AP Microeconomics Final Exam Review
Inferior good
A good for which demand increases when income decreases EX: spam
Normal good
A good for which demand increases when income increases EX: steak
Cartel
An agreement that is difficult to maintain over time because individual members may find it profitable to cheat
Game Theory
Analyzes the pricing behavior of oligopolists
Gini Ratio
Calculated by A/A+B
Economic Profit
Calculated by: Total Revenue - Explicit Costs - Implicit Costs
MRP=MRC or MRP=W
Hiring point for workers in a Factor Market
MR DARP
In a perfectly competitive market: Marginal Revenue = Demand = Average Revenue = Price
Economic Loss
In a perfectly competitive market: P<ATC
Zero Economic Profit
In a perfectly competitive market: P=ATC
Shut-Down Point
In a perfectly competitive market: P=AVC
Economic Profit
In a perfectly competitive market: P>ATC
Gini Coefficient
Measures the inequality of income distribution 0=complete equality 1=complete inequality
Excess Capacity
Occurs in a Monopolistic Competitive Market when each firm has developed more production capability than is needed, and output is below the ATCmin
PPC/PPF
Production Possibilities Curve/Frontier. On the curve = efficient Inside the curve = inefficient Outside the curve = unattainable Can move outward by either trade, a new source of a resource, or technology. The Law of Increasing Opportunity Costs makes it possible for it to be bowed outward from the origin.
Comparative advantage
The ability of Trading Nation A to produce something at a lower opportunity cost than Trading Nation B
Opportunity cost
The next best alternative given when a choice is made.
Law of Diminishing Marginal Returns
Three Stages: 1. Total Product ^ Marginal Product ^ 2. Total Product ^ Marginal Product v 3. Total Product v Marginal Product v
MR=MC
Where profit is maximized and loss is minimized in a perfectly competitive market AND in a monopoly
Price Discrimination
-Charging different people different prices for the same good/service -Must identify and separate consumers -Buyers must not be able to resell goods to non-members
Proportional Tax
-Constant tax regardless of income -EX: flat tax
Demand Determinants
-Consumer Income -Consumer Tastes & Preferences -Expectations -Number of Buyers (Population) -Price of Related Goods
Supply Determinants
-Cost of Inputs -Expectations -Government Regulation -Number of Sellers -Productivity -Taxes and Subsidies -Technology
Positive Externality
-Gives additional benefit to society -Resources under-allocated -Not enough of a good thing -Solutions: voucher/subsidy
Negative Externality
-Gives additional cost to society -Resources over-allocated -Too much of a bad thing -Solutions: have costs internalized/impose a tax
Lorenz Curve
-Graphically illustrates the degree of income inequality in a country
Progressive Tax
-Income ^ Average Tax Rate ^ -EX: US income tax
Regressive Tax
-Income ^ Average Tax Rate v -EX: sales tax
Perfect Competition
-Large number of sellers -Standardized products -Easy entry/exit -Price taker
Ceilings
-Legal maximum on the price at which a good can be sold at -Price set below market equilibrium makes it binding -Causes a shortage -Common for gas/apartments
Floors
-Legal minimum on the price at which a good can be sold at -Price set above market equilibrium makes it binding -Causes a surplus -Used in minimum wages
Marginal Revenue Product
-Measure the value of what the next unit of a resource brings to a firm -Is calculated by MPP x P
Derived Demand
-Occurs in a Factor Market -The demand for a factor of production -Derived from the demand for the goods/services it is used to produce -EX: an increase in demand for new homes causes an increase in demand for new furniture causes an increase in demand for wool
Monopoly
-Single seller -No close substitutes -Price maker -Blocked entry -Non-price competition
Nash Equilibrium
-all players choose their optimal actions given the actions of others -non-cooperative equilibrium
