AP MICRO REVIEW



AP MicroeconomicsMr. Wash?Microeconomics Exam Review Guide UNITS ONE AND TWOFOUNDATIONS, CONSUMER CHOICE and ELASTICITYMARGINAL UTILITYLAW OF DIMINISHING MARGINAL UTILITY IRRATIONAL GOODS MU of product A/price of A = MU of product B/price of B = etc.?ELASTICITYDETERMINANTS 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 ?UNIT FOURCOSTSCOSTSEXTERNAL 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 ?PRODUCTIVE EFFICIENCY P = ATC EP = 0 FAIR RETURN ALLOCATIVE EFFICIENCY P = MC NATURAL EQUILIBRIUM SOCIALLY OPTIMAL X EFFICIENCY MINIMUM POSSIBLE LONG RUN ATC PROFIT MAXIMIZATION FORMULAif TR > TC then MAX PROFIT PRODUCE AT MR > MC if TR < TCbut TR > TVC then MIN LOSSES PRODUCE AT MR > MC LOSE LESS THAN TFC, BUT LONG RUN LOOK TO SHUT DOWN if TR < TVCthen SHUT DOWN LOSE TFC ?????UNIT FOURMARKET MODELSPERFECT COMPETITIONINFINITE 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 PRICERISK TAKERPRICE MAKERRISK TAKERPRICE MAKERRISK AVOIDERPRICE MAKER- DEMAND IS VERY CLOSE TO PERFECTLY INELASTICRISK AVOIDERPRODUCTIVE EFFICIENCY P = ATC ALWAYS IN LONG RUN EP = 0 FAIR RETURN ALLOCATIVE EFFICIENCY P = MC NATURAL EQUILIBRIUM SOCIALLY OPTIMAL ALWAYS X EFFICIENCY MINIMUM POSSIBLE LONG RUN ATC ALWAYS IN LONG RUN PRODUCTIVE EFFICIENCY P = ATC ALWAYS IN LONG RUN EP = 0 FAIR RETURN ALLOCATIVE EFFICIENCY P > MC ARTIFICIAL EQ NEVER X EFFICIENCY MINIMUM POSSIBLE LONG RUN ATC ALWAYS OVERKAPITALIZED IN LONG RUN PRODUCTIVE EFFICIENCY P > ATC NEVER IN LONG RUN EP > 0 ALLOCATIVE EFFICIENCY P > MC ARTIFICIAL EQ NEVER X EFFICIENCY USUALLY IN LONG RUN HIT AND RUN COMPETITION SHORT RUN COLLUSION PRODUCTIVE EFFICIENCY P > ATC NEVER IN LONG RUN EP > 0 ALLOCATIVE EFFICIENCY P > MC ARTIFICIAL EQ NEVER X EFFICIENCY NEVER CONTESTABLE MARKET? HIT AND RUN COMPETITION? NON-PRODUCTIVE COSTS LAWSUITS LOBBYING LYNCHING PERFECT COMPETITIONCOSTSEXTERNAL 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 ??IMPERFECT MARKETSMONOPOLISTIC COMPETITIONMONOPOLISTIC 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 MAX PROFIT PRODUCE AT MR > MC BUT Qs < Qd SHORTAGE SO P = Qd UNTIL Qd = Qs ARTIFICIAL EQUILIBRIUM FOR MONOPOLISITIC COMPETITIONLONG 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 OLIGOPOLYOLIGOPOLY A FEW FIRMS DIFFICULT ENTRY INTO MARKET DIFFERENTIATED PRODUCT INTERDEPENDENT NASH BOX PRISONER'S DILEMMA PRICE MAKERRISK AVOIDERKINKED 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 MARKETCOLLUSION IF THREATENED FROM OUTSIDEX-EFFICIENCY OVERCAPITALIZATION FOR POTENTIAL EXPANSION NOT PRODUCTIVE EFFICIENCY NOT ALLOCATIVE EFFICIENT ??MONOPOLYMONOPOLY ONE FIRM IMPOSSIBLE ENTRY INTO MARKET STANDARD PRODUCT PRICE MAKERRISK AVOIDERCONTESTABLE 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 ??UNIT FIVERESOURCE MARKETSPERFECTLY COMPETITIVERESOURCE MARKETPERFECT COMPETITIONHOUSEHOLDS ARE SELLERS OF RESOURCESLAND = ACAPITAL = KLABOR = LBUSINESSES ARE BUYERS OF RESOURCESMRP = MR MRC (MFC) = MC LEAST COST FORMULA FOR A COMBINATION OF RESOURCES:MRPL=MRPA=MFCK= 1MFCLMFCAMFCKPROFIT MAXIMIZATION FORMULAMRP > MFC?????IMPERFECTLY COMPETITIVERESOURCE MARKETIMPERFECT COMPETITIONMONOPSONYPROFIT MAXIMIZATION FORMULATR > TCMAX PROFIT PRODUCE AT MRP > MFC BUT Qs > Qd SURPLUS UNEMPLOYMENT SO W= Qd UNTIL Qd = Qs ARTIFICIAL EQUILIBRIUM ??? ................
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