cost and Revenue
AVC
MR
$71.00
Minimum AVC
is the Shut-Down
Point
1 2 3 4 5 6 7 8 9 10

PURE COMPETITION AND EFFICIENCY
Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC

MONOPOLY REVENUES & COSTS
Inelastic
Elastic
$200
150
200
50
Inelastic Portion
MR is Negative
Dollars
A Monopolist will always operate on the Elastic Portion of the Demand Curve
MR
D
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
$750
500
250
Dollars
TR
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

OUTPUT AND PRICE DETERMINATION
200
175
150
125
100
75
50
25
Price, costs, and revenue
Q
0 1 2 3 4 5 6 7 8 9 10
Profit Maximization Under Monopoly
Remember the MR=MC Rule?
Profit
Per Unit
MC
$122
Profit
ATC
$94
D
MR = MC
MR

INEFFICIENCY OF PURE MONOPOLY
An industry in pure competition
sells where supply and
demand are equal
P
S = MC
At MR=MC
A monopolist
will sell less
units at a
higher price
than in
competition
Pm
Pc
D
MR
Q
Qc
Qm

MONOPOLISTIC COMPETITION
AND EFFICIENCY
Price is Not
= Minimum
ATC
Price  MC
MC
Long-Run Equilibrium
ATC
P3
= A3
Price and Costs
D
MR
Q3
Quantity

OLIGOPOLY BEHAVIOR
High
Low
A
B
$12
$15
High
$12
$6
D
C
$6
$8
Low
$8
$15
A Game-Theory Overview
RareAir’s Price Strategy
Uptown’s Price Strategy

High
Low
A
B
$12
$15
High
$12
$6
D
C
$6
$8
Low
$8
$15
OLIGOPOLY BEHAVIOR
Greatest
Combined
Profit

High
Low
A
B
$12
$15
High
$12
$6
D
C
$6
$8
Low
$8
$15
OLIGOPOLY BEHAVIOR
Independent
Actions
Stimulate
Response

High
Low
A
B
$12
$15
High
$12
$6
D
C
$6
$8
Low
$8
$15
OLIGOPOLY BEHAVIOR
Independent
Actions
Stimulate
Response
Gravitating
to the
Worst Case

OLIGOPOLY BEHAVIOR
High
Low
A
B
$12
$15
High
$12
$6
D
C
$6
$8
Low
$8
$15
Collusion
Invites a
Different
Solution.

High
Low
A
B
$12
$15
High
$12
$6
D
C
$6
$8
Low
$8
$15
OLIGOPOLY BEHAVIOR
Collusion
Invites a
Different
Solution.
But, the
incentive
to cheat
is very real.

Marginal
Resource
Cost
Change in Total (Resource) Cost
Unit change in Resource Quantity
=
MARGINAL PRODUCTIVITY
THEORY OF RESOURCE DEMAND
Rule for Employing Resources:
MRP = MRC

MP of Capital
MP of Labor
Price of Capital
Price of Labor
MRPC
MRPL
1
PC
PL
OPTIMUM COMBINATION
OF RESOURCES
Least-Cost Rule
Least-Cost Combination of Resources
Profit-Maximizing Combination

PURELY COMPETITIVE LABOR
MARKET EQUILIBRIUM
Non-
Labor
Costs
Wage Rate (dollars)
Quantity of Labor
Quantity of Labor
S
Includes
Normal
Profit
S = MRC
Wc
($10)
$10
$10
$10
$10
$10
$10
Wc
Labor
Costs
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Individual Firm
Labor Market

MONOPSONISTICLABOR MARKET
MRC
S
The competitive
solution would
result in a higher
wage and greater
employment.
Wage Rate (dollars)
Wc
Wm
MRP
Qm
Qc
Quantity of Labor

OPTIMAL AMOUNT OF A PUBLIC GOOD
P
$ 9
7
5
3
1
S
Yields the
optimum amount
of the public good
MB = MC
DC
Q
0 1 2 3 4 5

COST-BENEFIT ANALYSIS
Marginal Cost = Marginal Benefit Rule
Externalities
Spillover Costs
Overallocation
Spillover Benefits
Underallocation

Ap micro review

by MrRed on Jan 17, 2011

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