AP MICROECONOMICS UNIT #3



AP MICROECONOMICS UNIT #3

THE FIRM

GEORGIA PERFORMANCE STANDARDS IN THIS UNIT

SSEMI4 The student will explain the organization and role of business and analyze

the four types of market structures in the U.S. economy.

a. Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation.

b. Explain the role of profit as an incentive for entrepreneurs.

c. Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition.

COLLEGE BOARD STANDARDS IN THIS UNIT

I. Basic Economic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8–14%)

F. Marginal analysis

II. The Nature and Functions of Product Markets. . . . . . . . . . . . . . .. (55–70%)

C. Production and costs (10–15%)

1. Production functions: short and long run

2. Marginal product and diminishing returns

3. Short-run costs

4. Long-run costs and economies of scale

5. Cost minimizing input combination and productive efficiency

D. Firm behavior and market structure (25–35%)

1. Profit

a. Accounting versus economic profits

b. Normal profit

c. Profit maximization: MR=MC rule

2. Perfect competition

a. Profit maximization

b. Short-run supply and shutdown decision

c. Behavior of firms and markets in the short run and in the long run

d. Efficiency and perfect competition

3. Monopoly

a. Sources of market power

b. Profit maximization

c. Inefficiency of monopoly

d. Price discrimination

e. Natural monopoly

4. Oligopoly

a. Interdependence, collusion, and cartels

b. Game theory and strategic behavior

c. Dominant strategy

d. Nash equilibrium

5. Monopolistic competition

a. Product differentiation and role of advertising

b. Profit maximization

c. Short-run and long-run equilibrium

d. Excess capacity and inefficiency

READING ASSIGNMENTS

1. Chapter 4 : pp. 68-69.

2. Chapter 20: pp. 378-384.

3. Chapter 20: pp. 384-389.

4. Chapter 20: pp. 389-396.

5. Chapter 21: pp. 399-409.

6. Chapter 21: pp. 409-420.

7. Chapter 22: pp. 423-436.

8. Chapter 22: pp. 436-441.

9. Chapter 23: pp. 444-450.

10. Chapter 23: pp. 451-464.

LECTURES

1. The Production Function.

2. Costs in the Short-Run.

3. Costs in the Long-Run.

4. Introduction to Perfect Competition.

5. Short-Run and Long-Run Per. Comp.

6. Introduction to Monopoly.

7. Monopoly charts/graphs.

8. Inefficiency of monopoly/regulation.

9. Monopolistic Competition.

10. Oligopoly #1.

11. Oligopoly #2.

TEXTBOOK STUDY QUESTIONS

1. Chapter 20: 2, 4, 7, 10.

2. Chapter 21: 3, 4, 6, 7.

3. Chapter 22: 4, 5, 6, 12.

4. Chapter 23: 2,7, 8, 9, 11.

1.

PROJECTS

TBA

UNIT GRAPHS

See handout

REFLECTION PAPERS

See handout

QUIZZES

1. Business organizations. (15)

2. Production Function. (16)

3. Basics of costs. (17)

4. Revenue/Cost/Profit for Perfect Competition. (18)

5. Computing Revenue/Cost/Profit from Graphs. (19)

6. Perfect Competition FRQ. (20)

7. Basics of Monopoly. (21)

8. Monopoly graph interpret. (22)

9. Natural/regulated monopoly and price discrimination. (23)

10. Monopoly FRQ. (24)

11. Monopolistic competition. (25)

12. Oligopoly demand curve. (26)

13. Game theory. (27)

14. Market structures review. (28)

TEST PRACTICE

1. Sample Multiple Choice.

2. Sample Free Response.

TESTS

Unit Test #3

OBJECTIVES

1. Explain the relationship between marginal cost and marginal product and marginal cost and AVC and ATC.

2. List and analyze the differences between the four major market structures.

3. Explain the tendency towards break-even in the long-run in perfect competition.

4. Explain entry barriers that keep competitors out of industries controlled by monopolies.

5. Explain the gap between marginal revenue and price in noncompetitive markets.

6. Explain how elasticity of the demand curve determines output and pricing in a monopoly.

7. Analyze why noncompetitive markets are less efficient than perfect competition.

8. Identify and analyze pricing problems associated with an oligopoly.

VOCABULARY

economic cost economies of scale fair-return pricing

explicit cot constant returns to scale marginal cost pricing

implicit cost diseconomies of scale nonprice competition

normal profit natural monopoly excess capacity

economic profit perfect competition homogeneous oligopoly

total product (TP or Q) monopolistic competition differentiated oligopoly

Marginal product (MP) oligopoly mutual interdependence

Average product (AP) monopoly concentration ratio

Law of diminishing returns price taker Herfindhal index

fixed costs (TFC) price maker game theory

variable costs (TVC) average revenue (AR) dominant strategy

total cost (TC) marginal revenue (MR) Nash Equilibrium

Average fixed cost (AFC) total revenue (TR) kinked demand curve

Average Variable Cost (AVC) break-even point

Average Total Cost (ATC) shut-down point

Marginal Cost (MC) MR=MC rule

sole proprietorship Increasing-cost industry

partnership Constant-cost industry

corporation Decreasing-cost industry

horizontal merger collusion

vertical merger cartel

conglomerate allocative efficiency

stock/bond deadweight loss rent-seeking

price discrimination

GRAPH/CHART/APPLICATION SKILLS

1. Compute marginal product and average product from a table and a graph.

2. Compute TFC, TVC, TC, AFC, ATC, and MC from a table and from a graph.

3. Identify cost and production curves on a graph.

4. Interpret long-run ATC graphs.

5. Compute price, quantity, total revenue, average revenue, and marginal revenue from a table and a graph for all market structures.

6. Identify profit, break-even, loss, and shutdown from total cost/total revenue curves and from average cost/average revenue curves from all market structures.

7. Determine the profit-maximizing output level in all four market structures.

8. Analyze how changes in the industry of a product changes cost and revenue for the firms in that industry (in all market structures).

9. Identify different output and price levels for a monopoly under government regulation.

10. Identify the deadweight loss from a monopoly on a graph.

11. Compute and analyze Herfindhal index figures for different industries.

12. Interpret a profit payoff matrix for an oligopoly.

13. Interpret the kinked demand curve of an oligopoly.

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