Define Economics

1
MICROECONOMICS
AP EXAM
REVIEW
A Summerstime Production
2
Define Economics
3
A Social Science
which studies how people respond to the
Unlimited Wants Limited Resource Dilemma
4
DefineOpportunity Cost
5
The amount of other products
forgone in order to produce
a given product
6
This is referred to by them as
Economists make the assumption that we act in a
way that maximizes
our utility.
____________ Self Interest
7
Rational
Self Interest
8
Define
Marginal Analysis
9
Comparing
Remember This Formula MB MC
Marginal Benefit
to
Marginal Cost
10
Why might your
Marginal Analysis
yield a completely different result
than my Marginal Analysis?
11
Because the utility you receive
will not necessarily match
the utility I receive
from the very same good or service
12
Define this term
MARGINAL
13
EXTRA
ADDITIONAL
CHANGE IN
14
Ceteris Paribus
refers to an assumption Economists must make to
study their theories.
What does it mean?
15
All
Other
Things
Being
Equal
16
Statements which are
Facts
Cause and Effect
Descriptive
and Have No Value Judgment
are referred to as ___ ___
17
POSITIVE
ECONOMICS
18
The use of
ALL
AVAILABLE
RESOURCES
is the definition of ___ ___
19
FULL
EMPLOYMENT
20
Define Productive Efficiency
21
The production of
a mix of goods and services
at the lowest possible cost
22
What Formula indicates Productive Efficiency?
23
P Minimum ATC
24
Explain what this is and what the given curve and
points stand for.
B
A
25
This is a PPF Curve
The curve represents the full employment of
resources and the various possible combinations
of two goods or types of goods.
Point A is Inefficient Use Of Resources and Point
B is Unobtainable At This Time
Production Possibilities Frontier
Capital Goods
B
A
Consumer Goods
26
Look at the Opportunity Cost Of Producing X.
What is the cost of changing the number of X
produced from C to D?
X
D
C
B
A
Y
E F G H I
27
The Production of Y falls from
F to E
X
D
C
B
A
Y
E F G H I
28
Name The Law
The Opportunity Cost of Each Additional Unit is
Greater than the Cost of the Preceding One
29
The Law OfIncreasingOpportunity Cost
30
Why does the cost of producing the next good
increase with additional production of that good?
31
Because the resources used
on the first units
are more suited for that good
than those used on subsequent units
32
Name 4 things that make the
PPF Curve shift
IN
or
OUT
33
? in resource QUALITY
? in resource QUANTITY
? in TECHNOLOGY
? in the INFRASTRUCTURE
34
Statements Which Contain Words Like
Should
or
Ought To
or that support specific policies
are referred to as ___ ___
35
NORMATIVE
ECONOMICS
36
What is
Allocative
Efficiency
?
37
Allocative Efficiency is
the least costly production
of the particular mix of goods and services
most wanted by society
38
So what is the Economic Term
That means that you are producing
with both Productive
and Allocative
Efficiency?
39
FULL
PRODUCTION
40
You are headed to the board!
We need to see a PPF that demonstrates how a
society can use its resources in a way that
results in economic growth!
41
By using more of their resources
for Capital on PPF1
they can move out to PPF2
Capital Goods
Consumer Goods
PPF2
PPF1
42
How do economists measure the satisfaction we
derive from the consumption of a good or service?
43
UTILS
44
All Groups!
Draw a basic
four box
Circular Flow Chart
45
And The Answer Is
Resource Market
Costs
WRIP
Resources
Land, Labor, Capital, and Entrepreneurial Ability
Businesses
Households
Goods and Services
Goods and Services
Consumption Expenditures
Revenue
Product Market
46
Who should grow what?
Avocados 90 60
U.S.A. Mexico
15 30
Soybeans
47
Avocados Mexico Soybeans U.S.A.
Avocados 90 60
U.S.A. Mexico
15 30
Soybeans
48
Fair Terms of Trade?
Avocados 90 60
U.S.A. Mexico
15 30
Soybeans
49
1 Soybean 3.5 Avocados
Avocados 90 60
U.S.A. Mexico
15 30
Soybeans
50
what should you answer?
Convex or Concave ?
If they ask what shape the PPF Curve is
51
Convex or
Concave
52
What will happen to price and quantity if there
is an increase in demand?
53
Title
S
Price
P1
Pe
D2
D
D1
Qe
Q1
Quantity
54
What will happen to price and quantity if there
is an increase in supply?
55
S
S1
Title
Price
S2
Pe
P1
D
Qe
Q1
Quantity
56
What will happen in the corn industry if the
farmers greatly expand their corn production for
alternative fuel yet production of vehicles that
run on ethanol has only increased slightly?
57
Title
S1
Price
S2
Pe
P2
D2
D1
Quantity
Qe
Q2
58
What will happen if widgett production increases
slightly at the same time that scientists
discover that people who own widgetts live
longer, healthier lives?
59
Title
S1
Price
S2
P2
Pe
D2
D1
Quantity
Qe
Q2
60
How would you graph the concept that the demand
for labor is a
DERIVED DEMAND
61
Demand for Wazits
Demand for Wazit Makers
W a g e s
P r i c e
S
S
P2
W2
P1
W1
D2
DL2
DL1
D1
Quantity of Wazits
Quantity of Labor
QL1
QL2
Q1
Q2
The Demand For Labor Is DERIVED from the Demand
for the Product They Make
62
What is this and what does it cause?
S
?
D
63
Its a Price Ceiling
S
Pc
D
QS
QD
Causing A Shortage!
64
Explain A and B
S
A
Pe
B
D
Qe
65
Consumer Surplus those who were willing and
able to spend more than they had to for this
product and did not have to
S
CS
Pe
PS
D
Qe
Producer Surplus those who were willing and
able to accept a lower price for their product
and did not have to
66
Draw and explain the differences between a Market
Day, Short Run, and Long Run Supply Curve.
67
Market Day all variables are fixed
Short Run some variables are fixed
Long Run NO variables are fixed
SMD
SSR
P
SLR
Q
68
State the formula for the
ELASTICITY
of
DEMAND
69
Ed ? in QD of X
? in P of X
70
What Do These Mean?
ED 8
ED 0
71
What Do These Mean?
ED 8 Perfectly Elastic ?Q
0
8
ED 0 Perfectly Inelastic 0
? P
0
72
What Do These Mean?
ED gt 1
ED lt 1
73
ED gt 1 Elastic Demand
The ? in Q is more than the ? in P
ED lt 1 Inelastic Demand The ? in P is
more than the ? in Q
74
Draw a typical demand curve
and label the areas of
1 unit elasticity
2 inelasticity
3 elasticity
75
Price
10 9 8 7 6 5 4 3 2 1 0
Elastic
Unit Elastic
Inelastic
D
1 2 3 4 5 6 7 8
9 10 Quantity
76
Four Things Help To Determine That The Demand For
A Good Will Be Highly Elastic
If there are many good ___________.
It uses a high of your ___________.
If it is a ____ rather than a ___ good.
You have plenty of ____ to acquire the good.
77
Four Things Help To Determine That The Demand For
A Good Will Be Highly Elastic
SUBSTITUTES
There are many good
INCOME
A high of your
will be used
LUXURY GOOD
It is a
TIME
Theres plenty of
to acquire the good
78
State the formula for the
Cross Elasticity
of
Demand
79
? Qx
Exy
? Py
and it is used to determine if two goods
are COMPLEMENTS
or
SUBSTITUTES
80
So what is the cross elasticity of demand
coefficient for a
SUBSTITUTE GOOD
and a
COMPLEMENT
and why ??????
81
SUBSTITUTE GOOD EXY gt 0
because as the price of Y goes up - the quantity
demanded of X goes up - so Exy is a positive
COMPLEMENT EXY lt 0
because as the price of Y goes up - the quantity
demanded of X goes down - so Exy is a negative
82
How can you tell the strength of the relationship
of two goods? (The answer is the same for both
complements and substitutes.)
83
The Further The Coefficient is from
ZERO
The Stronger The Relationship
84
What if Exy 0
85
Exy 0 There is no relationship between the two
goods they are INDEPENDENT GOODS
86
State the Formula For
INCOME ELASTICITY
87
Income Elasticity Formula
? Qx
Ei
? I
88
What does it mean if Ei gt 0
What does it mean if Ei lt 0
89
Ei gt 0 If
Income and Quantity it is a NORMAL GOOD
Ei lt 0 If
Income and Quantity it is an INFERIOR
GOOD
90
What is this and what does it cause?
S
?
D
91
Its a Price Floor
S
Pf
D
QD
QS
Causing A Surplus!
92
Draw a double-decker graph with Total Utility in
the top graph and Marginal Utility in the bottom
graph.
93
Utils
TU
Quantity
Utils
Quantity
MU
94
Other things being equalif marginal utility
falls sharply the demand for that good is
95
INELASTIC
A decline in price will elicit only a small
increase in quantity demanded because the second
unit really does not give much additional
utility. Even on sale I
do not want more.
That is INELASTIC demand.
If my marginal utility for the second unit is
only slightly less, I am very likely to buy the
second good. With just a small decrease in price
I am compelled to buy the second one.
That
would be ELASTIC demand.
96
Explain how raising prices on an elastic good
will have a different result than raising prices
on an inelastic good.
97
A small price increase for an elastic good will
cause MANY
consumers to flee.
Therefore your profits
will
FALL
98
What happens to Total Revenue When You Increase
the price on an Elastic Good?
Price
TR is less after the price increase on an elastic
good
5 4 3 2 1 0
TR after
TR Before
D
1 2 3 4
5 6 7
Quantity
99
But a small price increase for an inelastic good
will cause VERY FEW consumers to flee. Most will
still buy the product at the new higher price.
Therefore your profits
will
INCREASE
100
What happens to Total Revenue When You Increase
the price on an Inelastic Good?
Price
5 4 3 2 1 0
TR is more after the price increase on an
inelastic good
P
TR
When Demand is INELASTIC
TR before
D
1 2 3 4
5 6 7
Quantity
101
A small price decrease for an elastic good will
cause VERY MANY ADDITIONAL units to
be sold.
Many new buyers or those who bought a few
will buy many more.
Therefore your profits
will
INCREASE
102
What happens to Total Revenue When You Drop the
price on an Elastic Good?
Price
TR is more after the price decrease on an elastic
good
5 4 3 2 1 0
TR before
TR AFTER
D
1 2 3 4
5 6 7
Quantity
103
A small price decrease for an inelastic good will
cause VERY FEW
additional units to be sold
Therefore your profits
will
FALL
104
What happens to Total Revenue When You Drop the
price on an Inelastic Good?
Price
5 4 3 2 1 0
TR Before
P
TR
When Demand is INELASTIC
TR is less after the price decrease on an
inelastic good
D
1 2 3 4
5 6 7
Quantity
105
All Group Question!
Draw a graph that shows the impact on CS, PS, and
DWL when the government institutes a Price Ceiling
106
S
DWL
P1
CS
Pe
Pc
PS
D
QC
Qe
107
What formula is used to show how we make choices
that maximize our utility?
108
MUA
MUB

PA
PB
109
Write The Formula That Explains Why We Consume
More Water Than Diamonds
110
MU low utils from last water purchased
MU many utils from last diamond purchased

Plow price
Phigh price
So if the last bottle of water you purchased cost
1 and gave you 1 util of satisfaction that 1/1
ratio is equal to the 1000 utils you got from
your one and only diamond ring which cost you
1000.00
111
What is this and what does it show?
Utils
500 400 300 200 100
A
B
1 2 3 4 5 6 7 8 9 10
10 9 8 7 6 5 4 3 2 1
Number of Good H
Number of Good J
0
112
Indifference Curves
A and B represent different bundles that give
the consumer 200 total utils of satisfaction
The farther you are from the originthe higher
your utilitybecause you have more.
Utils
500 400 300 200 100
A
B
1 2 3 4 5 6 7 8 9 10
10 9 8 7 6 5 4 3 2 1
Number of Good H
Number of Good J
0
113
So how do you use Indifference Curves to
determine what will give you the most utility?
Utils
500 400 300 200 100
A
B
1 2 3 4 5 6 7 8 9 10
Number of Good H
10 9 8 7 6 5 4 3 2 1
Number of Good J
0
114
Lay in a BUDGET LINE with endpoints set where you
buy only J or buy only H - In this case 7 J and
10 H
You maximize utility where your budget line is
tangent to an Indifference Curve - point C
Utils
500 400 300 200 100
A
C
B
1 2 3 4 5 6 7 8 9 10
10 9 8 7 6 5 4 3 2 1
Number of Good H
Number of Good J
0
115
The monetary payments a firm makes to those who
supply labor, materials, fuel, transportation,
etc. are called _____ costs.
The opportunity costs of using its
self-owned, self-employed resources that could
have been put to an alternative use are called
_____ costs.
116
The monetary payments a firm makes to those who
supply labor, materials, fuel, transportation,
etc. are called Explicit Costs
The opportunity costs of using its
self-owned, self-employed resources that could
have been put to an alternative use are called
Implicit Costs
117
Total Revenue Explicit Costs
____________ PROFIT
The Above Implicit Costs
____________ PROFIT
118
Total Revenue Explicit Costs
ACCOUNTING PROFIT
Accounting Profit Implicit Costs
ECONOMIC PROFIT
119
The minimum payment made by a firm to obtain and
keep the entrepreneur is called
120
NORMAL
PROFIT
When a firm has a normal profit it is covering
all of its costsincluding the amount it takes
for the entrepreneur to make this product rather
than something else
121
Given fixed technology and all resources of
equal quality
Then as successive units of a variable
resource are added to a fixed resource,
beyond some point the marginal product that can
be attributed to each additional unit of
variable resource will decline
NAME THE LAW
122
The Law
of Diminishing Returns
123
Explain
Total Product
Average Product
Marginal Product
124
Total Product is how many total units all of the
resource (labor) was able to produce.
(LABOR is usually the resource used in the
examples!)
Average Product is output per labor unit
Marginal Product is how many units the last
worker hired added to the Total Product.
Firms use MARGINAL PRODUCT to decide if it is
worth hiring the NEXT employee.
125
Marginal Product is the
____________
Of the Total
Product Curve
126
Marginal Product is the
SLOPE
Of the Total
Product Curve
127
Graph the relationship between
Total Product
and
Marginal Product
128
Product
TP
Units of Labor
Product
Units of Labor
MP
Watch your TP slope from start to finish and the
relationship between TP and MP at MP 0
129
Graph the relationship between
Marginal Product
and
Average Product
130
Show the relationship such that when MP is
greater than AP, AP is increasing and when MP is
less than AP, AP is decreasing.

AP MP
AP
Units of Labor
MP
131
Explain
Total Fixed Costs
Total Variable Costs
Total Costs
132
TFC costs that dont vary with output
TVC costs that change with the level of
output
TC fixed costs plus variable costs
133
You knew it was next
Graph the relationship between TFC, TVC, and TC.
134
TC
Costs
TVC
TFC
TVC
TFC
Output
135
Write the Formula
ATC AFC
AVC
136
AFC TFC / Q
AVC TVC / Q
ATC TC / Q
or AVC AFC
137
Graph
AFC AVC ATC MC
138
MC crosses ATC and AVC at their minimums.
AFC approaches the X axis as the Fixed Costs
are spread across more and more
output. ATC and AVC draw closer
as AFC fall.
Costs
MC
ATC
AVC
AFC
Output
139
What will happen to each of these curves if
property taxes increase?
Costs
MC
ATC
AVC
AFC
Output
140
Taxes are Fixed Costs so AFC and
ATC shift up and MC and AVC do not.
Costs
MC
ATC
AVC
AFC
Output
141
What will happen to each of these curves if
variable costs increase?
Costs
MC
ATC
AVC
AFC
Output
142
When Variable Costs IncreaseMC and AVC and ATC
shift up. AFC does not.
Costs
MC
ATC
AVC
AFC
Output
143
Explain
Total Revenue
Average Revenue
Marginal Revenue
144
TR Price x Total Sold
AR TR Total Sold
(Same as Price in PURE COMPETITION)
MR The additional revenue
from the sale of the next unit
145
Graph the relationship between the
Total Cost Curve
and
Total Revenue Curve
for the Purely Competitive Firm
146
TC
TR TC
Profit Maximization
Break Even
Point
TR
Maximum Economic Profit
Break Even
Point
Quantity Demanded
147
In Pure Competition
P ___
because every additional unit is sold for the
same price
148
In Pure Competition
P MR
because every additional unit is sold for the
same price
149
What Formula Uses Marginal
Revenue To Define The
Profit Maximization Point?
150
MR MC
151
Practice the Graph Which Shows How a Perfectly
Competitive Firm Can Use Marginal Revenue To
Determine Everything From When They Will Maximize
Profits To When They Should Shut Down
152
Pure Competition -
The Firm At A
Represents?
A Represents Where The Firm Is Shut Down -
losses would be greater if they produce because
they would owe Fixed AND Variable Costs
MC
price
ATC
AVC
MR5
E
MR4
D
MR3
C
MR2
B
MR1
A
quantity
153
Pure Competition -
The Firm At B
Represents?
B Represents Where The Firm Is At SHUT DOWN
POINT
MC
price
ATC
AVC
MR5
E
MR4
D
MR3
C
MR2
B
MR1
A
quantity
154
Pure Competition -
The Firm At C Represents?
C Represents Where The Firm Is losing but
remains open because at least some of the FIXED
COSTS are covered
MC
price
ATC
AVC
MR5
E
MR4
D
MR3
C
MR2
B
MR1
A
quantity
155
Pure Competition -
The Firm At D
Represents?
D Represents Where The Firm Is
Earning a Normal Profit
MC
price
ATC
AVC
MR5
E
MR4
D
MR3
C
MR2
B
MR1
A
quantity
156
Pure Competition -
The Firm At E
Represents?
E Represents Where The Firm Is
Earning an ECONOMIC PROFIT
MC
price
ATC
AVC
MR5
E
MR4
D
MR3
C
MR2
B
MR1
A
quantity
157
So where is the Supply Curve
For Pure Competition?
MC
price
ATC
AVC
MR5
E
MR4
D
MR3
C
MR2
B
MR1
A
quantity
158
It is the MC Curve ABOVE the Shut Down Point
MC
price
ATC
AVC
MR5
E
MR4
D
MR3
C
MR2
B
MR1
A
quantity
159
Draw a graph that shows the relationship between
productivity and cost curves.
160
AP MP
AP
MP
Quantity of Labor
MC
AC MC
AC
Quantity of Product
161
Long Run ATC Curves are U-Shaped.
That is
NOT because of the Law of
Diminishing Return because that
law assumes a
_______ Plant
(that one resource is
fixed in supply)
162
Fixed Plant
163
So what does explain the reason that Long Run ATC
Curves are U-Shaped?
________ of ________
164
Long Run Cost Curves are shaped by
ECONOMIES
of
SCALE
165
Draw the three different Long Run Average Total
Cost Curves and label each with a
real-world example
166

StarJoes
Tarmart
LRAC
LRAC
Costs
Costs
Output
Output
Planes, Inc.
Costs
LRAC
Output
167
What should you label the area between Q1 and Q2 ?
Planes, Inc.
Costs
LRAC
Output
Q1
Q2
168
MES
Minimum Efficient Scale
Planes, Inc.
Costs
LRAC
MES
Output
Q1
Q2
169
MES
can also be referred to as
Tarmart
Costs
LRAC
MES
Output
Q1
Q2
170
MES
Constant Return To Scale
Tarmart
Costs
LRAC
MES
Output
Q1
Q2
171
Tarmart
LRAC
Why is the MES so much further to the right for
Planes, Inc. than for Tarmart?
Costs
MES
Output
Costs
Planes, Inc.
LRAC
MES
Output
172
Tarmart
Because it takes a large plant with high output
to reach MES for airplanes.
LRAC
Costs
MES
Output
Costs
Planes, Inc.
LRAC
MES
Output
173
StarJoes
LRAC
This part of the LRAC curve for StarJoes is where
__ _ __ occur.
Costs
MES
Output
Q1
Q2
174
StarJoes
LRAC
Costs
MES
Output
Q1
Q2
Economies of Scale
175
StarJoes
LRAC
This part of the LRAC curve for StarJoes is where
__ _ __ occur.
Costs
MES
Output
Q1
Q2
176
LRAC
StarJoes
Costs
MES
Output
Q1
Q2
Diseconomies of Scale
177
StarJoes
LRAC
Costs
Economies of Scale means that a 10 increase of
inputs will result in a _____ _____ 10
increase in output.
MES
Output
Q1
Q2
178
StarJoes
Economies of Scale means that a 10 increase of
inputs will result in a greater than
10 INCREASE in
output.
LRAC
Costs
MES
Output
Q1
Q2
179
StarJoes
LRAC
Costs
So what does Diseconomies of Scale
Mean?
MES
Output
Q1
Q2
180
StarJoes
Diseconomies of Scale means a
10 increase of
inputs results in a less than
10 increase in output.
LRAC
Costs
MES
Output
Q1
Q2
181
And what happens if you
increase resources by 10
in the MES section of the graph?
Costs
MES
Quantity
Q2
Q1
182
A 10 increase of the inputs within the MES
section of the graph results in exactly a 10
increase in the
output of the good.

183
Characteristics of the
Four Basic Market Models
But before we go there
Can You Name The 4 Models?
184
The Four Basic Market Models
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
185
The Characteristics of PURE COMPETITION
Click To Reveal One Answer At A Time
A Very Large Number
Standardized
None Price Takers
No Barriers To Entry
None (nothing different about your product to
tell people about)
Agriculture
186
The Characteristics of MONOPOLY
Click To Reveal One Answer At A Time
One
Unique (no substitutes)
Price Makers
Blocked
Few (public relations ads)
Local Utilities
187
The Characteristics of MONOPOLISTIC COMPETITION
Click To Reveal One Answer At A Time
Many
Differentiated
Some (within narrow limits)
Relatively Easy
Major Emphasis
Jeans Companies
188
The Characteristics of Oligopoly
Click To Reveal One Answer At A Time
Few
Standardized or Differentiated
Limited by Mutual Interdependence but
Considerable With Collusion
Significant Obstacles
Much But Only When Product is Differentiated
Standardized Product Oil Differentiated
Product - Appliances
189
Use a graph to show how the perfectly competitive
firm is a price taker.
190
Industry
Firm
MC
S
ATC
PMR
Pe
D
Qe
q
Q
The perfectly competitive firm takes its price
from the industry equilibrium
price.
191
Now show how much an industry-wide increase in
demand will impact the perfectly competitive firm.
192
Industry
Firm
MC
S
ATC
Pe2
PMR2
Economic Profit
PMR1
Pe1
D2
D1
q1
q2
Qe1
Q
Qe2
The Firm is making an Economic Profit in the
Short Run.
193
Industry
Firm
MC
S1
S2
ATC
Pe2
PMR2
Pe1
PMR1,3
D2
D1
q1,3
q2
Qe1
Q
Qe2
Qe3
But in the Long Run, new firms will be attracted
by that Economic Profit, industry-wide supply
will increase, and the firm will return to
earning a Normal Profit
194
Now show how much an industry-wide decrease in
demand will impact the perfectly competitive firm.
195
Industry
Firm
MC
S
ATC
Pe1
PMR1
Loss
PMR2
Pe2
D1
D2
q1
Q
q2
Qe1
Qe2
The Firm is At A Loss in the Short Run
(an AVC curve would be needed to tell if they
should shut down)
196
Industry
Firm
p
P
MC
S
ATC
AVC
Pe1
PMR1
Loss
PMR2
Pe2
D1
D2
q
q1
Q
q2
Qe1
Qe2
Now you have the AVC Curve!
What should this firm do in the SHORT
RUN?
197
Industry
Firm
MC
S
ATC
AVC
Pe1
PMR1
Loss
PMR2
Pe2
D1
D2
q1
Q
q2
Qe1
Qe2
Its Time To Stop Producing Those 8-Track Tapes!
not only cant you pay your fixed costs ( see
) if you produce anything you will also have
these variable costs ( see ) you cannot pay!
198
Sometimes the decrease in demand creates a
situation where a firm should continue to operate
at a loss in the short run.
Draw That Graph
199
Industry
Firm
MC
S
ATC
AVC
Pe1
PMR1
Loss
PMR2
Pe2
D1
D2
q1
Q
q2
Qe1
Qe2
This firm should continue to produce in the SHORT
RUN because they are at LEAST covering almost
half ( see )of their fixed costs
200
Are firms in Perfectly Competitive Industries
efficient?
201
Productively?
YES! P min. ATC
Allocatively?
YES! P MC
It is only in Pure Competition that you have
Productive and Allocative Efficiency
All other models have Excess Capacity
202
Industries change based on the demand for their
products. Given A Constant Costs Perfectly
Competitive Industry Draw the graph which shows
the Long Run Supply Curve for
this industry.
203
Perfect Competition With Constant Costs
Price
S3
S4
S1
S2
SL
D1
D4
D2
D3
Quantity
204
Lets move on to a different type of industry
structure
Graph
A
PURE MONOPOLY
205
Price
MONOPOLY
MC
PM
ATC
Economic Profit
AM
D
Quantity
QM
MR
206
Price
MONOPOLY
MC
PM
ATC
Economic Profit
AM
D
Quantity
QM
MR
How do you know they produce at QM with price PM
and Costs PC resulting in an economic profit?
207
Price
MONOPOLY
MC
PM
ATC
Economic Profit
AM
D
Quantity
QM
MR
Because you always maximize profits where MR
MC
208
Why does the
MR curve
Fall Faster Than The Demand Curve?
209
The Law Of Demand explains that to sell more of
something you must lower the price .
Price
So to sell the next higher quantity of goods you
must charge a lower price.
As you sell more, your TOTAL REVENUE increases by
smaller and smaller increments.
D
Quantity
MR
Therefore MR falls faster than D
210
Why is a Monopoly Price always in the
ELASTIC SECTION of the Demand
Curve?
211
Because it is only in the elastic region that
lowering the price
will result in an INCREASE in Revenue
212
Price and Marginal Revenue
Pure Monopoly
What is true at A?
D
Quantity
A
20
MR
A ?
213
Price and Marginal Revenue
Pure Monopoly
D
Quantity
A
20
MR
A 10
because MR falls twice as quickly
as Price
214
Price and Marginal Revenue
Pure Monopoly
D
Quantity
10
20
MR
Discuss the Demand Curve
to the left of the dashed
line.
215
Price and Marginal Revenue
Pure Monopoly
D
Quantity
10
20
MR
The Demand Curve to the left of the dashed line
is ELASTIC.
As the price is lowered
what happens to Total
Revenue?
216
Price and Marginal Revenue
Pure Monopoly
D
Quantity
10
20
MR
Total Revenue Goes Up
because Marginal Revenue is still
POSITIVE
217
How can you tell from the graph that a Monopoly
does not have
Productive
or
Allocative
Efficiency
218
Price
MONOPOLY
MC
PM
ATC
Economic Profit
AM
D
Quantity
QM
MR
Because P ? Min ATC and P ? MC
(no productive or allocative efficiency)
219
Do Monopolies Under Allocate Or Over Allocate
Resources?
220
Price
MONOPOLY
MC
PM
ATC
Economic Profit
AM
D
Quantity
QM
MR
UNDER ALLOCATE ( P gt MC )
we value the product more than the resources
used to make the good We wish they would make
more!
221
So what is
Price
Discrimination?
222
When a Monopolist
knowing who will pay at each price level and
having a product that cannot be re-sold
charges each customer the price they are willing
and able to pay.
For example the airline that charges more for a
seat reserved today than for the seat reserved 4
weeks ago
223
So how does the graph differ for a
Price
Discriminating Monopolist
?
224
Price
MONOPOLY
Price Discriminating Monopoly
MC
PM
ATC
Economic Profit
AM
D
D MR
Quantity
QM
MR
Economic Profits Increase Because MR D For The
P.D.M.
225
If a natural monopoly is going to be regulated,
what options do governments consider?
226
Price
REGULATING MONOPOLIES
They Use The Fair Return Price
MC
PM
PF
ATC
PS
D
QM
QS
QF
Quantity
MR
PM and QM represent what the Monopoly wants

(profits are maximized where MR MC)
PS and QS represent the Socially Optimal Price
and Quantity
(Allocative Efficiency PMC)
PF and QF represents the Fair Return Price and
Quantity
(monopoly earns a normal profit because Price
Average Total Cost)
227
Regulation often occurs when economies of scale
prevent more than one industry from producing a
good or service.
What do we call that type of market model?
228
A
Natural
Monopoly
229
Graph Monopolistic Competition.
show the firm making an
economic profit
230
MONOPOLISTIC COMPETITION
Price
MC
ATC
PMC
Economic Profit
AMC
D
MR
Quantity
QMC
The monopolistic competitor earns an economic
profit in the short
run.which attracts others to enter the industry.
231
Graph what happens as more
firms enter this industry.
232
MONOPOLISTIC COMPETITION
Price
MC
ATC
AMC
Economic Loss
PMC
D
MR
Quantity
QMC
As firms enter the industry, the increased
competition takes consumers away from the firm,
to the point some firms suffer losses
that force them to
shut down.
233
So what does the graph look like for
Monopolistic Competition
in the Long Run?
234
MONOPOLISTIC COMPETITION
Price
MC
ATC
PMC
D
MR
Quantity
QMC
As firms drop outthe monopolistic competitor
earns a normal profitin the long run.
235
Why are the Demand and Marginal Revenue Curves so
much more elastic on the Monopolistic Competition
graph than on the Pure Monopoly graph?
236
Because the barriers to entry are presentbut not
that greatso competitors can come and go fairly
easily.
237
Draw an Oligopoly Graph when firms act
independently.
238
Price
OLIGOPOLY
D2
MC1
Po
MC2
MC3
MR2
D1
Quantity
Qo
MR1
239
Look carefully at the Oligopoly Graph what is
the name of the theory this explains and what
does that theory state?
240
Kinked-Demand Theory
The few oligopoly firms will match another firms
price decrease below Po because they dont want
to lose their customers to the competitionbut
they do so knowing that since Demand is Inelastic
on this part of the curve they are all going to
lose money with the price decrease.
They will not match a price increase above Po
because Demand is Elastic so if they dont follow
the price increase they will pick up the
customers fleeing from the firm that is raising
their price.
Therefore Oligopoly Prices Tend To Be Stable
241
Sometimes Oligopoly firms decide that rather than
be stuck with a price of Po they will meet in a
dark room and come to an agreement to set output
such that they can get a higher price and more
profits for their goods.
What are these evil-doers practicing?
242
Collusion
243
Sometimes it isnt that they have come to an
illegal agreement.
Sometimes there is just one dominant, efficient
firm that is the first to react to cost or demand
changes, changes that will also impact all of the
firms in the Oligopoly.
So the other firms tend to follow what that
dominant firm does.
What do economists call this
Oligopoly Model?
244
PRICE LEADERSHIP
245
So what does the Oligopoly Graph look like
if the firms are
practicing COLLUSION
or
PRICE LEADERSHIP?
246
OLIGOPOLY (COLLUSION or PRICE LEADERSHIP)
MONOPOLY
Price
MC
PC
ATC
Economic Profit
AC
D
Quantity
QC
MR
247
It is time to practice some Game Theory!
Copy this chart and use squares to show the ABC
Gum strategy and circles to show the Bubble Gum
strategy.
ABC Gum Profits
High
Low
36
45
High
36
18
Bubble Gum Profits
18
24
Low
24
45
The Numbers Represent the Price for a Crate of
Gum
Click when you are ready to check your answer
248
Game Theory!
Squares show the ABC Gum strategy. Circles
show the Bubble Gum strategy.
Is there a dominant strategy here?
Is there Nash Equilibrium here?
ABC Gum Profits
High
Low
45
36
High
36
18
Bubble Gum Profits
24
18
Low
24
45
The Numbers Represent the Price for a Crate of
Gum
249
Is there a dominant strategy here?
YES - low, low
Is there Nash Equilibrium here?
YES no player can benefit from moving from
the low, low strategy if
the other player does not move with her
ABC Gum Profits
High
Low
45
36
High
36
18
Bubble Gum Profits
18
24
Low
24
45
Game Theory!
250
The price and amount of resources used is
determined in the
_______ _______
251
FACTOR MARKET
252
What determines how many resources an industry
will demand and what is this called?
253
The Demand For The
Product Determines The Demand For The Resource
this is a DERIVED DEMAND
254
So to maximize profits, a firm needs to determine
how much a resource will cost vs. how much it
will add to its revenue.
Write This Formula
255
MRP MRC
Marginal Revenue Product Marginal Resource Cost
256
Given a perfectly competitive labor market
How many workers should this firm hire if the
market wage is 10.00 per hour?
Firms MRP Firms MRC Units of
Labor --- 10 0
20 10 1 18
10 2 15 10 3
12 10 4
9 10 5
6 10 6
257
Given a perfectly competitive labor market
How many workers should this firm hire if the
market wage is 10.00 per hour?
Firms MRP Firms MRC Units of
Labor --- 10 0
20 10 1 18
10 2 15 10 3
12 10 4
9 10 5
6 10 6
258
The MRP curve represents the firms demand for..
259
LABOR
260
If a perfectly competitive firm operates where
there is a perfectly competitive labor
marketwhat does the graph for the supply and
demand for labor look like?
261
Perfect Competition Seller and Perfect
Competition Employer
Price and Wage Rate
PW
MRC
D MRP
QL
Quantity of Resource Demanded
note the demand curve is fairly elastic because
they do not have to lower their price to sell
more goods so MRP only falls because of the Law
of Diminishing Returns
262
But what if the employer is not selling a good in
a perfectly competitive market?
She must lower the price to sell the additional
units.
Draw her demand for labor graph.
263
Imperfect Competition Seller and Perfect
Competition Employer
Price and Wage Rate
PW
MRC
D MRP
QL
Quantity of Resource Demanded
The demand curve is LESS elastic because the
price must be lowered to sell more units so MRP
falls QUICKLY

due to the Law of
Diminishing Returns
and because the
Price is being lowered to sell additional units
264
What if a firm is using both labor and capital to
produce its product.
What formula do they use to determine how much to
use of each in order to produce at
the least cost ?
265
MPL MPC
PL
PC
Marginal Product of Labor divided by the Cost of
Labor must equal the Marginal Product of Capital
divided by the Cost of Capital to produce at the
lowest possible cost.
266
Given MPL MPC

PL PC MPL 500 MPC
250 ..PL 10 PC 25
What should this firm do?
267
Wanted MPL MPC PL
PC 500 ? 250 10 25
50 gt 10 ..1 1
The Firm Should Use More Labor
268
What is the PROFIT MAXIMIZING RULE
269
MRPL MRPC 1 PL PC
270
Is this firm UNDEREMPLOYING
or
OVEREMPLOYING
its Resources?
MRPL 30 PL 15
MPRC 10 PC 5
271
Profit Maximizing Rule Is
MRPL MRPC 1
PL PC
Given MRPL 30 PL 15
MPRC 10 PC
5
30 10 15 5
?

1
This firm is UNDER-EMPLOYING both resources
because the ratios do not equal one. They should
keep using both until they have 15/15 5/5
1
272
Sometimesa firm is the only place in town for
people to work.
For example a coal mine town
What Is This Called And What Does Its Labor
Market Graph Look Like?
273
The Monopsonist hires at Qm and Pays at Wm. If
there were other options for employment, they
would have to hire at
Qc and pay at Wc.
MONOPSONY
MRC
S
wages
MRP MRC
Wc
Wm
MRP
QM people will work for this wage
Qm
Qc
Quantity of Labor
274
Draw the Graph that is used to explain a
Negative Externality
275
Firm Creating Pollution
Price Cost
MSC
MPC
MSB
Qsociety wants
Qbeing produced
Quantity
Cost to Society is gt Cost to the Producer so this
is inefficient it is an overallocation of
resources and it is creating a NEGATIVE
EXTERNALITY
276
So what does the government do in a negative
externality situation?
277
Tax the producer so his costs increase, driving
the quantity produced down to a socially
acceptable level.
278
Draw the Graph that is used to explain a
Positive Externality
279
Flu Shots
Price Cost
MPC
MSB
MPB
Qsociety wants
Quantity
Qbeing produced
Benefit to Society gt Benefit to the Producer so
this is inefficient it is an underallocation of
resources and it is creating a POSTITIVE
EXTERNALITY
280
So what does the government do in a positive
externality situation?
281
The government subsidizes the activity so
production will increase to a socially acceptable
level.
282
Good Luck on the AP Micro Exam