Ap micro review

AP MICRO REVIEW

The percentage change in price

The percentage change in quantity

Q

P

P1

P2

Q1Q2

D

Commonly Expressed as…

PRICE ELASTICITY OF DEMAND

% P% Q d

Elasticity is .5

Q

P

D

Total revenue riseswith price to a

point...

then declines

ElasticDemand

ElasticDemand

InelasticDemand

TR

Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE

InelasticDemand

UnitElastic

http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter20/interactive_graphs.html

Algebraic Restatement of theUtility Maximization Rule

MU of product A

Price of A

MU of product B

Price of B=

UTILITY MAXIMIZING COMBINATION

8 Utils

$1

16 Utils

$2=

SHORT-RUN COSTS GRAPHICALLY

Quantity

Co

sts

(do

llar

s)

AFC

AVCATC

MC

Plotting Average andMarginal Costs


EconomicProfit

Implicit costs(including a

normal profit)

ExplicitCosts

Accountingcosts (explicit

costs only)

AccountingProfit

Ec

on

om

ic (

op

po

rtu

nit

y) C

os

ts

TOTAL

REVENUE

Profits to anEconomist

Profits to anAccountant

ECONOMIC COSTS

Law of Diminishing Returns

SHORT-RUN PRODUCTIONRELATIONSHIPS

Tota

l Pro

du

ct, T

P

Quantity of Labor

Ave

rag

e P

rod

uct

, AP,

an

dM

arg

inal

Pro

du

ct, M

P

Quantity of Labor

Total Product

MarginalProduct

AverageProduct

IncreasingMarginalReturns

http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.html



Tota

l Pro

du

ct, T

P

Quantity of Labor

Ave

rag

e P

rod

uct

, AP,

an

dM

arg

inal

Pro

du

ct, M

P

Quantity of Labor

Total Product

MarginalProduct

AverageProduct

DiminishingMarginalReturns




Tota

l Pro

du

ct, T

P

Quantity of Labor

Ave

rag

e P

rod

uct

, AP,

an

dM

arg

inal

Pro

du

ct, M

P

Quantity of Labor

Total Product

MarginalProduct

AverageProduct

NegativeMarginalReturns



ECONOMIES ANDDISECONOMIES OF SCALE

Un

it C

ost

s

Output

long-run ATC

Economiesof scale

Diseconomiesof scale

Constant returnsto scale

$200

150

100

50

0

Co

st a

nd

Rev

enu

e

1 2 3 4 5 6 7 8 9 10

MC

MR

AVCATC

Economic Profit

$131.00

$97.78

MARGINAL REVENUE-MARGINAL COST APPROACH

Profit Maximization Position


$200

150

100

50

0

Co

st a

nd

Rev

enu

e

1 2 3 4 5 6 7 8 9 10

MC

MR

AVCATC

Economic Profit

$131.00

$97.78


MR = MCOptimumSolution

Profit Maximization Position

$200

150

100

50

0

Co

st a

nd

Rev

enu

e

1 2 3 4 5 6 7 8 9 10

MC

MRAVCATC

Economic Loss

$81.00$91.67


Loss Minimization Position

$200

150

100

50

0

Co

st a

nd

Rev

enu

e

1 2 3 4 5 6 7 8 9 10

MC

MR

AVCATC

$71.00


Short-Run Shut Down Point

Minimum AVCis the Shut-Down

Point

PURE COMPETITION AND EFFICIENCY

Productive EfficiencyPrice = Minimum ATC

Allocative EfficiencyPrice = MC

UnderallocationPrice > MC

OverallocationPrice < MC


MONOPOLY REVENUES & COSTS

Q

Do

llar

sD

oll

ars

$200

150

200

50

$750

500

250

TR

MR D

InelasticElastic

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

A Monopolist will always operate on the Elastic Portion of the Demand Curve

Inelastic PortionMR is Negative

Profit Maximization Under Monopoly

D

MC

ATC

MR

$94

$122

Profit

MR = MC

ProfitPer Unit

OUTPUT AND PRICE DETERMINATION

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

cost

s, a

nd

rev

enu

eRemember the MR=MC Rule?

Q

INEFFICIENCY OF PURE MONOPOLY

P

DMR

S = MC

Pc

Pm

QcQm

At MR=MCA monopolistwill sell lessunits at ahigher pricethan incompetition

An industry in pure competitionsells where supply anddemand are equal

D

MR

MC

P3 = A3

ATC

Pri

ce a

nd

Co

sts

Q3

Quantity

Long-Run EquilibriumPrice is Not= Minimum

ATC

Price MC

MONOPOLISTIC COMPETITIONAND EFFICIENCY

OLIGOPOLY BEHAVIORA Game-Theory Overview

High

Low

High Low

Up

tow

n’s

Pri

ce S

trat

egy

RareAir’s Price Strategy

BA

DC

$12 $15

$12 $6

$6 $8

$8$15



High

Low

High Low

Up

tow

n’s

Pri

ce S

trat

egyRareAir’s Price Strategy

BA

DC

$12 $15

$12 $6

$6 $8

$8$15

GreatestCombined

Profit


High

Low

High LowU

pto

wn

’s P

rice

Str

ateg

y


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

IndependentActions

StimulateResponse


High

Low

High LowU

pto

wn

’s P

rice

Str

ateg

y


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

IndependentActions

StimulateResponse

Gravitatingto the

Worst Case


High

Low

High LowU

pto

wn

’s P

rice

Str

ateg

yRareAir’s Price Strategy

BA

DC

$12 $15

$12 $6

$6 $8

$8$15

CollusionInvites aDifferentSolution.


High

Low

High LowU

pto

wn

’s P

rice

Str

ateg

y


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

But, theincentiveto cheat

is very real.

CollusionInvites aDifferentSolution.


MARGINAL PRODUCTIVITYTHEORY OF RESOURCE DEMAND

Rule for Employing Resources:

MRP = MRC

MarginalResource

Cost=

Change in Total (Resource) Cost

Unit change in Resource Quantity

OPTIMUM COMBINATIONOF RESOURCES

Least-Cost Rule

Profit-Maximizing Combination

MP of Labor MP of Capital

Price of Labor Price of Capital

MRPL

PL

MRPC

PC1

Least-Cost Combination of Resources

Non-LaborCosts

LaborCosts

PURELY COMPETITIVE LABORMARKET EQUILIBRIUM

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

IncludesNormalProfit


Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

employment.

MONOPSONISTICLABOR MARKET


P

Q

$ 9 7

5

3

1

0 1 2 3 4 5

DC

S

OPTIMAL AMOUNT OF A PUBLIC GOOD

Yields theoptimum amount

of the public good

MB = MC

COST-BENEFIT ANALYSIS

Marginal Cost = Marginal Benefit Rule

Spillover CostsOverallocation

Spillover BenefitsUnderallocation

Externalities



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