AP MICROECONOMICS FULL REVIEW
What causes a shift in a curve?
A change in supply or demand
What is a supply curve or schedule?
A curve or table that shows how many units a supplier is willing to sell at a given price
What is a demand curve or schedule?
A curve that shows the quantities that a consumer will buy at a given price
What causes a shortage? (Government meddling)
A price ceiling (Below equilibrium)
What causes a surplus (Government meddling)
A price floor (Above equilibrium)
How does product differ in the long run?
All production factors are varied
What does a perfectly competitive market bring about?
Allocative Efficiency (MC=P) and Productive Efficiency (Q at minimum ATC)
What are the factors of production?
Land and natural resources Labor Capital Entrepreneurship
What is profit maximization?
MR = MC
What is Marginal Revenue Product? (MRP)
Marginal revenue * marginal product
What is change in quantity demanded?
Caused by a change of price in a given good
What is change in demand?
Changes from everything that is not a change in the good's price
What causes a movement along a curve?
Changes in price
What is change in supply?
Changes in supply that are not a result of cost
What happens if the supply or the demand curves are perfectly inelastic?
Consumers carry all of the burden
If supply curve is more elastic than the demand curve, who carries more of the tax burden?
Consumers carry more of the tax burden
What are the implicit costs?
Costs that do not require money spending. (Time, Opportunity Cost)
What is elastic?
E > 1
What is inelastic?
E<1
What is unitary elastic?
E=1
Economic costs include?
Explicit (Accounting and out-of-pocket costs) and implicit costs (Non-monetary costs, such as time)
What is elasticity?
How consumers respond to price changes (How much does quantity demanded change)
What are economies of scale?
In the long run, average costs are declining, job specialization increases are the firm expands and productivity increases
What are constant returns to scale?
In the long run, average costs do not fluctuate. The cost per unit does not change
What is the law of demand?
Increase in price causes decrease in quantity demanded (QD)
What can a firm do in the long run?
It can expand or contract their fixed costs and freely enter or leave the industry
How does LRAC change in economies of scale?
It decreases
How does total revenue change if demand is unitary elastic?
It doesn't change
How does LRAC change in diseconomies of scale?
It increases
What does it mean to be inside the frontier?
It means that the resources are being used inefficiently or not being used at all
What does it mean to be at equilibrium?
It means that the sellers will be willing to sell all that they have and consumers will be willing to buy as they can buy
What does it mean when P<Pe?
It means that there is a shortage
What does it mean when P>Pe?
It means that there is a surplus
What is the Long Run Average Cost Curve (LRAC)?
It shows the cheapest way to product any given level of output
What happens if a firm cannot cover variable costs?
It will shutdown
Should the firm shut down if P>AVC (In short run)
No, the firm will produce at a loss though (Losses at shutdown will be more than if the firm keeps going)
What is normal profit?
Normal profit is the accounting profit that makes economic profit zero.
What is the law of increasing opportunity cost?
Obtaining more of your most desired good comes as the cost of losing more the next most-desired good
How does LRAC change in constant returns to scale?
Remains constant
How does the shape of the LRAC curve change?
Starts out as an economies of scale and then there will be constant costs and finally diseconomies of scale
What is the principle of diminishing marginal utility?
States that the satisfaction we gain from buying a product lessens as we buy more of the same product
What happens if the supply or the demand curves are perfectly elastic?
Suppliers carry all of the burden
If demand curve is more elastic than the supply curve, who carries more of the tax burden?
Suppliers carry more of the tax burden
What is market mechanism?
Supply and demand determine the price; owners allocate resources to the production of good that will make them the most profit
How does total revenue change if demand is elastic?
TR decreases when price increases and increases when prices decreases
What is comparative advantage?
The ability to produce a good at a lower opportunity cost than another producer
What is absolute advantage?
The ability to produce more of a good or service than competitors using the same amount of resources.
What is the production possibility frontier? (PPF)
The alternative combinations of final goods and services that could be produced in a given time period with all available and limited resources and technology
How does price discrimination affect the consumer surplus?
The consumer surplus is reduced and perfect price discrimination completely wipes out consumer surplus
What is opportunity cost?
The cost of choosing one good over the other
What will happen to a monopoly in the long run?
The demand curve will shift to the left until P = ATC and economic profits are zero, and there is no allocative efficiency,
What is the relationship between monopolies and efficiency?
The monopolist cannot achieve productive efficiency, produces where price is greater than the marginal cost, monopolists produce less at higher price than would be produced under perfect competition
What is macroeconomics?
The study of economic aggregates on a national or global scale
What is microeconomics?
The study of economic aggregates on an individual or firm level
Economics is
The study of how scarce resources are allocated among competing uses
What are straight line demand curves?
They are elastic at prices above the midpoint and inelastic at prices below it
What are horizontal demand curves?
They are perfectly elastic
What are vertical demand curves?
They are perfectly inelastic
Why is the short run average total cost u-shaped?
This is because declining average fixed costs bring costs down at low production levels, while rising average variable costs negate the effect declining fixed costs
What is the goal of consumer?
To maximize utility?
How does total revenue change if demand is inelastic?
Total revenue decreases when price decreases and increases when price increases
What are the three economic questions?
What to produce? How to produce? For whom to produce?
What is the principle of diminishing returns?
When at least one factor is fixed, a firm will experience diminishing MPP (Decrease in the change of quantity over the change in the units of labor)
What are diseconomies of scale?
When average costs are increasing due to a variety of problems
When does equilibrium occur? (Pe)
When quantity demanded equals quantity supplied
What does it mean for the frontier to expand?
When resources are increasing and/or due to technological advancements
What is a change in quantity supplied?
When the amount supplied changes due to a change in price
Is trade beneficial for all countries participating?
Yes, trade is beneficial
What is a command economy?
an economy in which production, investment, prices, and incomes are determined centrally by a government.
What is the law of supply?
an increase in price results in an increase in quantity supplied (QS)
What is a mixed market economy?
features characteristics of both planned and market economies
What is utility?
satisfaction
What is economic profit?
total revenue - (explicit costs + implicit costs)
What is accounting profit?
total revenue - explicit costs
What are the characteristics of an oligopoly?
-Few sellers and many buyers -Products are either very similar to completely different from each other, ads can manipulate, and strong barriers to entry
What are the characteristics of perfect competitor?
-Large number of buyers -Firms are selling a similar product -Consumers and producers do not need advertising -Both firms and producers are price-takers -No barriers to entry
What are the characteristics of a Monopoly?
-Single seller -No substitutes -no entry for new firms -almost complete control of market price -Price must decline in order to sell more
What are the resource types?
Anything that can help a company produce its output. (Labor, Land, Capital, and entrepreneurship)
How do utility and demand work together?
As the price of a good increases the utility decreases, which causes quantity demanded to fall
How does production differ in the short run?
At least one factor is fixed (Usually the firm's capital or plant)
What causes a change in equilibrium?
Both Pe and Que will change when supply or demand shift
What are economic costs?
Opportunity cost (Explicit and implicit costs)
What are anti-trust laws?
Prevents collusion and monopolies
What are the accounting costs?
The explicit costs, which are the actual expenses
What is marginal physical product? (MPP)
The extra production that can be created from an additional unit of production
What is the MRP curve?
The firm's demand curve for the firm's combined factors of production where the marginal products per dollars spent are the same for each factor