AP Economics

Mr. Crawford

 Microeconomics Exam Review Guide

Structure:

60 Multiple Choice questions (1 point each) in 70 minutes

3 Essays (20 points) in 60 minutes

• CHOICE
  • EUSR=MSUW
• OPPORTUNITY COST
  • TINSTAAFL
• SCARCITY
  • LIMITED AND DESIRABLE
• RATIONAL THINKING
• COST-BENEFIT ANALYSIS
  • FUTURE UTILITY
  • INVESTMENT
• MARGINAL THINKING
  • IMPERFECT INFORMATION
• ECONOMIC THEORY
• POSITIVE/OBJECTIVE
  • FACTS
  • THEORY
    • INDUCTION
    • DEDUCTION
• NORMATIVE/SUBJECTIVE
  • POLICY
• FALLACIES
  • POST HOC
  • COMPOSITION
  • DEFINITION
  • BIAS

• THE FOUR FUNDAMENTAL QUESTIONS
• TRADITIONAL SYSTEMS
  • BARTER

ADAM SMITH

• GREED
  • PROFIT MOTIVE
• PRIVATE PROPERTY
• FREEDOM OF CHOICE
• MARKETS
• COMPETITION
• NO GOVT
  • "LAISSEZ FAIRE"
  • "INVISIBLE HAND"

• CAPITALISM
  • SPECIALIZATION
  • CAPITAL
  • MONEY
• CONSUMER SOVEREIGNTY
  • DERIVED DEMAND

Law of Demand

CHANGE IN P= CHANGE IN Qd

INVERSE

• DMU
• YFX
• SFX

CHANGE IN NPD= CHANGE IN D

• TASTES
• INCOME
• MORE OR FEWER BUYERS
• EXPECTATIONS
• RELATED GOODS' PRICES
  • SUB=SAME
  • COMP=OPPOSITE

CHANGE IN D= PQ

CHANGE IN D= PQ

Law of Supply

 CHANGE IN P =  CHANGE IN Qs

DIRECT

• DMR/IC
• P X Q = TR

CHANGE IN NPD= CHANGE IN S

• GOVERNMENT
  • TAXES/SUBSIDIES
  • PRICE CONTROLS
• OTHER PROFIT OPPORTUNITIES
• NUMBER
• INVESTMENT IN TECHNOLOGY
• COST OF RESOURCE
• EXPECTATIONS

CHANGE IN S= PQ

CHANGE IN S= PQ

• WEALTH = UTILITY
• LABOR THEORY OF VALUE
• ALIENATION
• EXPLOITATION
  • SUBSISTENCE
  • PROFIT IS SURPLUS LABOR
• FLAWS OF CAPITALISM
  • EXTERNALITIES
    • PUBLIC COSTS
  • ASYMMETRIC INFORMATION
  • PUBLIC GOODS
  • IMPERFECT COMPETITION
    • MONOPOLY
  • INEQUITY
• SOLUTION
  • UNIONS
  • REVOLUTION
  • 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
  • TIME
  • SUBSTITUTES
  • NECESSITY
  • INCOME
• TOTAL REVENUE TEST
  • P = TR
    • E<1, INELASTIC
  • P = TR
    • E>1, ELASTIC

• "Good Enough Formula":

E =		(Q2 - Q1/Q1)
		(P2 - P1/P1)

• DEMAND CURVES
  • MORE ELASTIC AT HIGH PRICES
  • MORE INELASTIC AT LOW PRICES
  • UNIT ELASTIC AT EQUILIBRIUM

SURPLUS

• CONSUMER SURPLUS
  • DIFFERENCE BETWEEN WHAT CONSUMERS ARE WILLING TO PAY AND WHAT THEY HAVE TO PAY IN ORDER TO RECEIVE THE PRODUCT
  • UTILITY
• PRODUCER SURPLUS
• AMOUNT GREATER THAN COST WHICH PRODUCERS RECEIVE FOR PRODUCT
• PROFIT

COSTS

• EXTERNAL
• INTERNAL
  • EXPLICIT
    • FIXED
      • RENT
      • INTEREST
    • VARIABLE
      • WAGES
  • 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
  • MAX PROFIT
  • PRODUCE AT MR > MC
• TR < TC
  • TR > TVC
    • MIN LOSSES
    • PRODUCE AT MR > MC
    • LOSE LESS THAN TFC, BUT LONG RUN LOOK TO SHUT DOWN
  • TR < TVC
    • SHUT DOWN
    • LOSE TFC
• ALL MARKETS IN LONG RUN EQUILIBRIUM
  • EP = 0
• PRODUCTIVE EFFICIENCY
  • P = ATC
  • EP = 0
  • FAIR RETURN
• ALLOCATIVE EFFICIENCY
  • P = MC
  • NATURAL EQUILIBRIUM
  • SOCIALLY OPTIMAL
• X EFFICIENTY
  • MINIMUM POSSIBLE LONG RUN ATC

• MANY FIRMS
• EASY ENTRY INTO MARKET
• DIFFERENTIATED PRODUCT

PRICE MAKER

RISK TAKER

CHOOSE NOT TO PRICE DISCRIMINATE, SO P DOES NOT EQUAL MR

PROFIT MAXIMIZATION FORMULA IN IMPERFECT COMPETITION:

• TR > TC
  • MAX PROFIT
  • PRODUCE AT MR > MC
• BUT Qs < Qd
  • SHORTAGE
• SO P = Qd
  • UNTIL Qd = Qs
  • ARTIFICIAL EQUILIBRIUM

FOR MONOPOLISITIC COMPETITION

• LONG RUN
  • IF EP > 0
    • FIRMS ENTER
    • ATC
    • P
    • EP = 0
  • IF EP < 0
    • FIRMS LEAVE
    • ATC
    • P
    • EP = 0

• LONG RUN PRODUCTIVE EFFICIENCY
• X-EFFICIENCY
  • OVERCAPITALIZATION FOR POTENTIAL EXPANSION
• NOT ALLOCATIVE EFFICIENT

• A FEW FIRMS
• DIFFICULT ENTRY INTO MARKET
• DIFFERENTIATED PRODUCT
• INTERDEPENDENT
  • NASH BOX
  • PRISONER'S DILEMMA

PRICE MAKER

RISK AVOIDER

• KINKED DEMAND CURVE
  • IF P
    • OTHER FIRMS KEEP PRICE THE SAME
    • SO DUE TO SUBSTITUTION EFFECT, Qd
• TR
• E > 0
• IF P
  • OTHER FIRMS LOWER PRICES
  • PRICE WAR
  • Qd CONSTANT
• TR
• E < 0

STABLE MARKET

COLLUSION IF THREATENED FROM OUTSIDE

• X-EFFICIENCY
  • OVERCAPITALIZATION FOR POTENTIAL EXPANSION
• NOT PRODUCTIVE EFFICIENCY
• NOT ALLOCATIVE EFFICIENT

• ONE FIRM
• IMPOSSIBLE ENTRY INTO MARKET
• STANDARD PRODUCT

PRICE MAKER

RISK AVOIDER

• CONTESTABLE MARKET
  • IF NOT X-EFFICIENT, FIRMS WILL TAKE ADVANTAGE OF WINDOW OF OPPORTUNITY
  • INNOVATION COMES FROM OUTSIDE
  • HIT AND RUN COMPETITION
• NON PRODUCTIVE COSTS
  • PREDATORY PRICING
  • PRICE DISCRIMINATION
  • TYING CONTRACTS/BUNDLING
  • LOBBYING, LAWSUITS, LYNCHING
• GOVERNMENT REGULATION
  • BREAK UP
  • 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
  • OVERCAPITALIZATION
    •  PROTECT AGAINST POTENTIAL COMPETITORS
    • DEFEND AGAINST GOVERNMENT PRICE REGULATION
• NOT PRODUCTIVE EFFICIENCY
• NOT ALLOCATIVE EFFICIENT

PERFECT COMPETITION

HOUSEHOLDS 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:

PROFIT MAXIMIZATION FORMULA

MRP > MFC

IMPERFECT COMPETITION

MONOPSONY

PROFIT MAXIMIZATION FORMULA

• TR > TC
  • MAX PROFIT
  • PRODUCE AT MRP > MFC
• BUT Qs > Qd
  • SURPLUS
  • UNEMPLOYMENT
• SO W= Qd
  • UNTIL Qd = Qs
• ARTIFICIAL EQUILIBRIUM