1. AP microeconomics
Semester Review

2. Intro unit : PRODUCTION POSSIBILITIES CURVE (PPC)
What is the PER UNIT opportunity cost of moving
From point A to B?
(remember: cost/gain)
From point C to B?
What does point D represent?  
What does point E represent?
What do points on the curve represent?
Why does the PPC will shift:
Remember: outward shift = economic growth; inward shift = decline

3. Marginal Utility (when you see MU, think “value of the product to the consumer”)
Maximizing Utility:
MU<MC = don’t
MU>MC = do
MU=MC – do and STOP (maximize utility here)
If the marginal utility of an iphone is $200 and the price is $199, should a person purchase the phone?

4. Marginal utility if multiple items
MU/P = MU/P
If a consumer needs to chose between two items, a person must compare the marginal utility per price of each item (like a common denominator) Marginal utility per price = MU/P.
Buy more of the item with the highest MU/P and less of the other item
If MU/P of one item is = to that of the other item continue to purchase the same amount.

5. Multplie items: Marginal utility
The marginal utility for a cake is 20 and the price of cake is $5.00. The Marginal utility for a cookie is 10 and the price is $5.00. If you are a utility maximizing consumer, what should you purchase? MU/P cake = 20/5 =4 MU/P cookie = 10/5 = 2 * Buy more cake !!!!
The marginal utility of a shirt is 20 and the price is $10. The marginal utility of socks is 4 and the price is $2.00. If you are a utility maximizing consumer, what should you purchase? MU/P shirt = 20/10 = 2 MU/P socks = 4/2 = 2 Continue to buy same amount!!!!

6. Absolute Advantage: goes to the country that can more of the item
Which country has the Absolute advantage in cloth? ______________
Which country has the absolute advantage is shoes? ___________

7. Per Unit cost = COST/GAIN
The per unit cost of producing shoes in China is 1 s = 12/3 = 4 C The per unit cost of producing cloth in China is 1 c = ¼ S The per unit cost of producing shoes in India is 1 s = 5/2 C The per unit cost of producing cloth in India is 1c = 2/5 S

8. Who has the comparative advantage in shoes?
Comparative Advantage: means specializing – the comparative advantage always goes to the person that can make an item at a LOWER PER UNIT cost
China: 1S = 12/3 = 4c
1C = ¼ S
India: 1S = 5/2= 2 ½ C
1c = 2/5 S
Who has the comparative advantage in shoes?
Who has the comparative advantage in cloth?

9. Unit 1: Price elasticity – used to determine if goods are elastic or inelastic
Total revenue test: used to determine if goods are elastic or inelastic
If price and TR go in same direction demand is INELASTIC
If price and TR go in opposite directions demand is ELASTIC
Perfectly elastic: horizontal line
Perfectly inelastic: vertical line; same Q demanded/supplied regardless of price

10. Demand Why does the demand curve will shift? Change in income
Change in tastes/preferences
Change in substitutes
Change in complements
Change in # of consumers
Change in future expectations
A change in PRICE of the item is only a movement along the demand curve (this is called a CHANGE IN QUANTITY DEMANDED)

11. SUPPLY Why does the supply curve shift??? Change in # of suppliers
Change in # of resources
Change in government policies
Change in technology
Change in cost of production
A change in the PRICE of the item is only a movement along the supply curve ( this is called a CHANGE IN QUANTITY SUPPLIED)

12. Determining equilibrium price and quantity: remember all prices in a market economy are determined by the interaction of supply and demand
Pens and pencils are substitute goods. If there is an increase in the demand for PENS, the price of PENCILS will ___________ and the quantity of PENCILS will __________ The price of wood used to make houses decreases. As a result, the price of a house will ______________ and the quantity of houses will ______________

13. * a DOUBLE shift will result in either P or Q being indeterminate
The demand for a product increases and the supply increases by the same amount. As a result, the price of the product will _______ and the quantity of the product will  ______

14. Price floors :
lowest legal price an item can sell for always ABOVE equilibrium price because the government thinks the equilibrium price is too low
(example: minimum wage)
Price floors always result in a SURPLUS of the item

15. Price Ceiling
highest legal price an item can sell for; always BELOW equilibrium price because the government thinks the equilibrium price is too high (example: rent controls)
Price ceilings always result in a SHORTAGE of the item

16. Unit 2 Marginal Product: stages of production
# of workers
Total product
Marginal product 1 15 2 35 3 45 4 44
Which workers produced increasing returns? Which workers produced diminishing returns? Which worker produced negative returns?

17. Marginal Product: stages of production
# of workers
Total product
Marginal product 1 15 2 35 20 3 45 10 4 44 -1
Which workers produced increasing returns? 1 and 2 Which workers produced diminishing returns? 3 Which worker produced negative returns? 4

18. SHORT RUN Costs
Short run = PLANT SIZE IS FIXED

19. Long Run Costs Plant size is VARIABLE
In the LONG RUN economies of scale can happen:
Economics of scale – ATC decreases as firm gets bigger
Diseconomies of scale – ATC increases as a firm gets bigger

20. Profit Maximization in output market:
MR<MC = don’t produce
MR>MC = produce
MR=MC – produce and stop (maximize production here)
A firm’s marginal revenue of producing one more product is $50 and marginal cost is $30, if the firm is a profit maximizing firm, what should they do?

21. Assume the product in the above chart exists in a perfectly competitive market and sells for $10.00 each.    
Total product
Marginal product
Total cost
Marginal cost
Total revenue
Marginal revenue 2 1 10 17 3 27 4 43 5 73 6
113

22. Assume the product in the above chart exists in a perfectly competitive market and sells for $10.00 each.    
Total product
Marginal product
Total cost
Marginal cost
Total revenue
Marginal revenue 2 1 10 8 17 7 20 3 27 30 4 43 16 40 5 73 50 6
113 60
What Q should this firm produce?
What is the profit at this Quantity?

23. PERFECTLY COMPETITIVE FIRMS
THEY HAVE CONTROL OVER THE Q they produce, but not the PRICE – As a result, they are price takers
Products are IDENTICAL
If there is a change in the market price, the firm must adjust their Quantity
To new MR =MC

24. What quantity will the firm produce. E Why
What quantity will the firm produce? E Why? MR = MC What area on the graph shows the firm’s TR? AHEO What area on the graph shows the firm’s TC? BGEO Is this firm earning a profit or loss? PROFIT What area on the graph shows the profit/loss? AHGB

25. When should a firm SHUT DOWN?
Shut down or not???

26. Perfectly competitive firms in the LONG RUN
In the long run, PC firm’s will always be at a break even point (normal profit) this is due to the ease of entry into the market
When PC firms make a profit, new firms will ENTER the market causing SUPPLY to INCREASE which leads to prices going down When PC firms have a loss, firms will LEAVE the market causing SUPPLY to DECREASE which leads to prices going up

27. Unit 3 MONOPOLIES: Unique product, Price makers, MR <DARP
Why?? In order to sell more units, the firm must lower their price
Q determined where MR=MC
P determined by D=AR=P
Monopolies will always price their item in the ELASTIC portion of the demand curve
Why? They want their Total revenue to go up when they lower their price

28. Monopolies
Monopolies in the LONG RUN always earn a PROFIT because they don’t face any competition due to high barriers to entry
Single price monopolies: firms charge the same price to all customers Price discriminating monopolies: firms charge different prices for the same item

29. What Q will the firm produce?
8   WHY? MR = MC
What P will the firm charge?
$ 150  
What is the firm’s TR?
$150 X 8 = $ 1200  
What is the firm’s TC?
$ 175 X 8 = $1400 
Does this firm have a profit or loss?
LOSS  
How much is the profit/loss?
TR – TC = = - 200 
What is the socially optimal Q?
where S = D; 10 

30. MONOPOLISTIC COMPETION
Try to DIFFERENIATE their products from the competition ; Price makers
* graph looks just like monopoly graph
In the LONG RUN, monopolistic competitive firms will break even:
Why? Easy to enter this structure They do break even, but they are still NOT EFFICIENT

31. OLIGOPOLIES:
Few firms dominate the market, One firm’s actions impact the other firm’s actions Use a pay off matrix to show interdependency of firms
In the LONG RUN – oligopolies will make a PROFIT; due to high barriers to entry

32. If yellow has a low price and white has a
High price, what will be yellow’s profit? ___
White’s profit? ___________
If yellow and white both have a high price,
What will be yellow’s profit? ________
White’s profit? _____________
At the Nash equilibrium, what will be
Yellow’s profit? ________ white’s? _______
What is yellow’s dominant strategy?
What is white’s dominant strategy?

33. * * * * If yellow has a low price and white has a
High price, what will be yellow’s profit? $50
White’s profit? $ 160
If yellow and white both have a high price,
What will be yellow’s profit? $100
White’s profit? $100 
At the Nash equilibrium, what will be
Yellow’s profit? $100 white’s? $100
What is yellow’s dominant strategy?
HIGH 
What is white’s dominant strategy?
HIGH * * * *

34. Unit 4 Market Failures:
imperfect information externalities public goods market power uneven distribution of wealth

35. How does the G correct for failures???
Positive externalities: SUBSIDIES Negative externalities: TAX Uneven distribution of wealth: PROGRESSIVE income taxes (wealthier people taxed at a high % rate)

36. To compensate for NEGATIVE externalities: Government issues a TAX
What quantity will be produced without any Government intervention? What is the price consumers will pay before the tax? What is the price consumers will pay after the tax? What price do producers receive before the tax? What price do producers receive after the tax? What quantity will be produced after the tax? What is the dollar amount of the tax? How much of the tax do consumers pay? How much of the tax does the producer pay?

37. To compensate for NEGATIVE externalities: Government issues a TAX
What quantity will be produced without any Government intervention? 200 What is the price consumers will pay before the tax? $10 What is the price consumers will pay after the tax? $12 What price do producers receive before the tax? $10 What price do producers receive after the tax? $ 8 What quantity will be produced after the tax? 100 What is the dollar amount of the tax? $4.00 How much of the tax do consumers pay?$2.00 How much of the tax does the producer pay?$2.00

38. Positive Externality

39. Negative Externality

40. Unit 5 Resource Market
In the RESOURCE/FACTOR market, who/what demands? Who/what supplies? In the PRODUCT MARKET, who/what demands? Who/what supplies?

41. Demand and supply of labor
Why does the Demand for labor shift???
Change in price of product
Change in demand for product
Change in substitute resources
Change in productivity
Why does the Supply of labor shift???
Change in # of workers
Change in worker attitudes
Change in Government regulations
Shifting a curve on market labor graph
1. Decide which curve will shift
2. Shift the curve
3. Read the graph to determine wages and Q

42. The price of apples increase
The price of apples increase. As a result, wages for apple pickers will _____________, and the Quantity of apple pickers will _________________ There is a decrease in the supply of teachers. As a result, wages for teachers will ______ and the Q of teachers will __________________

43. Profit Maximization in the Resource market:
MRP<MFC don’t hire
MRP>MFC hire
MRP=MFC hire and stop (maximize profits here)

44. Assuming the firm in the above chart is a perfectly competitive firm that hires workers in a perfectly competitive labor market. The wage rate is $5 and the item sells for $10 each.
# of workers
Total product
Marginal product
Marginal revenue product (P X MP)
Total cost
Marginal factor cost 1 15 2 35 3 45 4 50 5 48

45. Assuming the firm in the above chart is a perfectly competitive firm that hires workers in a perfectly competitive labor market. The wage rate is $5 and the item sells for $10 each.
# of workers
Total product
Marginal product
Marginal revenue product (P X MP)
Total cost
Marginal factor cost 1 15
150 5 2 35 20
350 10 3 45
450 4 50
500 48 -2
480 25
According to the table above, how many workers should this firm hire?
What will be the profit at this point?  

46. Profit Maximization in RESOURCE MARKET if hiring multiple INPUTS
firms maximize utility just like consumers when they purchase things (if using multiple resources) MP (L) = MP (c ) W (L) W ( c) If the two resources are equal in their value, firm should stay put, if not equal, firm should hire more of the valuable resource and less of the least valuable resource.
Price to hire one more baker is $20 at an MP of 40. The price to hire one more waitress is $10 at an MP of 30. If this firm is a profit maximizing firm, what should they do?