Ap micro review
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Ap micro review Ap micro review Presentation Transcript

  • 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
  • SHORT-RUN PRODUCTION
    RELATIONSHIPS
    Law of Diminishing Returns
    Total Product
    Total Product, TP
    Diminishing
    Marginal
    Returns
    Quantity of Labor
    Average Product, AP, and
    Marginal Product, MP
    Average
    Product
    Marginal
    Product
    Quantity of Labor
  • SHORT-RUN PRODUCTION
    RELATIONSHIPS
    Law of Diminishing Returns
    Total Product
    Total Product, TP
    Negative
    Marginal
    Returns
    Quantity of Labor
    Average Product, AP, and
    Marginal Product, MP
    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
    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
  • MARGINAL REVENUE-MARGINAL COST APPROACH
    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
  • MARGINAL REVENUE-MARGINAL COST APPROACH
    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
    A Game-Theory Overview
    RareAir’s Price Strategy
    Greatest
    Combined
    Profit
    Uptown’s Price Strategy
  • High
    Low
    A
    B
    $12
    $15
    High
    $12
    $6
    D
    C
    $6
    $8
    Low
    $8
    $15
    OLIGOPOLY BEHAVIOR
    A Game-Theory Overview
    RareAir’s Price Strategy
    Independent
    Actions
    Stimulate
    Response
    Uptown’s Price Strategy
  • High
    Low
    A
    B
    $12
    $15
    High
    $12
    $6
    D
    C
    $6
    $8
    Low
    $8
    $15
    OLIGOPOLY BEHAVIOR
    A Game-Theory Overview
    RareAir’s Price Strategy
    Independent
    Actions
    Stimulate
    Response
    Uptown’s Price Strategy
    Gravitating
    to the
    Worst Case
  • High
    Low
    A
    B
    $12
    $15
    High
    $12
    $6
    D
    C
    $6
    $8
    Low
    $8
    $15
    OLIGOPOLY BEHAVIOR
    A Game-Theory Overview
    RareAir’s Price Strategy
    Independent
    Actions
    Stimulate
    Response
    Uptown’s Price Strategy
    Gravitating
    to the
    Worst Case
  • 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
    Collusion
    Invites a
    Different
    Solution.
    Uptown’s Price Strategy
  • High
    Low
    A
    B
    $12
    $15
    High
    $12
    $6
    D
    C
    $6
    $8
    Low
    $8
    $15
    OLIGOPOLY BEHAVIOR
    A Game-Theory Overview
    RareAir’s Price Strategy
    Collusion
    Invites a
    Different
    Solution.
    But, the
    incentive
    to cheat
    is very real.
    Uptown’s Price Strategy
  • 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