Mr. Bernstein Micro Graphs Review May 2014 AP Economics Mr. Bernstein Micro Graphs Review May 2014

AP Economics Mr. Bernstein The Production Possibilities Curve

AP Economics Mr. Bernstein Economic Growth Concave due to “Law of increasing opportunity costs”

AP Economics Mr. Bernstein Circular Flow Diagram

AP Economics Mr. Bernstein Expanded Circular Flow Diagram

AP Economics Mr. Bernstein Demand Curves A Shift in Demand is different from movement along the Demand Curve!!

AP Economics Mr. Bernstein Supply Curves A Shift in Supply is different from movement along the Supply Curve!!

AP Economics Mr. Bernstein Equilibrium Price is the adjustment mechanism: falls when there is a surplus, rises when there is a shortage

AP Economics Mr. Bernstein Simultaneous Shifts of Supply and Demand Curves Example: Demand for Justin Beiber tickets decreases and Supply decreases Equilibrium Price is ambiguous but Quantity change decreases (awww…) Know all four possible combinations

AP Economics Mr. Bernstein Elasticity along the Demand Curve Consumers are less price sensitive on inexpensive items TR begins to fall as prices rise and Elasticity grows

AP Economics Mr. Bernstein Consumer Surplus and Producer Surplus CS is the difference between what a consumer is willing to pay for a good or service and what they actually have to pay PS is the difference between what a producer must receive to sell a unit and the actual price they receive

AP Economics Mr. Bernstein Deadweight Loss Example: The Effect of Taxes Excise tax causes lower Q, efficiency loss Qt Q D Dead Weight Loss P Q S1 S CS T D D T PS

AP Economics Mr. Bernstein Price Ceilings Price ceiling is below equilibrium, creates shortage

AP Economics Mr. Bernstein Price Floor Price floor is above equilibrium; creates surplus

AP Economics Mr. Bernstein Quotas (Quantity Controls) Examples: limits, licenses; creates price “wedge”

AP Economics Mr. Bernstein Firm’s Cost Curves: Swoosh, Smirk and Smile The MC curve intersects the U-shaped AC and AVC curves at their minimum points

AP Economics Mr. Bernstein Perfectly Competitive Firm Produce at MR=MC Profit = MR – ATC In this case, zero economic profit… This is long-run equilibrium… Profit or loss if P > or < ATC ATC Q* MC MR D.AR.P! $ Output

AP Economics Mr. Bernstein The Short-Run Shut-Down Decision Shut down when P < AVC ATC P=ATC Q* MC P=MR=d=AR $ Output AVC Shut-down Price

AP Economics Mr. Bernstein Long Run Average Costs U-shaped LRATC is a series of U-shaped SRATCs – one for each level of fixed costs

AP Economics Mr. Bernstein Adjustment toward Long-Run Equil (Perf Comp)

AP Economics Mr. Bernstein Classic Monopoly Graph Q at MR=MC; lower Q and higher P than Perfect Competition; long-run economic profit exists due to barriers to entry

AP Economics Mr. Bernstein Monopoly Reduces Societal Welfare

AP Economics Mr. Bernstein Price Regulation Restores Consumer Surplus

AP Economics Mr. Bernstein Monopolists will use Price Discrimination Without competition, they take advantage of differing elasticities

AP Economics Mr. Bernstein Game Theory Each player competes to maximize individual payoffs and ignores the effects of his/her action on the payoffs received by the rival But Oligopolies engage in tacit collusion, tit for tat

AP Economics Mr. Bernstein Monopolistic Competition in the Long Run Adjusts to normal profit, as in Perfect Competition P*=ATC, tangent to ATC (not at minimum…)

AP Economics Mr. Bernstein Factor Market: Labor Value of W* = MRPL; (MC = W) Market Labor Demand Market Labor Supply Wage W* Q

AP Economics Mr. Bernstein Imperfect Competition in the Labor Market Hire where MPRL = MFCL Monopsony pays W* < MRPL Remember, whether Perfect or Imperfect Markets, firms hire where MRPL = MFCL MFCL Labor Supply W* MRPL Wage Quantity of Labor (workers) E*

AP Economics Mr. Bernstein Equilibrium in the Market for Land and Capital Supply curve for Land is very steep (inelastic)

AP Economics Mr. Bernstein Positive Externalities: MSB > MPB Market underproduces vs. socially optimal outcome Deadweight loss Policy to eliminate: Subsidy Price, MSB MPB MSB S Popt Qopt Qmkt Pmkt Subsidy Pcons Qty

AP Economics Mr. Bernstein Negative Externalities: MSC > MPC Market overproduces vs. socially optimal outcome Deadweight loss Policy to eliminate: Per unit tax Lump-sum tax does not affect MC so does not affect Q Price, MSC MPC D MSC Popt Qopt Qmkt Pmkt Tax Pfirm Electricity