AP MICROECONOMICS: AP TEST REVIEW
Unit 1: Intro to Microeconomics: Chapter 1, 2, and 5
1. Define ECONOMICS
a. the social science concerned with how individuals, institutions, and society make the
best choices under conditions of scarcity
2. Define and identify OPPORTUNITY COSTS
a. To obtain one thing, society must forgo the opportunity of getting the next best thing.
That sacrifice is the opportunity cost of the society. The basic problem that economics
study is that of choice. Since our wants are unlimited and the productive capacity of our
economy is limited, we must choose to produce the things we want at the expense of
things we want less.
b. If you study for two hours, your trade-offs/opportunity costs are making $8.00 an hour
at KFC ($16 profit), or $6.00 an hour babysitting ($12 profit), or 2 hours of sleep, ect.
3. Understand the MB=MC RULE
P
MC
a. When producing, your optimal level of output is
where your Marginal Benefits (extra benefits of
producing one more unit) equals your Marginal
Costs (extra costs of producing one more unit).
E
The point of interception on a graph of your
MB
Marginal Benefits and Marginal Costs is the
Equilibrium Point.
Optimal Quantity Q
4. Characteristics and role of incentives in the MARKET SYSTEM
a. Aka Capitalism. Private ownership of factors of production and prices (supply and
demand) are used to direct economic activity
b. Characteristics:
c. Private Property – capital and land owned privately, also freedom to negotiate binding
legal contracts. Private rights encourage investments, innovation, and facilitate change.
d. Freedom of Enterprise and Choice – Freedom of enterprise allows individuals and firms
to produce; freedom of choice allows buyers and sellers to make choices regarding
production and consumption.
e. Self-Interest – Each economic unit attempts to achieve its goal, at the same time
delivering something of values to others like goods and services
f. Competition – among economic units, competition exists. Requires two or more sellers
to independently compete in the marketplace, freedom of sellers and buyers to enter
and exit the marketplace. Regulatory forces in the market system are taxes, limits, ect.
g. Market and Prices – Market systems convey decisions made by buyers and sellers of
products and resources. Market system itself is the coordinating and organizing
mechanism. Allows for communication between buyers and sellers. How? A high
number of buying shows the price is too low and a low amount of buying shows the
price is too high.
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AP MICROECONOMICS: AP TEST REVIEW
h. Technology and Capital Goods – Market system encourages the use and rapid
development of complex capital goods. This allows for greater efficiency and more
output.
i. Specialization – individuals, firms, regions, or nations produce one or a few good or
services rather than the entire range. This allows for greater efficiency.
i. Division of Labor – human specialization makes use of differences in ability,
fosters learning by doing, and saves time
ii. Geographic specialization – regional and international basis, Florida makes only
oranges and Honduras makes only bananas, rather than both FLordia and
Honduras make both for themselves.
j. Use of Money – money is a medium of exchange that facilitates trade; barter
exchange/trading goods is problematic because it requires coincidence of wants
between buyers and sellers; money must be acceptable to sellers in an exchange; it is
sociably defined; global currency differences can lead to trade complications.
k. Active, but Limited, Government – government has limited role, but addresses market
failures in order to increase the effectiveness of the market system.
5. Understanding the concept of COMPARATIVE ADVANTAGE and what it encourages.
a. A nation has a comparative advantage when it can produce a product at a lower
domestic opportunity costs that can a potential trading partner.
b. Specialization and international trade increase the productivity of a nation’s resources
and allow for greater total output than would be possible without trade. In short, they
can operate at lower opportunity costs.
6. Be able to calculate COMPARATIVE ADVANTAGE and OPPORTUNITY COST.
a. See the two charts below for production possibility for US and Mexico
US
PRODUCTION POSSIBILITIES
A
B
C
D
E
APPLES
0
5
15
30
90*
ORANGES
30*
15
5
2
0
MEXICO
PRODUCTION POSSIBILITIES
A
B
C
D
E
APPLES
0
5
10
15
20
ORANGES
4
3
2
1
0
b. If you look at how much can be produced, US will always out produce Mexico, giving
them an ABSOLUTE ADVANTAGE. See arrows for reasoning, but when looking at
comparative advantage, you need to look at who gives us the least in opportunity costs.
To calculate the opportunity costs forgone by each, take one production possibility set
(like C) and calculate how much of the other product that they would give up by
producing the other. See the diagram below:
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AP MICROECONOMICS: AP TEST REVIEW
APPLES
MEXICO
3
ORANGES
MEXICO
Must give up 2
Must give up 10
oranges to make 10
apples to make 2
apples (1/5).
oranges (5).
US
Must give up 5
US
Must give up 15
oranges to make 15
apples to make 5
apples (1/3).
oranges (3).
COMPARATIVE
Mexico has the
COMPARATIVE
US has the lower
ADVANTAGE
lower opportunity
ADVANTAGE
opportunity cost,
costs, so they
so they should
should make the
make the oranges.
apples.
7. Shape of PPC and explanation of this shape. What does the PPC illustrate?
a. The PPC (Production Possibility Curve) has 4 assumptions:
i. full employment of resources
ii. resources fixed in terms of quantity/quality
iii. fixed technology
iv. only two goods being produced (one consumer and one capital – pizza and
robots)
b. Constant Opportunity Costs
Increasing Opportunity Costs
Robots
9
8
7
6
5
4
3
2
1
A Maximum
Level of Output
Inefficient
Levels of = Unemployment
Production
1 2 3 4 5 6 7 8 9 10 11 12 13 14
9
8
7
6
5
4
3
2
1
Unattainable Levels of
Production
Growth
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Pizzas
c. The PPC illustrates two main things:
i. efficiency – each point on the curve represents the max output of the two
products
ii. underutilization – points inside the curve imply that resources are not being
used to full potential
8. How do gains from trade affect the PPC?
a. If you gain from a trade, your PPC will show growth, like the example on the right,
allowing producing more of the good you specialize in.
AP MICROECONOMICS: AP TEST REVIEW
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Unit 2: Supply and Demand: Chapter 3, 18, and 19
1. Understand the LAW OF DEMAND and the LAW OF SUPPLY.
a. Law of Demand – inverse relationship between price and quantity demanded. States
that as the price increases, the quantity demanded decreases. Why? People buy less at
higher prices and more at lower prices (Black Friday).
b. Law of Supply – direct/positive relationship between price and quantity supplied. States
that as the price increases, the quantity supplied increases. Why? More people are
willing to work at $25 an hour that $5 an hour (labor).
Demand for Chocolate
2. What are the causes of change in SUPPLY and DEMAND?
P
a. Income (graph)
b.
c.
d.
e.
f.
i. Minimum Wage is increased, so everyone has
more money
ii. consumer income increases, demand increases
iii. consumer income decreases, demand decreases
Market Size
i. size of market increases, demand increases
P
ii. size of market decreases, demand decreases
Consumer Tastes (graph)
i. People begin to cry when the chocolate diet
doesn’t work.
ii. consumer tastes increase, demand increases
iii. consumer tastes decrease, demand decreases
Consumer Expectations
i. consumer expectations increase, demand
P
increases
ii. consumer expectations decreases, demand
decreases
Substitute Goods – good or service that can be used in
place of another good or service (graph)
i. Chips (substitute for chocolate) are very popular.
ii. demand for substitute increases, demand
P
decreases
iii. demand for substitute decreases, demand
increases
Complementary Goods – goods that are used together
(graph)
i. Marshmallows (complement b/c of smores) are
very popular.
ii. demand for complementary good increases,
demand increases
iii. demand for complementary good decreases, demand decreases
Q
Q
Q
Q
AP MICROECONOMICS: AP TEST REVIEW
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Supply of Wooden Dolls
g. Input Costs (graph)
P
i. price of wood decreases
ii. increase in input costs, supply
decreases
iii. decrease in input costs, supply
increases
h. Labor Productivity
i. productivity of workers increases,
supply increases
P
ii. productivity of workers decreases,
supply decreases
i. Government Action (graph) (graph)
i. government lowers wood tax
ii. excise tax – taxes on the
production/sale of certain goods
iii. new tax or amount of tax increases,
supply decreases
iv. amount of tax decreases, supply
P
increases
v. government lessens subsidy of wood
vi. subsidy – government payment for
part of production costs
vii. amount of subsidy decreases, supply
decrease
viii. new subsidy or amount of subsidy
increase, supply increases
j. Technology
P
i. new wooden dolls machine created
ii. new technology, supply increases
k. Producers Expectations
i. if producers expect a future price
increase, they will withhold current
supply causing supply to decrease
ii. think of pumpkins, why sell in August
P
when you can make much more
money closer to Halloween
l. Number of Producers
i. a depression causes wood doll shops
to close
ii. as more producers enter the industry,
the supply increases
iii. as more producers leave the industry, the supply decreases
Q
Q
Q
Q
Q
AP MICROECONOMICS: AP TEST REVIEW
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3. Understand COMPLEMENTARY GOODS.
a. The easiest way to understand complementary goods and substitutive goods is by
thinking with common sense.
b. If I give you a complement (say that you look nice today), you will thank me and feel
good. A complementary good works just like this, it helps another good out by working
with it. When its demand goes up, the complementary good’s demand also goes up, and
vice versa.
c. If you have a substitute teacher for a day in econ (remember, you’re an AP student, so
anyway you don’t spent learning is a bad day!) you will be sad and depressed,
hopelessly lost without our wonderful teacher. Substitute goods feel the same, when
one does good, the other must be doing bad. When the demand for one good increase,
the demand for the substitute must decrease.
4. Show SHIFTS in the supply and demand curves.
a. See number 2 (What are the causes of change in SUPPLY and DEMAND?)
5. What is the shape of a PERFECTLY INELASTIC DEMAND CURVE?
a. A perfectly inelastic demand curve is shown to the
P
right. One thing to note is its vertical line shape. The
S
understanding that we gain from this is that no
matter the price, $5 or $500, people are willing to buy
it. No good in the modern world is a perfectly
inelastic, but many come close. Think of insulin. A
diabetic must have their insulin shot or they may die,
therefore, they are willing to pay any amount of
D
money to keep themselves alive. The only way to
affect the price of the good/service is to change the
Q
supply.
low quantity demanded,
6. Understand MARKET EQUILIBRIUM.
high quantity supplied
a. You market equilibrium is the point where the
P
supply and demand curve meet. At this point, the
S
Price to
optimal price and quantity are reached.
Surplus
b. If you operate at a point with a price to high, you high
will form a surplus.
Equilibrium
c. If you operate at a point with a price to low, you
Point
will form a shortage.
Shortage
Price to
d. Disequilibrium is any point on the graph except the
low
D
equilibrium point. At every disequilibrium point,
you will not be operating efficiently.
high quantity demanded, Q
7. What will cause a MARKET SURPLUS?
low quantity supplied
a. A price to high, because you have no demand and
too much product (see graph)
8. What will happen to price if there is a SHORTAGE?
a. A price to low, because you have too much demand and no product (see graph)
AP MICROECONOMICS: AP TEST REVIEW
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9. Know how to calculate PRICE ELASTICITY of demand. Understand the value of the PRICE
ELASTICITY COEFFICIENT.
a. Price elasticity is measuring the responsiveness to price changes.
b. A formula for measuring this is:
c.
d. Another way to state it would be:
e.
f.
Once you have figured out your answer, you then use the Price Elastic Coefficient to find
if it is relatively elastic or inelastic. The ranges are listed below:
g. Elastic: Price Elasticity of Demand > 1
h. Inelastic: Price Elasticity of Demand < 1
i. Unit Elastic: Price Elasticity of Demand = 1
10. Understand the FACTORS affecting ELASTICITY OF SUPPLY.
a. If a producer is relatively responsive to changes in price, the supply is more elastic.
b. If a producer is relatively unresponsive to change in price, the supply is more inelastic.
c. Measuring the elasticity of supply is the same as demand.
d. The degree of price elasticity of supply depends on how quickly/easily production
resources can be shifted between alternate uses.
e. When you think of tickets to a concert, can a supplier
P
magically supply more space in the short run? No, so
the supply is going to be inelastic b/c it doesn’t
change.
11. Explain ELASTICITY of the demand curve.
a. The easiest way to show the difference between the
elastic and inelastic shape of demand curve is
through a visual. The orange section represents the
inelastic demand curve and the green represents the
elastic section. The black line is a unit elastic demand
curve and the orange and green lines are the
perfectly inelastic and perfectly elastic, respectfully.
b. For example, the dotted red line is in the green
section, which represents elasticity, meaning that the line is relatively elastic.
12. Define UTILITY and the THEORY OF CONSUMER BEHAVIOR.
a. Utility is the satisfaction/use that the consumer gets when he/she uses the product.
b. The theory of consumer behavior says that people will act with rational behavior.
Consumers will try to use his/her income to derive the greatest amount of satisfaction/
maximize total utility.
Q
AP MICROECONOMICS: AP TEST REVIEW
13. Be able to calculate MARGINAL UTILITY.
a. Marginal Utility is the extra utility/satisfaction that someone gains by consuming on
more unit of good/service. Look at the below chart for the utility experienced by
someone who is eating candy.
Units
Total
Marginal
Consumed
Utility
Utility
1
5
5
2
8
3
3
10
2
4
11
1
5
11
0
b. By subtracting the total utility between the second and first unit consumed (orange),
you can find out how much extra utility that the consumer obtained by eating one more
piece of candy. In the next section we will talk about why it is decreasing towards zero.
14. Explain DIMINISHING MARGINAL UTILITY.
a. When looking at the chart previous, you can see that the marginal utility is decreasing.
This is one of many examples of a strongly observed trend, the diminishing marginal
utility.
b. The official rule states that as additional units of a good/service are consumed, the
marginal utility/extra satisfaction lessens.
c. Think of something like a computer. The first computer that you get will give you much
satisfaction. Then I give you another, you will gain some extra utility, but not as much
b/c you have most of your needs already met. By the time we get to ten computers, you
are gaining no utility b/c what do you need ten computers for?
15. Understand the SUBSTITUTION EFFECT and the INCOME EFFECT.
a. The substitution effect is the change in the amount that people will buy because they
purchase at substitute good instead due to a cheaper price.
i. If you go to the grocery store and see that the price of ground beef is $30 a
pound and the price for ground turkey is on sale for only $15 a pound, you may
decided that it would be better to buy the ground turkey due to the lower price.
b. The income effect is the change in the amount that consumers are willing to spend
because the buying power of their income that changed, but the actually amount of
income has not changed.
i. If you go to the same store a week later and the ground beef is now on sale for
$20 a pound, you will buy more and feel wealthier, even though you didn’t gain
any actual money, you just saved more and can spend more than normal
because the change in price.
16. Know the FORMULA for UTILITY MAXIMIZATION with a particular income.
a. The formula is:
b. Rather than just giving the formula, let’s do an example. You have ten dollars and you
are looking at two different products that you can by. The first is one dollar and the
second is two dollars. In the chart below, the Marginal Utilities are listed:
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AP MICROECONOMICS: AP TEST REVIEW
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PRODUCT A ($1)
PRODUCT B ($2)
Units
Marginal Utility Marginal Utility Marginal Utility Marginal Utility
Consumed
per Dollar
per Dollar
1
10
A. 10
24
B. 12
2
8
C. 8
20
D. 10
3
7
E. 7
18
F. 9
4
5
G. 5
16
H. 8
5
1
I. 1
12
J. 6
The goal of Utility Maximization is to allocate you income so that the last dollar spent on
each product yields the maximum marginal utility. When looking at each Marginal Utility
per dollar column, I have added in letters to help guide you through the process.
c. The most utility that one can obtain is in Box B, so we will pay 2 dollars for this first
Product B.
d. Now, the next two are Box A and D with 10 utils per dollar. We have now spent a total
of 5 dollars and eliminated choices A, B, and D.
e. The next highest utility is in Box F, with 9 utils. This brings our total to 7 dollars.
f. The next highest utility is in Box C and H, with 8 utils. This adds three more dollars and
brings our total to ten dollars, so we have spent all ten of our dollars while gaining the
most utility by buying two units of Product A and four units of Product B.
g. This is the thought process between the Utility Maximizing Formula.
Unit 3: Costs of Production and Market Structure:
Chapters 20-23
80
70
Total Product Produced
1. What is the LAW OF DIMINISHING RETURNS?
a. As successive units of a variable
resource (labor) are added to a fixed
resource (land/capital), eventually the
additional/marginal product attributed
to each additional unit of the variable
resource will decline. This assumes
that all workers are of equal quality,
technology, and production methods.
2. What is the difference between the LONG RUN
and the SHORT RUN?
a. Short Run has fixed plants – the time
period is too short to alternate plant
capacity, yet long enough to change
the plants usage. You can change
labor, resources, and materials. Some
fixed and some variable costs.
Law of Diminishing
Returns
60
50
40
30
20
10
0
0
1
2
3
4
5
6
7
Number of Workers
8
9
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AP MICROECONOMICS: AP TEST REVIEW
Costs ($)
160
140
120
100
80
60
40
20
0
1 2 2 3 4 5 6 7 8 9 10
Quantity
TC
TVC
TFC
Short Run Production
Costs
120
100
costs ($)
b. TVC – Total Variable Costs
i. looks just like the TC, just below it
ii. addition of each variable costs
c. TFC – Total Fixed Costs
i. horizontal line
ii. always a constant cost
d. ATC – Average Total Costs
i. the total costs of production
ii. can be found by adding vertically the AFC
and AVC together
e. AVC – Average Variable Costs
i. reflects the law of diminishing returns
ii. can be found by dividing Total Variable
Costs by Quantity
f. AFC – Average Fixed Costs
i. declines as output increases
ii. can be found by dividing Total Fixed Costs
by Quantity
g. MC – Marginal Costs
i. the additional cost of one more unit of
output
ii. can be found by dividing Change in TC by
Change in Q
5. Know the relationship between the MC and ATC.
Short Run Production
Costs
80
60
40
20
0
1
2
3
4
5
6
7
8
Quantity
MC
ATC
AVC
AFC
MC - AVC
Relationship
COSTS
b. Long Run has variable plants – the time period is
long enough to adjust plant capacity and existing
firms to leave or enter the industry. You can make
all you resources variable and change them.
3. What do ECONOMIC COSTS include?
a. Economic Costs are the opportunity costs to the
firm in a money amount. Costs exist for all firms
since resources are scarce, productive, and have
alternate uses. The Economic Cost is the value or
worth a productive resource would have in its best
alternate use.
4. Know how all COST CURVES are graphed. Including ATC,
AVC, AFC, and MC.
a. TC – Total Costs
i. total costs of production
ii. found by adding TVC and TFC curves
10
40
20
MC
0
1
2
3
4
Quantity
5
6
AVC
AP MICROECONOMICS: AP TEST REVIEW
6.
7.
8.
9.
10.
11.
12.
11
a. Marginal Costs (MC) intersects both ATC and AVC at their minimum points
Understand the difference between ACCOUNTING PROFITS and ECONOMIC PROFITS.
a. Your accounting profit is the money that you receive. For example, you sell 10 t-shirts at
$10 each; your accounting profit would be $100.
b. You economic profit factors out your economic costs (economic profit = accounting
profit – economic costs). In the above example, you need to take out the money that
you could have made by using the fabric for
Finding Profit/Loss
P
something else.
1. MR=MC Rule
What is NORMAL PROFIT?
MC
2. Drop to AVC
a. Normal Profit is the payment made by a firm to
3. Send over to price
obtain and retain entrepreneurial ability. If you
4. Shade in Profit
ATC
did not realize at least this minimum payment
MR. D. AR. P.
for your effort, you would withdraw/shut down
from the line of business and use your abilities
Profit
AVC
elsewhere. So, your normal profit is the
minimum cost of doing business.
Q
Apply the MR=MC RULE to all market structures.
a. On all graphs, where MR=MC, you will be operating at your optimal levels.
b. See each individual structure’s section for more detail.
Name for a PURE COMPETATOR is what?
a. PRICE TAKER – the sellers have
Market
Firm
P
P
no control over price and must
S
adjust to market prices
Shape of industry and firm’s demand
curves in PURE COMPETITION (side-byside graph)
D
a. The market will have typical
Supply and Demand, but the firm
must take the equilibrium price
D
and operate at that price.
Examples of PURE COMPETITION.
Q
Q
a. We need a large number of firms producing a standardized product. This is very hard to
find in today’s economy, but we can come close. The best example would be a farmer.
There are many farmers and you really can’t
MC
make your tomatoes that much better than an
P
opponent.
ATC
SHUTDOWN CASES
AVC
a. If you AVC is higher than your P at every output.
This means that the variable costs will always be
higher than what you would bring in and you will
never make any money. See graph.
Shutdown
MR. D. AR. P.
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AP MICROECONOMICS: AP TEST REVIEW
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P
MC
13. What are the characteristics of a MONOPOLY?
a. Single Seller
ATC
b. No close substitute goods/services
c. Price Maker – controls the entire
Same rules for
Quantity Supplied and therefore
finding Profit
controls the Price
D
d. High Barriers to Entry
Inelastic
e. Nonprice Competition
When MR becomes
14. Relationship between the firm and industry’s
Negative, Demand curve
Q
demand curves for a MONOPOLY.
becomes
inelastic
MR
a. Because the firm makes up the whole
industry, they are the same. The
Demand curve is down sloping and always above the MR. Similar to the MR. D.AR.P.
Rule in pure competition, The D. AR. P. is still the same. So the Demand, Average
Revenue, and Price are all the same
15. What is a NATURAL MONOPOLY and what are its
causes?
a. An economy with economies of scale so
300
high that a single firm can produce a
250
product with a lower average total cost
than any other firm would ever be able
200
to produce.
150
b. One main reason is possession of natural
ATC
resources. If you control all the oil in
100
North America, not main other firms can
50
be able to be oil producers in the region.
0
c. Economies of Scale have high start up
1 3 5 7 9 11 13 15
costs. See the graph to the right.
Quantity
16. How can a monopolist make LONG RUN
PROFITS?
a. Because it is not operating at an efficient output, the monopoly will raise its prices to
cover the losses. Because it has no
competition, it can raise its prices as high P
as it wants and still get a reasonable
amount of service.
Elastic Portion
17. What are the ELASTIC regions of the monopolist
demand curve?
a. The Elastic portion is the part where you
Inelastic Portion
have a positive MR. The Inelastic portion
is the part where you have a negative
MR.
D
MONOPOLY
Costs ($)
Economies of Scale
Q
MR
AP MICROECONOMICS: AP TEST REVIEW
18. Is a monopolist reaching ALLOCATIVE
Consumer
P
EFFICIENCY? Why?
Surplus
MC
a. No
b. If you look at the graph to the right, P2
Deadweight
you can see the blue shaded region.
Loss
P1
This is a deadweight loss. A
Producer
deadweight loss symbolizes a lack of
Surplus
allocative efficiency. The firm
D
should be operating at the Price 1,
the dotted line, but to make up for
Q
MR
Q2 Q1
losses, it will operate at Price 2. The
same is with the quantity. You will have not made as much product as you should have
with the given number of resources, so you have been wasteful. This is not the best way
to use your resources and is an efficiency loss.
19. What is the relationship between the MR and PRICE when a firm’s demand curve is downward
sloping?
a. Remember that the Demand curve is also the Price curve.
b. The MR curve will always be underneath the Price curve because the lower price applies
not only to the extra units, but it also applies to all prior units of output.
20. What are the characteristics of a MONOPOLISTIC
P
COMPETITION?
MC
a. Small Market Shares
i. each firm has a relatively small
percent of the market
b. No Collusion
i. groups of producers do not agree
on a set price
Same set up as a monopoly
c. Independent Actions
but has more elastic D & MR
i. no interdependence
Q
21. What is the ELASTICITY of a monopolistic competitors demand curve?
a. The set up is the same as a monopoly is, but it has a more elastic Demand and Marginal
Revenue cost curve (more horizontal).
22. What is NONPRICE COMPETITION?
a. Competition based on distinguishing one’s product by product differentiation and then
advertising the difference to the consumers.
b. Make you product special and say that yours is better because of this specialty.
23. What are the characteristics of an OLIGOPOLY? Why are they hard to analyze?
a. A few Large producers
i. four firms controlling over 40% of the industry
ii. example – steel or copper
b. Homogenized Products OR
i. all the same type of product (steel)
13
ATC
D
MR
AP MICROECONOMICS: AP TEST REVIEW
24.
25.
26.
27.
28.
c. Differentiated Product
i. many different types of products (cereal, cars)
d. They are hard to analyze because they have a high incentive to cheat, but not all cheat,
so you have to balance the two different models and try to find the root of the random
appearing desire to cheat.
Understand INTERDEPENDANCE.
a. Relation between its members such that each is mutually dependent on the others. This
concept differs from a simple dependence relation, which implies that one member of
the relationship can function or survive apart from the other.
b. Think of the game theory, both firms will act so they will get the highest profit, but also
help out the other in the process.
Define and give examples of DIFFERENTIATED Oligopolies and HOMOGENOUS Oligopolies.
a. Homogenized Oligopoly
i. all the same type of product
ii. steel, copper
b. Differentiated Oligopoly
i. many different types of products
P
ii. cereal, cars
MC
What must the FOUR-FIRM CONCENTRATION RATIO
be for an Oligopoly to exist?
a. If the four firms make up 40% or more of the
entire industry, the industry is considered an
oligopoly.
D
What is the relationship between the demand curve
and MR curve for a MONOPOLY?
a. The Demand curve will always be above the
Q
MR curve.
MR
b. Why?
c. The MR curve will always be underneath the Price curve because the lower price applies
not only to the extra units, but it also applies to all prior units of output.
Possibilities of LONG RUN PROFIT in monopolies and pure competition.
a.
Unit 4: Resource Market: Chapter 25-27
1. Importance of RESCOURCE PRICING.
a. Money Income Determination
i. resource prices are a major factor in determining the income of households
ii. the expenditures that firms make in acquiring economic resources flow as wage,
rent, interest, and profit incomes to the households that supply those resources
b. Cost Minimization
i. to a firm, resource prices are costs
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AP MICROECONOMICS: AP TEST REVIEW
15
ii. to obtain the greatest profit, the firm must produce at the profit-maximizing
output with the most efficient combination of resources
iii. resource prices play the main role in determining the quantity of land, labor,
capital, and entrepreneurial ability hat will be combined in producing each good
or service
c. Resource Allocation
i. just as product prices allocate finished goods and services to consumers,
resource prices allocate resources among industries and firms
ii. in a dynamic economy, where technology and product demand often changes,
the efficient allocation of resources over time calls for the continuous shift of
resources from one use to another
iii. resource pricing is a major factor in producing those shifts
d. Policy Issues
i. many polices issues surround the resource market
ii. Ex: To what extend should the government redistribute income through taxes
and transfers? Should the government do anything to discourage excess pay to
corporate executives? Should the government encourage or restrict labor
unions?
iii. the facts and debates relating to these policy questions are grounded on
resource pricing
2. Define and provide examples of DERIVED DEMAND.
a. the demand for a resource is an inverse relationship between the price of the resource
and the quantity of the resource demanded
b. it is derived from the products that the resource help produce
c. Ex: The demand for airplanes helps derive the demand for assemblers, airplane wings,
etc. The demand for haircuts helps derive the demand for barbers.
3. Define MRC and MRP.
a. MRP – Marginal Revenue Product
i. change in the total revenue resulting from the use of each additional unit of
resource (labor)
ii.
b. MRC – Marginal Resource Costs
i. the amount that each additional unit of
resource adds to the firm’s total costs
LABOR MARKET
P
S
ii.
4. Explain what it means if a firm is a WAGE TAKER.
a. in a perfect/pure competition labor/resource
market, a firm must take whatever the market
sets labor at
b. See graph
P
INDIVIDUAL FIRM
S=MRC
D = MRP
Q
D=MRP
Q
AP MICROECONOMICS: AP TEST REVIEW
16
The red curve shows a
pure competition
demand curve as the
black is an imperfect
competition demand
curve.
5. What is the relationship between MRP and the FIRM’S RESOURCE
P
DEMAND CURVE?
a. In a purely competitive firm, the Demand curve is the same as
the MRP curve.
b. when product price is constant, the downward slope of the
D=MRP curve is due solely to the decline in the resources
marginal product/ law of diminishing returns
6. Understand the Supply and Demand Curves for LABOR HIRED in pure
competition for industry and firm. Understand the shaped of each
curve.
a. The supply and demand curves will have the same look for both the industry and the
firm (compared to what we have learned earlier). The industry will be the same as in
unit 2, and the firm will remain the same, as seen on the previous page in the side by
side graph, as it has in unit 3. The only changes will be the names of the graph, like the
D=MRP instead of just the D curve.
P
S
7. Define ECONOMIC RENT.
a. price paid for the use of land and other natural resources
that are completely fixed in total supply
b. o the right is the demand and supply curve for land, notice
that the supply is fixed because we can’t magically make
earth bigger to gain more land; the only determinate of
price is the demand for it
8. What is the relationship between ECONOMIC RENT and the
INCENTIVE FUNCTION?
a. the perfectly inelastic supply of land must be contrasted with the relatively elastic
supply of capital, such as apartment buildings, machinery, and warehouses; in the long
run, capital is not fixed in total supply
b. a higher price gives entrepreneurs the incentive to construct and offer larger quantities
of property resources; conversely, a decline in price induces suppliers to allow existing
facilities to deprecate and not be replaced
c. the supply curves of these nonland resources are upward-sloping, meaning that the
prices paid to such resources provide an incentive function; a high price provides an
incentive to offer more of the resource, whereas a low price prompts resource suppliers
to offer less
9. How is EQUILIBRIUM INTEREST RATE determined?
a. Just as the equilibrium price and quantity was determined in Interest
earlier chapters, equilibrium interest rate is determined by
rate (%)
where the supply and demand curves meet.
b. the loanable funds theory of interest explains the interest rate
not in terms of total supply of and demand for money, but,
rather, in terms of the supply of and demand for funds available
for lending and borrowing
D=MRP
Q
D1
D2
D3
D4
S
D
Q
Q
AP MICROECONOMICS: AP TEST REVIEW
Unit 5: Government and Market Failures: Chapter 28-30
1. What are the characteristics and examples of a PUBLIC GOOD and PRIVATE GOOD?
a. Public
i. nonrivilary
1. one person’s consumption does not prevent the consumption of the
good to another
2. roads
ii. nonexcludability
1. there is no way that one can prevent someone from benefiting from the
good/service
2. national defense
b. Private
i. rivalry
1. one person’s consumption does prevent the consumption of the good
to another
2. food
ii. excludability
1. people who do not pay for the good/service cannot obtain benefits
2. food
2. How do you determine the OPITMAL QUANTITY of a public good?
a. vertical summation of curves
i. by survey, etc. government forms an idea of each person’s willingness to pay for
the good at each quantity and adds up each curve via vertical summation.
ii. they then graph the curves and find the equilibrium point and find the quantity
b. see number 3
3. Be able to use VERTICAL SUMMATION to calculate the demand for a public good.
Quantity
Person 1
Person 2
Person 3
Collective Willingness to Pay
1
$4
$5
$9
18
2
3
4
7
14
3
2
3
5
10
4
1
2
3
6
5
0
1
1
2
a. You will be given all the information in the white boxes, but you need to determine the
prices in the blue shaded boxes. This is done by adding each person’s willingness to pay
at a given quantity. (see arrow)
4. Understand how to do a COST-BENEFIT ANALYSIS of Government Action.
a. Find if the costs of action are higher than the benefits of the action
i. if costs are higher – don’t do it
ii. if benefits are higher – do it
b. The government wants to find the most beneficial action with the lowest costs, so costbenefit analysis is very common with public goods
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AP MICROECONOMICS: AP TEST REVIEW
Negative Externality
Tax
CORRECT
18
Should be
more costs
5. Define and give examples of both a
producing
POSITIVE EXTERNALITY and a NEGATIVE
at red
EXTERNALITY.
lines, but
a. Positive
you are
i. benefits affect a third party producing
over allocation
ii. create an under allocation at black
Positive Externality
Subsidy (Consumer)
of resources
iii. vaccinations
less cost
b. Negative
more demand
i. costs affect a third party
ii. create an over allocation of
resources
under allocation
iii. pollution
Positive Externality
Subsidy (Producer)
6. Understand EXTERNALITIES and relationship
with the supply and demand curves.
less cost
a. costs/benefits accruing to an
more demand
individual not involved in original
economic action
b. see the graphs to right
under allocation
7. What is the COASE THEOREM?
a. if issues rise between two individuals/groups, they should work out a solution amongst
themselves
8. Explain the PUBLIC CHOICE THEORY.
a. the economic analysis of government decision making, politics, and elections
b. when talking about government failures, we want to look at why they happened; to do
this, we use a series of techniques and methods, all categorized in the public choice
theory, to understand the failure
9. Be able to explain inefficiencies
800
with MAJORITY VOTING.
700
a. Looking at the diagram to
the right, you see three
600
different people each
500
voting for a tax. The bar
person 1
400
represents the amount of
person 2
benefits they receive. If
TAX
300
person 3
you look at the NO vote,
200
you have only one person
receiving benefits above
100
the $300 tax, so the other
0
two would vote no and
Inefficient NO
Inefficient Yes
the tax would not be
passed, but when you look at the total costs ($300 x 3) of $900 and the total benefits
AP MICROECONOMICS: AP TEST REVIEW
($700 + 250 + 200) of $1150, the benefits are larger than the costs, so the logical and
correct vote would be YES and pass the tax. This is an example of an inefficient no vote.
b. In the next section, the inefficient yes graph, the majority wanted to pass the tax (2/3),
so the tax is passed, but when you compare the total costs ($300 x 3) of $900 to the
total benefits ($100 + 350 +350) of $800, you see that the tax is costing the people more
than what they would be benefiting from it. This is an example of an inefficient yes vote.
10. Define and give examples of a PROGESSIVE TAX, REGRESSIVE TAX, and a PROPORTIONAL TAX.
a. Progressive
i. tax rate increases as income increases
ii. federal individual income tax
Spent/Income
Tax
Rate
$200,000
$20,000
10%
Increasing
2,000
140
7%
20
1
5%
b. Regressive
i. tax rate decreases as income increases
ii. sales tax
Spent/Income
Tax
Rate
$200,000
$10,000
5%
Decreasing
2,000
120
6%
20
1.40
7%
c. Proportional
i. tax rate remains constant as income changes
ii. corporate income tax
Spent/Income
Tax
Rate
$200,000
$16,000
8%
Constant
2,000
160
8%
20
1.60
8%
11. What did the SHERMAN ACT and the CLAYTON ACT do?
a. Sherman Antitrust Act or 1890
i. cornerstone of antitrust legislature
ii. monopolization was a felony
iii. outlawed restrains of trade
b. Clayton Antitrust Act of 1914
i. strengthened Sherman Act
ii. outlawing techniques that firms may use to develop monopoly power
iii. outlawed price discrimination, prohibited tying contracts, and forming of
interlocking directorates
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