AP Microeconomics

1
AP Microeconomics

• Review 4

2
Market Structure

• The nature and degree of competition between
  firms in the same industry
• 4 Categories
• Perfect Competition
• Monopolistic Competition
• Oligopoly
• Monopoly

3
Monopoly

• Price-Maker, only provider of product, perfectly
  inelastic good
• Still faces elasticitythere is a limit to how
  high they can raise prices
• Downward sloping demand and MR curve

4
Monopoly

• Lerner Index
• Measures pricing power of firms
• How much can the firm charge for product over
  cost of product?
• (P MC)
• P

• Herfindahl Index
• Measures the size of a firm compared to its
  industry
• Bigger the size more market power

5
Graph
MR will cross the x-axis at demands midpoint
this helps to show elasticity!!
Price Cost
MC
Cons. Surplus
Dead Weight Loss waste
PX
P MC allocative efficient, if perfect comp
where Px price of resources
Profit
AC
Total Revenue
Cost
Demand
MR
QX
Output
6
Types of Monopolies

• Natural Monopolies (regulated)
• Better for whole to have one efficient supplier
  of product large companies show economies of
  scale as they grow
• Ex) utilities
• Govt will choose fair-return price (P AC)
• Unregulated Monopolies
• Illegal in the country
• Sherman, Clayton, Justice Dept., ICC, FTC, etc.

7
Monopolistic Competition

• Characteristics
• Many firms
• Very similar products
• Product differentiation (advertising) leads to
  pricing power (PgtMC)
• No barriers to entry

• Graph
• Same graph as monopoly all represent imperfect
  competition
• Why?
• Has some price power, therefore downward sloping
  MR!!!
• Both Lerner and Herfindahl index are much lower
  than monopoly though!!!

8
Long Run Equilibrium

• Why?
• LR means making profit and can expand
• Very similar products and no barriers to entry
  means more firms will enter a profitable market.
• Demand for individual firms decrease as more
  suppliers enter driving down profits!!

• Graph

Price Cost
MC
LRAC
PX
D
QX
MR
Output
9
Oligopoly

• Price Leader
• One major firm and a few small firms
• Cartel
• Firms working together to set price and quantity
  (collusion)
• Kinked
• Strategy Game follow for a price drop but not
  for a price raise

10
Kinked Graph
Price Cost
MC
PX
ATC
Profit
Demand
QX
Output
MR
11
Game Theory

• Strategy theory that choices made by players
  based on the reaction expected by opponents.
• Dominant Strategy a strategy that is best no
  matter what the opposition does
• Nash Equilibrium the result of all players
  playing their best strategy given what their
  competitors are doing.

12
Game Theory

• Circle Test use to find dom. strategy circle
  your opponents best move based on your move if
  player gets two circles in same decision, then it
  is a dominant strategy

Rick
Left Right
Top 100, 0 100, 100
Bottom -100, 0 200, 100
Jim
Best Play Rick will always choose Right, Jim
will see Ricks strategy and will always choose
Bottom
Does Jim have a dominant strategy?
If Jim Chooses Top, Ricks best move
If Jim Chooses Bottom, Ricks best move
Rule, since both circles are in Ricks right
option it is his dominant strategy!!
No, his best results are in different choices!!
13
A.P. Microeconomics

• Have out Unit IV Review Sheet!!

14
Market Failures Need for Govt

• When the market (firms households) cannot
  determine price or quantity there is a need for
  govt to do so!!

15
Externalities

• Unintended side effects of an economic
  decision-activity
• Negative pollution
• Govt taxes firm the value of social cost
• Positive education smoke detectors
• Govt subsidizes firm value of benefit

16
Internalizing Externalities

• GRAPH

MSC
S1
MC
Price
Cost
S0
Pnew
MR
PX
D
QX
Output
Quantity
Taxes on the firm will decrease supply and thus
raise the price
17
Public Goods

• Goods which are non-exclusive
• Private firms wont offer because cant deny
• Govt must provide with tax revenue

• Free Rider
• People can receive and never pay for them

• Rent
• Getting more money than what is deserved, P gt MC

18

• Imperfect Information
• Caveat emptor, let the buyer beware
• Truth in advertising laws
• Govt agencies to regulate firms (FDA)
• Imperfect Competition
• Monopolistic, Oligopoly, Monopoly
• Anti-trust laws regulatory agencies (FTC, ICC,
  SEC)

19
Efficiency

• Allocative Efficiency
• P MC
• Resources are being used efficiently to produce
  all society would like to have
• PX value of output
• MCX value of inputs to make the output

• Pareto Efficiency
• An improvement for society as long as some people
  are gaining without others losing
• If efficient to begin with, there are no
  improvements possible without hurting some
  people.
• Must weigh costs benefits

20
Income Redistribution

• Haves
• Family
• Talent - Skill
• Education
• Power Connection
• Luck

• Have-Nots
• -below poverty level
• Economic Stabilizers
• Ways for govt to help
• -welfare, food stamps, WIC, HEAP, SSI,
  unemployment, housing, loans.
• Transfer Payments the govt gives w/o anything
  in return

21
The Lorenz Curve

• Measures Income Distribution of entire nations
  population compare to perfect equality.
  Population is ranked and then split into fifths
  (quintiles) and studied.

GRAPH
Perfect Equality
OF INCOME
Income Gap
Lorenz Curve
OF HOUSEHOLDS