12 pm – may 17 th, 2012 ap microeconomics test review rmce/hwrhs

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12 PM – May 17 th , 2012 AP Microeconomics Test Review RMCE/HWRHS

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Page 1: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Page 2: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

In the beginning …Economics

How to allocate scarce resources with unlimited wants or desires.

ResourcesLaborLand/Natural ResourcesCapitalEntrepreneurship

Page 3: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Opportunity Costs & Marginal Analysis

Opportunity CostsThe cost of doing the next best option.

MarginalThe cost or benefit of “the next one” EX If one candy bar costs $2 and two bars cost $3, the

Marginal Costs of 1st bar is $2 and the MC of the 2nd bar is $1.

Basis of economic study.

Page 4: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Production Possibility Frontier

W

Y

X

Z

GoodA

Good B

Measures different combinations of production

X & Y are equallyefficient, on the PPF curve

W is inefficient,Not all resourcesIn use – a recession

Z is beyond capacity,borrowing or runninga deficit

Page 5: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Trade Advantages

Example:

Country A60 Pizzas80 Hot Dogs

Country B40 Pizzas 20 Hot Dogs

Page 6: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Absolute AdvantageWho can produce the most?

Pizzas:Country A – 60Country B – 40

Hot Dogs:Country A – 80Country B – 20

Country A b/c60 > 40.

Country A b/c80 > 20.

Page 7: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Comparative AdvantageWho gives up the least to produce?

(items produced/items no longer produced)

Pizzas:Country A – (60 Pizzas/80 HD) = 0.75Country B – (40 Pizzas/20 HD) = 1.50

Hot Dogs:Country A – (80 HD/60 Pizzas) = 1.33Country B – (20 HD/40 Pizzas) = 0.50

Country B b/c2.00 > 0.75.

Country A b/c1.33 > 0.50

NB There is always comparative advantages for both countries even when one country has an absolute advantage in both products

Page 8: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Supply and Demand

S

D

Quantity

Price

P

Q

Page 9: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

DemandMovement along the curve

Change in Price

Curve ShiftChange in Determinants Income Substitutes Complements Number Consumers Consumer Tastes Consumer Expectations

Page 10: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

SupplyMovement along the curve

Change in price

Curve shiftChange in Determinants Costs of inputs Number sellers Change in technology Taxes Producer expectations

Page 11: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Supply & DemandSubstitutes

Complements

Normal goods

Inferior goods

Page 12: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Equilibrium

S

D

Quantity

Price

P

Q

surplus

shortage

P+1

P-1

Page 13: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Price Floors & Ceilings

S

D

Quantity

Price

QD QS

Price Floor

Price Ceiling

Pf

Pc

DeadweightLoss (DWL)

Page 14: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Equilibrium

S

D

Quantity

Price

P

Q

Consumer Surplus

Producer Surplus

Total Welfare is the sum of Consumer & Producer Surpluses

Page 15: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

ElasticityMeasures change in QUANTITY caused by small changes in PRICE

= %ΔQ / %ΔP

Midpoint Formula =(Q1-Q2)/((Q1+Q2)/2)

(P1-P2)/((P1+P2)/2)

Page 16: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

ElasticityPerfectly Elastic

ED = ∞

Elastic 1 < ED < ∞

Unit Elastic ED = 1

Inelastic 0 < ED < 1

Perfectly Inelastic ED = 0

Page 17: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Determinants of Elasticity

Substitutes

Income

Time

Page 18: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Total Revenue (TR) MethodElastic

Price & TR move in opposite direction P TR P TR

Inelastic Price & TR move in the same direction P TR P TR

TR = P * Q ….do not compare P & Q !!!

Page 19: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Types of ElasticityIncome elasticity

%ΔQ / %Δ IncomeNegative number for Inferior Goods

Cross elasticity% Δ Q Good A / % Δ P Good BNegative number for Complementary Goods

Page 20: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

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Elasticity & TaxesGovernmentRevenue

Consumption Taxes paidBy Consumer

Taxes Paid by Supplier

PerfectlyElastic

Least Most 0 % 100 %

Elastic

Inelastic

PerfectlyInelastic Most Zero 100 % 0 %

Page 21: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

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Changing Elasticities

Inelastic – A large change in price…

… leads to a small change in quantity

Elastic – A small change in price…… leads to a large change in quantity

23

10

13

4 5 11 14

Price

Quantity

Page 22: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Graphing Tax Revenue

S

D

Quantity

Price

P

Q

PT

QT

Tax Revenue

ST

Tax shifts supply Curve – Price up & Quantity down

Page 23: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Firms, Markets & Costs

Accounting π = TR – Explicit CostsEconomic π = Acct π – Implicit Costs

Implicit Costs are Opportunity costsLong-run has no fixed costs

Sunk CostsEconomies of ScaleTC = TFC + TVC

Page 24: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Total & Average Cost Graphs

P

Q Q

TC

FC

VC

AFC

AVC

ATC

MC

Page 25: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Profits

P

Q

MC

MR

ATC

P1

Q1

Π determined byMC = MR

Π = (P-ATC)*Q

NB Shut down price for business If Price < Minimum AVC

Page 26: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

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Perfect Competition (profits)

Industry Firm

PricePrice

P1 P1

Q1 q1Quantity Quantity

Profits MC

ATC

D=MR=AR=P

S

D

S2

Q2

P2 D2

q2

New firms enter b/c profits, Results in P, Industry Q, Firm q, & π = 0

Page 27: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Perfect Competition (losses)

Industry Firm

PricePrice

P1 P1

Q1 q1Quantity Quantity

S

D

MC

ATC

D=P=MR=AR

Losses

D2P2

S2

Q2 q2

Firms leave b/c losses, results in P , Industry Q , Firm q , & π = 0

Page 28: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Monopoly

MC

ATC

Quantity

D

MR

Price

Q

P

Πmax set by MC=MR

Monopoly P set by demand Curve point above MC=MR

Socially optimal allocation or allocative efficiency at MC = D

Fair return Price ATC=P(0 economic profit)

Deadweight loss (DWL)Difference between Monopoly P & Socially optimal P

Page 29: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Monopolistic Competition

P

Q

MC

ATC

P

QExcess Capacity

MR

Equilibrium atzero economicprofits

ATC tangent to D

Page 30: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Monopolistic Competition

P

Q

MC

ATC

P

Q

MR

Economic profit willcause firms to enter,with more firms inthe market, consumershave more choice &demand for the company decrease

ATC < D

DD2

P2

Page 31: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Monopolistic Competition

P

Q

MC ATC

P

Q

MR

Economic losses willcause firms to exit which will increase demand for companiesstill in business

ATC > D

D

D2

P2

Page 32: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

OligopolyBarriers to entryMay or may not have differentiation

4 Firm ratio Prisoner’s dilemmaDominant Strategy

One choice is always better

Nash Equilibrium Each player know options of

opponent – no need to change

Jack

Confess Don’t Confess

Ji llC

onfe

ss

Don

’t C

onfe

ss

10 year

10 year

Free

Free

20 years

20 years 1 years

1 years

Page 33: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Oligopoly: Incentive to Collude

Game theory appliedOligopolists have a strong incentive to collude and raise their prices.

However, each firm also has an incentive to cheat by lowering price because the demand curve facing each firm is more elastic than the market demand curve.

This conflict makes collusive agreements difficult to maintain.

Page 34: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

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Factor EconomicsDemand for inputs

LaborResources

MRP = Marginal Revenue ProductMR for factor markets= ΔTR / ΔQ

MRC = Marginal Revenue CostMC for factor markets= ΔTC / ΔQ

Page 35: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Factor EconomicsIf MRP > MRC

Increase Production

If MRP = MRCMax profitsStop (ideal) Production

If MRP < MRCDecrease production

Page 36: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Factor Economics

Marginal Productivity / Least CostMPA / PA = MPB / PB

Firms produce at a level where all costs are minimized

Derived DemandDemand for products creates or affects the

demand for resources such as labor

Page 37: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Factors & Distribution

Marginal Productivity Theory of Income Distribution

Income allocated by how much production is created

Theory may lead to Income inequality Market Imperfections

Page 38: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Types of Goods

Rivals in Consumption

Yes

Yes

No

No

Excludable

PrivateGoods

NaturalMonopoly

Common Resources

Public Goods

Page 39: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Negative ExternalitiesSupply FailureSuppliers do not have to pay the full value Will supply more b/c

costs paid by others

Costs affect supplyTaxes raise price to public equilibrium

P2

P1

P

Private Value

Social Cost

Private Cost

Q1Q2 Q

Externality Cost

Page 40: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Positive ExternalitiesDemand FailurePublic not willing to pay full value Benefits or subsidies needed to

induce suppliers to supply at lower price levels

Benefits affect demandSubsidies absorb costs creating public equilibrium

P2

P1

P

PrivateValue

Private Cost

PublicCost

Q1 Q2 Q

External Benefit

Page 41: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Income Inequality

Lorenz Curve Measures ratio between

richest & poorest quintiles.

Gini Index Measures among of

distribution Increasing numbers

(ranges from 0.0 to 1.0) means less equality

Page 42: 12 PM – May 17 th, 2012 AP Microeconomics Test Review RMCE/HWRHS

12 PM – May 17th, 2012AP Microeconomics Test Review

RMCE/HWRHS

Miscellaneous

Taxes

Progressive Increasing Marginal Rates

Proportional

Regressive Decreasing Marginal Rates

Moral Hazard Taking higher risks b/c of

insurance or government bail-outs

Adverse Selection Signaling Only those who need product

would buy it (insurance)