ADVANCED PLACEMENT MICROECONOMICS REVIEW GUIDE
Circular Flow Diagram (Product Market, Factor Market, Role of Government, etc.
Demand
Law of Demand
Supply
Law of Supply
Production Possibilities Curve
Reasons for Law of Demand (Downward slope)
1.
2.
3.
Income Effect
Substitution Effect
Diminishing Marginal Utility
Diminishing Marginal Returns
Margin
Marginal Cost
Marginal Benefit
Normal Goods
Inferior Goods
Determinants of Demand (Definition and Specific Determinants)
Determinants of Supply (Definition and Specific Determinants)
Elasticity
Elastic
Inelastic
Unit elastic
Midpoint Formula
Price Elasticity of Demand (Definition and Formula)
Price Elasticity of Supply (Definition and Formula)
Cross Elasticity of Demand (Definition and Formula)
Determinants of Price Elasticity of Demand (Definitions and Specific Determinants)
Determinants of Price Elasticity of Supply (Definition and Specific Determinants)
Market Period
Short Run
Long Run
Total Revenue Test
Total Revenue Test:
If P↑ and TR↑ => inelastic D
If P↓ and TR↓ => inelastic D
If P↑ and TR↓ => elastic D
If P↓ and TR↑ => elastic D
Utility Maximization Rule (Definition and Formula)
Consumer Surplus
Producer Surplus
Price Ceiling
Price Floor
Externality
Positive Externality (definition and consequences)
Negative Externality (definition and consequences)
Deadweight Loss
Marginal Private Cost
Marginal Private Benefit
Marginal Social Cost
Marginal Social Benefit
Costs of Production
Total Costs
Implicit Costs
Explicit Costs
Normal Profit
Accounting Profit
Economic Profit
ATC
AVC
AFC
Why do the cost curves look the way they do?
Why does MC intersect ATC and AVC at their lowest points?
What causes cost curves to shift?
Why is the MC curve an individual firm’s supply curve above the AVC?
Where a firm is is earning economic profits (or losses) and describe the long-run adjustments that lead to the elimination of those
profits (or losses.)
What is the “shut-down” scenario?
Perfect Competition
1.
2.
3.
4.
What are the specific characteristics of a Perfectly Competitive industry?
Price Taker vs. Price Maker
Understand why the PC firm’s Demand curve is perfectly elastic (firms are price takers) and why D = MR = P.
Be able to illustrate what happens in the short run regarding profits or losses and what happens in the long run as a
result.
Allocative Efficiency
Productive Efficiency
Monopoly
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Marginal Revenue lies below Demand: Since a monopolist is the only seller of its product, in order to sell additional
units, it must lower the price of all previous units, so its MR falls at a faster rate than the price it charges.
There is Consumer Surplus in a single-price monopoly.
The firm is achieving economic profit (TR – TC > 0). This is because it is able to restrict output to the MC = MR level
in order to maximize profit
TC is found by taking the firms ATC at the profit maximizing level of output and multiplying it by output.
Just as in all markets, the firm’s MC curve sloped downward in the early level of output (due to increasing marginal
returns) then upwards as output increases (due to the law of diminishing marginal returns).
The MC intersects the ATC curve at its lowest point. You MUST know why this happens: because if the cost of the last
unit produced was lower than the average unit, then average cost will decrease, and vise versa (remember your grade in
class; if you do better on this test than you’ve averaged in the class, your average will go up!)
Notice that there is Deadweight Loss in a monopoly. This means market failure. Resources are under-allocated
towards the production of the good.
Price Discrimination
All Consumer Surplus from the single – price firm is turned into monopolist profit and producer surplus
MR shifts up to align with D (P) price charged for the last unit sold is different for each unit, allowing the firm to
extract the from each buyer exactly what he or she is willing to pay.
Monopolist now produces at the profit maximizing level of output (MR = MC).
P = MC, so allocative efficiency is achieved.
Notice, productive efficiency is not achieved, as the monopolist is not producing at min. ATC.
Lerner Index Formula
Natural Monopoly
Oligopoly (Definition and Specifics)
1.
Game Theory
2.
3.
Dominant Strategy
Nash Equilibrium
Monopolistic Competition
1.
2.
3.
4.
5.
6.
D is more elastic than in monopoly; there are more substitutes for the product.
MR lies below D (and P) b/c in order to sell additional output, firms must lower the price of all previous units of
output.
This firm is in equilibrium because ATC is tangent to the D curve. Due to low barriers to entry, if D were to shift out
and P go up, more firms would enter, shift the D curve faced by the individual firm back in, lowering price back to the
level of ATC.
Although it appears to be close to min. ATC, this firm is not achieving min. ATC, so it is not productively efficient.
At the profit maximizing level of output (where MR = MC) P does not equal MC (since P is greater than MR).
Therefore, this firm is not achieving allocative efficiency.
Monopolistically competitive firms are destined to earn only normal profits and the industry is inefficient since there is
an under-allocation of resources towards the production of this good.
Economic Rent
Rent Seeking Behavior
Factor (Resource) Markets
Derived Demand
Wage Taker vs. Wage Maker
MRP
MPP
MRC
MRP = MRC
Least Cost Rule
Profit Maximizing Rule
Monopsony
Roles of Government in the economy
Public Goods vs. Private Goods
2 principles of taxation
3 kinds of tax policies
Tax incidence
Coase Theorem
Lorenz Curve and Gini Coefficient
Major Graphs to Know
Production Possibilities Curve
Demand, Supply, Equilibrium
Consumer Surplus
Producer Surplus
Demand and Supply Shifts Left or right: What happens to Equilibrium Q and P?
Price Ceilings (Surplus)
Price Floors (Shortage)
Perfectly Competitive Firm: Short Run Economic Profit; Long Run Only Normal Profit
Perfectly Competitive Firm: Short Run Economic Loss; Long Run Only Normal Profit
Perfectly Competitive Firm: Shut-Down Point
Monopoly earning economic profit (include all curves and deadweight loss)
Monopoly earning economic loss
Monopolistic Competition: Long Run Equilibrium
Perfectly Competitive Labor Market (Wage Taker)
Monopsony (include deadweight loss)
Positive Externality (with deadweight loss)
Negative Externality (with deadweight loss)