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Ap micro review

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Ap micro review

  1. 1. AP MICRO REVIEW<br />
  2. 2. <br />Q<br />% <br />d<br /><br />% <br />P<br />PRICE ELASTICITY OF DEMAND<br />Commonly Expressed as…<br />The percentage change in quantity<br />P<br />The percentage change in price<br />P2<br />P1<br />Elasticity is .5<br />D<br />Q<br />Q1<br />Q2<br />
  3. 3. PRICE ELASTICITY & TOTAL REVENUE<br />Total revenue rises<br />with price to a <br />point...<br />then declines<br />P<br />TR<br />Unit<br />Elastic<br />Elastic<br />Demand<br />Inelastic<br />Demand<br />D<br />Elastic<br />Demand<br />Inelastic<br />Demand<br />Q<br />Quantity Demanded<br />
  4. 4. MU of product B<br />MU of product A<br />Price of A<br />Price of B<br />16 Utils<br />8 Utils<br />=<br />$1<br />$2<br />UTILITY MAXIMIZING COMBINATION<br />Algebraic Restatement of the<br />Utility Maximization Rule<br />=<br />
  5. 5. SHORT-RUN COSTS GRAPHICALLY<br />MC<br />Plotting Average and<br />Marginal Costs<br />ATC<br />AVC<br />Costs (dollars)<br />AFC<br />Quantity<br />
  6. 6. ECONOMIC COSTS<br />Economic<br />Profit<br />Accounting<br />Profit<br />Implicit costs<br />(including a<br />normal profit)<br />Accounting<br />costs (explicit<br />costs only)<br />Explicit<br />Costs<br />Profits to an<br />Economist<br />Profits to an<br />Accountant<br />T<br />O<br />T<br />A<br />L<br />R<br />E<br />V<br />E<br />N<br />U<br />E<br />Economic (opportunity) Costs<br />
  7. 7. SHORT-RUN PRODUCTION<br />RELATIONSHIPS <br />Law of Diminishing Returns<br />Total Product<br />Total Product, TP<br />Increasing<br />Marginal<br />Returns<br />Quantity of Labor<br />Average Product, AP, and<br />Marginal Product, MP<br />Average<br />Product<br />Marginal<br />Product<br />Quantity of Labor<br />
  8. 8. SHORT-RUN PRODUCTION<br />RELATIONSHIPS <br />Law of Diminishing Returns<br />Total Product<br />Total Product, TP<br />Diminishing<br />Marginal<br />Returns<br />Quantity of Labor<br />Average Product, AP, and<br />Marginal Product, MP<br />Average<br />Product<br />Marginal<br />Product<br />Quantity of Labor<br />
  9. 9. SHORT-RUN PRODUCTION<br />RELATIONSHIPS <br />Law of Diminishing Returns<br />Total Product<br />Total Product, TP<br />Negative<br />Marginal<br />Returns<br />Quantity of Labor<br />Average Product, AP, and<br />Marginal Product, MP<br />Average<br />Product<br />Marginal<br />Product<br />Quantity of Labor<br />
  10. 10. ECONOMIES AND<br />DISECONOMIES OF SCALE<br />Diseconomies<br />of scale<br />Constant returns<br />to scale<br />Economies<br />of scale<br />Unit Costs<br />long-run ATC<br />Output<br />
  11. 11. MARGINAL REVENUE-MARGINAL COST APPROACH<br />Profit Maximization Position<br />$200<br />150<br />100<br /> 50<br /> 0<br />Economic Profit<br />MC<br />MR<br />$131.00<br />ATC<br />Cost and Revenue<br />AVC<br />$97.78<br /> 1 2 3 4 5 6 7 8 9 10 <br />
  12. 12. MR = MC<br />Optimum<br />Solution<br />MARGINAL REVENUE-MARGINAL COST APPROACH<br />Profit Maximization Position<br />$200<br />150<br />100<br /> 50<br /> 0<br />Economic Profit<br />MC<br />MR<br />$131.00<br />ATC<br />Cost and Revenue<br />AVC<br />$97.78<br /> 1 2 3 4 5 6 7 8 9 10 <br />
  13. 13. MARGINAL REVENUE-MARGINAL COST APPROACH<br />Loss Minimization Position<br />$200<br />150<br />100<br /> 50<br /> 0<br />Economic Loss<br />MC<br />ATC<br />Cost and Revenue<br />AVC<br />$91.67<br />MR<br />$81.00<br /> 1 2 3 4 5 6 7 8 9 10 <br />
  14. 14. MARGINAL REVENUE-MARGINAL COST APPROACH<br />Short-Run Shut Down Point<br />$200<br />150<br />100<br /> 50<br /> 0<br />MC<br />ATC<br />Cost and Revenue<br />AVC<br />MR<br />$71.00<br />Minimum AVC<br />is the Shut-Down<br />Point<br /> 1 2 3 4 5 6 7 8 9 10 <br />
  15. 15. PURE COMPETITION AND EFFICIENCY<br />Productive Efficiency<br />Price = Minimum ATC<br />Allocative Efficiency<br />Price = MC<br />Underallocation<br />Price > MC<br />Overallocation<br />Price < MC<br />
  16. 16. MONOPOLY REVENUES & COSTS<br />Inelastic<br />Elastic<br />$200<br />150<br />200<br /> 50<br />Inelastic Portion<br />MR is Negative<br />Dollars<br />A Monopolist will always operate on the Elastic Portion of the Demand Curve<br />MR<br />D<br />Q<br />0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18<br />$750<br />500<br />250<br />Dollars<br />TR<br />Q<br />0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18<br />
  17. 17. OUTPUT AND PRICE DETERMINATION<br />200<br />175<br />150<br />125<br />100<br />75<br /> 50<br />25<br />Price, costs, and revenue<br />Q<br />0 1 2 3 4 5 6 7 8 9 10<br />Profit Maximization Under Monopoly <br />Remember the MR=MC Rule?<br />Profit<br />Per Unit<br />MC<br />$122<br />Profit<br />ATC<br />$94<br />D<br />MR = MC<br />MR<br />
  18. 18. INEFFICIENCY OF PURE MONOPOLY<br />An industry in pure competition<br />sells where supply and<br />demand are equal<br />P<br />S = MC<br />At MR=MC<br />A monopolist<br />will sell less<br />units at a<br />higher price<br />than in<br />competition<br />Pm<br />Pc<br />D<br />MR<br />Q<br />Qc<br />Qm<br />
  19. 19. MONOPOLISTIC COMPETITION<br />AND EFFICIENCY<br />Price is Not<br />= Minimum<br />ATC<br />Price  MC<br />MC<br />Long-Run Equilibrium<br />ATC<br />P3<br />= A3<br />Price and Costs<br />D<br />MR<br />Q3<br />Quantity<br />
  20. 20. OLIGOPOLY BEHAVIOR<br />High<br />Low<br />A<br />B<br />$12<br />$15<br />High<br />$12<br />$6<br />D<br />C<br />$6<br />$8<br />Low<br />$8<br />$15<br />A Game-Theory Overview<br />RareAir’s Price Strategy<br />Uptown’s Price Strategy<br />
  21. 21. High<br />Low<br />A<br />B<br />$12<br />$15<br />High<br />$12<br />$6<br />D<br />C<br />$6<br />$8<br />Low<br />$8<br />$15<br />OLIGOPOLY BEHAVIOR<br />A Game-Theory Overview<br />RareAir’s Price Strategy<br />Greatest<br />Combined<br />Profit<br />Uptown’s Price Strategy<br />
  22. 22. High<br />Low<br />A<br />B<br />$12<br />$15<br />High<br />$12<br />$6<br />D<br />C<br />$6<br />$8<br />Low<br />$8<br />$15<br />OLIGOPOLY BEHAVIOR<br />A Game-Theory Overview<br />RareAir’s Price Strategy<br />Independent<br />Actions<br />Stimulate<br />Response<br />Uptown’s Price Strategy<br />
  23. 23. High<br />Low<br />A<br />B<br />$12<br />$15<br />High<br />$12<br />$6<br />D<br />C<br />$6<br />$8<br />Low<br />$8<br />$15<br />OLIGOPOLY BEHAVIOR<br />A Game-Theory Overview<br />RareAir’s Price Strategy<br />Independent<br />Actions<br />Stimulate<br />Response<br />Uptown’s Price Strategy<br />Gravitating<br />to the<br />Worst Case<br />
  24. 24. High<br />Low<br />A<br />B<br />$12<br />$15<br />High<br />$12<br />$6<br />D<br />C<br />$6<br />$8<br />Low<br />$8<br />$15<br />OLIGOPOLY BEHAVIOR<br />A Game-Theory Overview<br />RareAir’s Price Strategy<br />Independent<br />Actions<br />Stimulate<br />Response<br />Uptown’s Price Strategy<br />Gravitating<br />to the<br />Worst Case<br />
  25. 25. OLIGOPOLY BEHAVIOR<br />High<br />Low<br />A<br />B<br />$12<br />$15<br />High<br />$12<br />$6<br />D<br />C<br />$6<br />$8<br />Low<br />$8<br />$15<br />A Game-Theory Overview<br />RareAir’s Price Strategy<br />Collusion<br />Invites a<br />Different<br />Solution.<br />Uptown’s Price Strategy<br />
  26. 26. High<br />Low<br />A<br />B<br />$12<br />$15<br />High<br />$12<br />$6<br />D<br />C<br />$6<br />$8<br />Low<br />$8<br />$15<br />OLIGOPOLY BEHAVIOR<br />A Game-Theory Overview<br />RareAir’s Price Strategy<br />Collusion<br />Invites a<br />Different<br />Solution.<br />But, the<br />incentive<br />to cheat<br />is very real.<br />Uptown’s Price Strategy<br />
  27. 27. Marginal<br />Resource<br />Cost<br />Change in Total (Resource) Cost<br />Unit change in Resource Quantity<br />=<br />MARGINAL PRODUCTIVITY<br />THEORY OF RESOURCE DEMAND<br />Rule for Employing Resources:<br />MRP = MRC<br />
  28. 28. MP of Capital<br />MP of Labor<br />Price of Capital<br />Price of Labor<br />MRPC<br />MRPL<br />1<br />PC<br />PL<br />OPTIMUM COMBINATION<br />OF RESOURCES<br />Least-Cost Rule<br />Least-Cost Combination of Resources<br />Profit-Maximizing Combination<br />
  29. 29. PURELY COMPETITIVE LABOR<br />MARKET EQUILIBRIUM<br />Non-<br />Labor<br />Costs<br />Wage Rate (dollars)<br />Quantity of Labor<br />Quantity of Labor<br />S<br />Includes<br />Normal<br />Profit<br />S = MRC<br />Wc<br />($10)<br /> $10<br /> $10<br /> $10<br /> $10<br /> $10<br /> $10<br />Wc<br />Labor<br />Costs<br />D = MRP<br />( mrp’s)<br />d = mrp<br />(1000)<br />(5)<br />Individual Firm<br />Labor Market<br />
  30. 30. MONOPSONISTICLABOR MARKET<br />MRC<br />S<br />The competitive<br />solution would<br />result in a higher<br />wage and greater<br />employment.<br />Wage Rate (dollars)<br />Wc<br />Wm<br />MRP<br />Qm<br />Qc<br />Quantity of Labor<br />
  31. 31. OPTIMAL AMOUNT OF A PUBLIC GOOD<br />P<br />$ 9<br /> 7<br /> 5<br /> 3<br /> 1<br />S<br />Yields the<br />optimum amount<br />of the public good<br />MB = MC<br />DC<br />Q<br />0 1 2 3 4 5<br />
  32. 32. COST-BENEFIT ANALYSIS<br />Marginal Cost = Marginal Benefit Rule<br />Externalities<br />Spillover Costs<br />Overallocation<br />Spillover Benefits<br />Underallocation<br />

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