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AP MicroeconomicsMr. Wash
Microeconomics Exam Review Guide Structure:60 Multiple Choice questions (1 point each) in 70 minutes3 Essays (20 points) in 60 minutes
UNIT ONEFUNDAMENTALS OF ECONOMICS
CHOICE o EUSR=MSUW
OPPORTUNITY COST o TINSTAAFL
SCARCITY o LIMITED AND DESIRABLE
RATIONAL THINKING COST-BENEFIT ANALYSIS
o FUTURE UTILITY o INVESTMENT
MARGINAL THINKING o IMPERFECT INFORMATION
ECONOMIC THEORY POSITIVE/OBJECTIVE
o FACTS o THEORY
INDUCTION DEDUCTION
NORMATIVE/SUBJECTIVE o POLICY
FALLACIES o POST HOC o COMPOSITION o DEFINITION o BIAS
THE FOUR FUNDAMENTAL QUESTIONS
TRADITIONAL SYSTEMS o BARTER
ADAM SMITH GREED
o PROFIT MOTIVE PRIVATE PROPERTY FREEDOM OF CHOICE MARKETS COMPETITION NO GOVT
o "LAISSEZ FAIRE" o "INVISIBLE HAND"
CAPITALISM o SPECIALIZATION o CAPITAL o MONEY
CONSUMER SOVEREIGNTY o DERIVED DEMAND
UNITS TWO AND THREESUPPLY AND DEMAND
DEMAND Law of Demand
CHANGE IN P= CHANGE IN QdINVERSE
DMU YFX SFX
CHANGE IN NPD= CHANGE IN D TASTES INCOME MORE OR FEWER BUYERS EXPECTATIONS RELATED GOODS' PRICES
o SUB=SAME o COMP=OPPOSITE
CHANGE IN D = P QCHANGE IN D = P Q
SUPPLY Law of Supply
CHANGE IN P = CHANGE IN Qs
DIRECT DMR/IC P X Q = TR
CHANGE IN NPD= CHANGE IN S
GOVERNMENT o TAXES
/SUBSIDIES
o PRICE CONTROLS
OTHER PROFIT OPPORTUNITIES
NUMBER INVESTMENT
IN TECHNOLOGY
COST OF RESOURCE
EXPECTATIONS
CHANGE IN S = PQ
CHANGE IN S = PQ
UNITS TWO AND THREECONSUMER CHOICE, ELASTICITY, AND MARKET
FAILURE
KARL MARX WEALTH = UTILITY LABOR THEORY OF VALUE ALIENATION EXPLOITATION
o SUBSISTENCE o PROFIT IS SURPLUS LABOR
FLAWS OF CAPITALISM o EXTERNALITIES
PUBLIC COSTS o ASYMMETRIC INFORMATION o PUBLIC GOODS o IMPERFECT COMPETITION
MONOPOLY o INEQUITY
SOLUTION o UNIONS o REVOLUTION o GOVERNMENT
PUBLIC OWNERSHIP SOCIALISM
MARGINAL UTILITY LAW OF DIMINISHING MARGINAL
UTILITY IRRATIONAL GOODS MU of product A/price of A = MU
of product B/price of B = etc.
ELASTICITY DETERMINANTS OF ELASTICITY
o TIME o SUBSTITUTES o NECESSITY o INCOME
TOTAL REVENUE TEST o P = TR
E<1, INELASTIC o P = TR
E>1, ELASTIC "Good Enough Formula":
E =(Q2 - Q1/Q1)
(P2 - P1/P1) DEMAND CURVES
o MORE ELASTIC AT HIGH PRICES
o MORE INELASTIC AT LOW PRICES
o UNIT ELASTIC AT EQUILIBRIUM
SURPLUS CONSUMER SURPLUS
o DIFFERENCE BETWEEN WHAT CONSUMERS ARE WILLING TO PAY AND WHAT THEY HAVE TO PAY IN ORDER TO RECEIVE THE PRODUCT
o UTILITY PRODUCER SURPLUS
o AMOUNT GREATER THAN COST WHICH PRODUCERS RECEIVE FOR PRODUCT
o PROFIT
UNIT FOURMARKETS AND COSTS
PERFECT COMPETITION
INFINITE NUMBER OF FIRMS
VERY EASY ENTRY INTO MARKET
STANDARD PRODUCT
MONOPOLISTIC COMPETITION
MANY FIRMS EASY ENTRY
INTO MARKET
DIFFERENTIATED PRODUCT
OLIGOPOLY A FEW FIRMS DIFFICULT
ENTRY INTO MARKET
DIFFERENTIATED PRODUCT
MONOPOLY ONE FIRM IMPOSSIBLE
ENTRY INTO MARKET
STANDARD PRODUCT
PRICE TAKER DEMAND IS
PERFECTLY ELASTIC AT MARKET PRICE
PRICE MAKERRISK TAKER
PRICE MAKERRISK AVOIDER
PRICE MAKER- DEMAND IS VERY
CLOSE TO PERFECTLY INELASTIC
RISK TAKER RISK AVOIDER PRODUCTIV
E EFFICIENCY
o P = ATC
o ALWAYS IN LONG RUN
o EP = 0
o FAIR RETURN
ALLOCATIVE EFFICIENCY
o P = MC
o NATURAL EQUILIBRIUM
o SOCIALLY OPTIMAL
o ALWAYS
X EFFICIENCY
o MINIMUM POSSIBLE LONG RUN ATC
o ALWAYS IN LONG RUN
PRODUCTIVE EFFICIENCY
o P = ATC
o ALWAYS IN LONG RUN
o EP = 0 o FAIR
RETURN
ALLOCATIVE EFFICIENCY
o P > MC
o ARTIFICIAL EQ
o NEVER
X EFFICIENCY
o MINIMUM POSSIBLE LONG RUN ATC
o ALWAYS OVERKAPITALIZED IN LONG RUN
PRODUCTIVE EFFICIENCY
o P > ATC
o NEVER IN LONG RUN
o EP > 0 ALLOCATIVE
EFFICIENCY o P >
MC o ARTIF
ICIAL EQ
o NEVER
X EFFICIENCY
o USUALLY IN LONG RUN
o HIT AND RUN COMPETITION
SHORT RUN COLLUSION
PRODUCTIVE EFFICIENCY
o P > ATC o NEVER
IN LONG RUN
o EP > 0 ALLOCATIVE
EFFICIENCY o P > MC o ARTIFI
CIAL EQ
o NEVER X EFFICIENCY
o NEVER o CONTE
STABLE MARKET?
o HIT AND RUN COMPETITION?
NON-PRODUCTIVE COSTS
o LAWSUITS
o LOBBYING
o LYNCHING
COSTS EXTERNAL INTERNAL
o EXPLICIT FIXED
RENT INTEREST
VARIABLE WAGES
o IMPLICIT NORMAL PROFIT (OPPORTUNITY COST)
TOTAL REVENUE = P X Q TOTAL REVENUE - INTERNAL
EXPLICIT COSTS = ACCOUNTING PROFIT
ACCOUNTING PROFIT - NORMAL PROFIT = ECONOMIC PROFIT
PROFIT MAXIMIZATION FORMULA
TR > TC o MAX PROFIT o PRODUCE AT MR > MC
TR < TC o TR > TVC
MIN LOSSES PRODUCE AT MR
> MC LOSE LESS THAN
TFC, BUT LONG RUN LOOK TO SHUT DOWN
o TR < TVC SHUT DOWN LOSE TFC
ALL MARKETS IN LONG RUN EQUILIBRIUM
o EP = 0 o
PRODUCTIVE EFFICIENCY o P = ATC o EP = 0 o FAIR RETURN
ALLOCATIVE EFFICIENCY o P = MC o NATURAL EQUILIBRIUM o SOCIALLY OPTIMAL
X EFFICIENTY o MINIMUM POSSIBLE LONG
RUN ATC
IMPERFECT MARKETSMONOPOLISTIC COMPETITION
MANY FIRMS EASY ENTRY INTO MARKET DIFFERENTIATED PRODUCT
PRICE MAKERRISK TAKERCHOOSE NOT TO PRICE DISCRIMINATE, SO P DOES NOT EQUAL MRPROFIT MAXIMIZATION FORMULA IN IMPERFECT COMPETITION:
TR > TC o MAX PROFIT o PRODUCE AT MR > MC
BUT Qs < Qd o SHORTAGE
SO P = Qd o UNTIL Qd = Qs o ARTIFICIAL
EQUILIBRIUM FOR MONOPOLISITIC COMPETITION
LONG RUN o IF EP > 0
FIRMS ENTER ATC P EP = 0
o IF EP < 0 FIRMS LEAVE
ATC P EP = 0
LONG RUN PRODUCTIVE EFFICIENCY X-EFFICIENCY
o OVERCAPITALIZATION FOR POTENTIAL EXPANSION
NOT ALLOCATIVE EFFICIENT
OLIGOPOLY A FEW FIRMS DIFFICULT ENTRY INTO MARKET DIFFERENTIATED PRODUCT INTERDEPENDENT
o NASH BOX o PRISONER'S DILEMMA
PRICE MAKERRISK AVOIDER
KINKED DEMAND CURVE o IF P
OTHER FIRMS KEEP PRICE THE SAME
SO DUE TO SUBSTITUTION EFFECT, Qd
TR E > 0
o IF P OTHER FIRMS
LOWER PRICES PRICE WAR Qd CONSTANT
TR E < 0
STABLE MARKETCOLLUSION IF THREATENED FROM
OUTSIDE X-EFFICIENCY
o OVERCAPITALIZATION FOR POTENTIAL EXPANSION
NOT PRODUCTIVE EFFICIENCY NOT ALLOCATIVE EFFICIENT
MONOPOLY ONE FIRM IMPOSSIBLE ENTRY INTO MARKET STANDARD PRODUCT
PRICE MAKERRISK AVOIDER
CONTESTABLE MARKET o IF NOT X-EFFICIENT, FIRMS
WILL TAKE ADVANTAGE OF WINDOW OF OPPORTUNITY
o INNOVATION COMES FROM OUTSIDE
o HIT AND RUN COMPETITION NON PRODUCTIVE COSTS
o PREDATORY PRICING o PRICE DISCRIMINATION o TYING
CONTRACTS/BUNDLING o LOBBYING, LAWSUITS,
LYNCHING GOVERNMENT REGULATION
o BREAK UP o NATURAL MONOPOLY
LONG RUN COSTS ARE SUCH THAT OPTIMAL EFFICIENCY IS ACHIEVED WITH ONLY ONE FIRM PRODUCING
ECONOMIES OF SCALE
PRICE REGULATION SOCIALLY
OPTIMAL PRICE
OVERCAPITALIZATION
FAIR RETURN PRICE
X-INEFFICIENCY
o OVERCAPITALIZATION PROTECT AGAINST
POTENTIAL COMPETITORS
DEFEND AGAINST GOVERNMENT PRICE REGULATION
NOT PRODUCTIVE EFFICIENCY NOT ALLOCATIVE EFFICIENT
UNIT FIVERESOURCE MARKETS
PERFECT COMPETITIONHOUSEHOLDS ARE SELLERS OF RESOURCES
LAND = A CAPITAL = K LABOR = L
BUSINESSES ARE BUYERS OF RESOURCES MRP = MR
MRC (MFC) = MC LEAST COST FORMULA FOR A
COMBINATION OF RESOURCES:MRPL = MRPA = MFCK = 1MFCL MFCA MFCK
PROFIT MAXIMIZATION FORMULAMRP > MFC
IMPERFECT COMPETITION
MONOPSONYPROFIT MAXIMIZATION FORMULA
TR > TCo MAX PROFIT o PRODUCE AT MRP >
MFC BUT Qs > Qd
o SURPLUS o UNEMPLOYMENT
SO W = Qd
o UNTIL Qd = Qs ARTIFICIAL EQUILIBRIUM