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AP Microeconomics
| Question | Answer |
|---|---|
| SUBSTITUTES relationship | direct/positive - if the price of one good increases, the demand for the other will increase |
| COMPLEMENTS relationship | inverse/negative - if the price of one increases, the demand for the other will fall |
| 5 shifters of DEMAND | - tastes and preferences - number of consumers - price of related goods - income - future expectations |
| 6 shifters of SUPPLY | - prices and availability of resources/inputs - government tools - competition/ number of sellers - technology - prices of other goods - producer expectations |
| relationship of SUPPLY | direct/positive |
| relationship of DEMAND | inverse/negative |
| 3 essential questions | - What to produce? - How to produce? - For whom to produce? |
| positive statments | based on facts |
| normative statements | includes value judgements |
| transfer payments | when the government redistributes income ex: welfare, social security, etc. |
| 4 key assumptions | - only 2 goods can be produced - full employment of resources - fixed resources - fixed technology |
| ceteris paribus | consumers buy more at low prices and less at high prices |
| constant opportunity cost | resources are easily adaptable for producing either good - results in a straight line PPC |
| 3 shifters of the PPC | - change in resource quantity/quality - change in technology - change in trade |
| outputs formula | other goes OVER |
| inputs formula | other goes UNDER |
| net total benefit | total benefit - total cost |
| utility maximizing combination formula | MUx/Px = MUy/Py |
| characteristics of INELASTIC goods | - few substitutes - necessities - small portion of income - required now rather than later - elasticity coefficient is less than 1 |
| characteristics of ELASTIC goods | - many substitutes - luxuries - large portion of income - plenty of time to decide - elasticity coefficient is greater than 1 |
| elasticity of demand coefficient formula | %∆Quantity/%∆Price - perfectly inelastic = 0 - unit elastic = 1 - perfectly elastic = ∞ |
| characteristics of INELASTIC SUPPLY | - hard to produce - high barriers to entry (few firms) - high costs or specialized inputs - hard to switch from producing alternative goods - elasticity coefficient less than 1 |
| characteristics of ELASTIC SUPPLY | - easier to produce - low barriers to entry (many firms) - low cost or generic inputs - easy to switch from producing alternative goods - elasticity coefficient is greater than 1 |
| cross-price elasticity of demand (XED) equation | %∆Q of product B/%∆Q of product A - if coefficient is positive, the goods are SUBSTITUTES - if coefficient is negative, the goods are COMPLEMENTS |
| income elasticity of demand (YED) equation | %∆Q/%∆income - if coefficient is positive, the good is NORMAL - if coefficient is negative, the good is INFERIOR |
| double shift rule | if two curves shift at the same time, either price or quantity will be INDETERMINATE |
| price ceiling criteria | must be BELOW equilibrium in order to be effective - maximum producer can charge for a product |
| price floor criteria | must be ABOVE equilibrium in order to be effective - minimum producer can charge for a product |
| excise tax | per unit tax on producers |
| tax incidence | who ends up paying for excise taxes - vertical Demand curve: paid by CONSUMERS - horizontal Demand curve: paid by PRODUCERS |
| shut down rule | a firm should continue to produce as long as the price is above the AVC |
| characteristics of PERFECT COMPETITION | - many small firms - identical products/perfect substitutes - low barriers - no advertisements - price takers |
| characteristics of MONOPOLY | - one firm - unique product - high barriers - price makers |
| characteristics of OLIGPOLY | - less than 10 firms - identical/differentiated products - high barriers - price maker - MUTUAL INTERDEPENDANCE |
| characteristics of MONOPOLISTIC COMPETITION | - large number of firms - differentiated products - price makers - low barriers - lots of advertising |
| types of barriers to entry | - economies of scale - superior technology - geography/ownership of raw materials - government-created barriers (patents) |
| where is productive efficiency located? | where P=ATC |
| where is allocative efficiency located? | where P=MC |
| INELASTIC DEMAND relationship | direct/positive - ex: price falls and TR falls |
| ELASTIC DEMAND relationship | inverse/negative - ex: price falls and TR increases |
| price discrimination criteria | - must be a monopoly - must be able to SEGREGATE the market - consumers can't resell the product |
| results of price discrimination | - several prices - more profit - no consumer surplus - higher socially optimal quantity - no DWL (perfect price discriminators are allocatively efficient) |
| 3rd degree price discrimination | charge different groups at different prices |
| 2nd degree price discrimination | charge different prices for different quantities (bulk discounts) |
| 1st degree price discrimination | charge each person the highest price they are willing to pay |
| types of factor payments | - rent (land) - wage (labor) - interest (capital) - profit (entrepreneurs) |
| economic rent formula | wage - opportunity cost |
| shifters for demand of labor | - price of output - worker productivity - change in price of substitute resources - PRODUCT PRICE - product demand |
| shifters for supply of labor | - education/training - availability of alternative options - immigration/mobility of workers - cultural expectations - working conditions - leisure preferences |
| characteristics of P.C. labor markets | - many small firms - many workers with identical skills - wage is constant - workers are wage takers |
| characteristics of MONOPSONISTIC markets | - imperfectly competitive - one firm - workers are immobile - firm is wage maker (hire less & pay less) |
| 4 market failures | - public goods - externalities -imperfect competition - unequal distribution of income |
| antitrust laws | designed to prevent monopolies and promote competiton (often price ceilings) |
| Gini coefficient equation | area A/sum of areas A & B closer to 1: more inequality closer to 0: more equality |
Created by:
maraschrantz
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