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Date Created: 08/18/14
AP Microeconomics Final Exam Study Guide Chapter 1 Key Terms o Scarcity o our inability to satisfy all our wants o time income and prices induce scarcity o causes us to make choices which involve costs o Economics o the social science that studies the choices made as individualsgroups face scarcity and what incentives affect those choices Chapter 1 Objectives o Define economics and explain the meaning of scarcity o See definitions above o Explain the difference between positive and normative statements o Positive statements are what is can be tested by facts normative statements are what ought should to be Chapter 2 Key Terms o Circular Flow Model o a model of the economy that shows the circular ow of expenditures and incomes that result from decision makers choices and the way the choices interact to determine what how and for whom goods and services are produced Chapter 2 Objectives o Use the circular flow model to provide a picture of how households firms and governments interact o A diagram can be found on page 43 o Real ows Households sell CELL to the rms via the factor market and GampS travel from the firms to the households via the goods market o Money Flows Firms pay WIPR to the households via the factor market and households pay expenditures on GampS that go to the firms via the good market o Federal Governments I Provide goods and services social security and welfare payments and transfers to state and local governments I Receive personal income taxes corporate business income taxes and social security taxes o State and Local Governments I Provide goods and services and welfare benefits I Receive sales taxes property taxes and state income taxes Transfers are what the government provides to the households and firms Taxes are what the households and firms pay to the government EXTRA government pays expenditures on GampS that travel from gov to good market to firm Chapter 3 Key Terms o Absolute Advantage o When one person is more productive than another person in several or even all activities o Comparative Advantage o The ability of a person to perform an activity or produce a good or service at a lower opportunity cost than someone else o Production Possibilities Frontier o The boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced given the available factors of production capital entrepreneurship land and labor and the state of technology pg 62 Chapter 3 Objectives o Explain how people gain from specialization and trade o Nations should specialize in the production of the goods in which they have the lowest opportunity cost Nations tend to have different resources and they are not equally ef cient when producing goods they have diff opportunity costs When they have different opportunity costs of producing goods it is possible to gain from trading More productive therefore producing at a level beyond the PPF o benefits of specialization a larger Q of goods and services can be produced improved productivity can produce beyond PPF resources are used more efficiently o Use the production possibilities frontier to illustrate the economic problem 0 Attainable on amp below ppf vs Unattainable above ppf 0 Efficient on ppf vs Inefficient below ppf o Tradeoffs efficienton ppf and free lunches inefficientbelow ppf o ALLOCA TIVE EFFICIENCY a situation in which quantities of GampS produced are those are those that people value most highly it s not possible to produce more of a good or service wo giving up some of another good that people value more highly I 2 conditions o Production ef ciencyproducing on ppf o Producing at highestvalued point on the ppf MBMC o Explain why a production possibilities frontier has a bowedout curve o The slope of the curve represents the opportunity cost as the number of a product foregone increases the number of the other product produced increases increasing opportunity cost Chapter 4 Key Terms o Demand 0 The relationship between the quantity demanded and the price of a good when all other in uences on buying plans remain the same price goes up quantity goes down o Quantity Demanded 0 amount that consumers plan to buy during a given time period at a particular price A specific point on the demand curve 0 amount of any good service or resource that people are willing amp able to buy during a specified period at a specified time o the quantity demanded can only change if the price of the good changes causing movement along the demand curve o Change in Demand 0 a change in quantity that people plan to buy when any influence on buying plans other than price of the good changes If demand increases the entire curve shifts right If demand decreases the entire curve shifts left Tastespreferences Related goods complementary and substitutes Income normal good and inferior good Buyers Expectations future availability and future prices OOOOOOO o Normal Good 0 if a rise in income brings an increase in demand and a fall in income brings an decrease in demand for high income individuals o Change in Supply 0 a change in the quantity that suppliers plan to sell when any influence on selling plans other than price of the good changes o when supply increases the supply curve shifts right when supply decreases the supply curve shifts left Resource costs econ resources FOPCELL input Other goods complements amp substitutes Technology TaxesSubsidies Expectations Number of Sellers OOOOOO o Change in Quantity Supplied o when the price changes the quantity supplied changes movement along the supply curve o Substitute in Production o another good that can be produced in a goods place o demand of a good increases if the price of its substitute rises o demand for good decreases if the price of its substitute falls o Equilibrium Price o the price at which quantity demanded equals the quantity supplied o Shortage or excess demand o a situation in which the quantity demanded exceeds the quantity supplied o Inferior Good o if a rise in income brings a decrease in demand and a fall in income brings an increase in demand for low income individuals o Change in the quantity demanded o a change in the quantity of a good that people plan to buy that results from a change in the price of the good with all other in uences on buying plans remaining the same o Quantity Supplied o the amount of a good or service that people are willing and able to sell during a specified period at a specified price o Complement in Production o another good that is produced along with a good o demand of a good decreases if the price of its complement rises o demand for good increases if the price of its complement falls o Change in the quantity supplied o results from price changes of the good o Equilibrium quantity o the quantity bought and sold at the equilibrium price o Surplus or excess supply o a situation in which the quantity supplied exceeds the quantity demanded Chapter 4 Objectives o Distinguish between quantity demanded and demand and explain what determines demand 0 In terms of the demand curve a change in quantity demanded is moving along an existing demand curve a change in demand is a shift of the demand curve to the left or right 0 TRIBE o Distinguish between a change in the quantity demanded and a change in demand o A change in quantity demanded is brought about by a change in price a change in demand is brought about by a change in income expectations change in price of related goods number of buyers and preferences TRIBE o Distinguish between quantity supplied and supply and explain what determines supply 0 Quantity supplied is one point on the curve which is the amount of any good or service people will supply at a speci ed timeprice Supply is the relationship between Qs and price of a good with all other buying influences remaining the same ROTTEN determines supply o Define substitute in production and complement in production o A substitute in production is a good produced in place of another good A complement in production is a good that is produced along with another good o Distinguish between a change in the quantity supplied and a change in supply o A change in the Qs results from a price change movement along the supply curve A change in supply is a change in the quantity to supply resulting from factors other than price o Explain how the demand and supply curve can determine the price and quantity in a market and explain the effects of changes in demand and supply o look at page 111 o Determine the equilibrium price and quantity in a supply and demand diagram o Where supply equals demand o Indicate the amount of a surplus or shortage if the price is not the equilibrium price 0 see page 106 Chapter 5 Key Terms o Inelastic Demand 0 When the percentage change in the quantity demanded is less than the percentage change in price o Elastic Demand o When the percentage change in the quantity demanded exceeds the percentage change in price c Total Revenue Test o A method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change with all other influences on the quantity sold remaining the same p 127 o Inelastic Supply o When the percentage change in the quantity supplied is less than the percentage change in price o Elastic Supply 0 When the percentage change in the quantity supplied exceeds the percentage change in price o Price elasticity of supply o A measure of the responsiveness of the quantity supplied of a good changes to a change in its price when all other influences on sellers plans remain the same p 130 Chapter 5 Objectives o Use the total revenue test to determine the price elasticity of demand o If price and total revenue change in opposite directions demand is elastic rubber band 0 If a price change changes the same as total revenue demand is unit elastic o If price and total revenue change in the same direction demand is inelastic o Discuss the relationship between a firm s prices and total revenue o TR P X Q o Define price elasticity of supply o See definition above o List and explain the influences on the price elasticity of supply o Production possibilities goods with constant or gently rising opportunity cost have an elastic supply Goods with a xed quantity ex beachfront have a perfectly inelastic supply Hotel rooms can t be turned into office and office can t be easily turned into hotelso supply of hotel roomsinelastic Storage Possibilities supply of storable goodelastic Time elapsed since price change more time passesmore elastic supply becomes Chapter 6 Key Terms o Consumer Surplus o The marginal bene t from a good or service minus the price paid for it summed over the quantity consumed People receive this when the buy something for less than it is worth to them p 149 Chapter 6 Objectives o Define consumer surplus and illustrate it in a figure 0 An example of this gure can be found on page 149 Chapter 7 Key Term o Price Ceiling o A government regulation that places an upper limit on the price at which a particular good service or factor of production may be traded if traded at a higher price that is considered the black market which is illegal This market is used by Lauren P because she is a badass sooo funnylolz Chapter 7 Objectives o Illustrate the effects of a rent ceiling set below the equilibrium rent and discuss how a rent ceiling can lead to a black market and increased search activity o This gure can be found on page 173 o A rent ceiling can create a black market because landlords want higher rents because they know renters are willing to pay more o A price ceiling creates a shortage of housing which increases search activity Chapter 8 Key Terms o Tax Incidence o The division of the burden of a tax between the buyer and the seller p 194 Chapter 8 Objectives o Explain how the incidence of a tax depends on the elasticities of demand and supply 0 The more inelastic the demand the more the buyer pays 0 The more inelastic the supply the more the seller pays o The more inelastic the demand or supply the smaller the excess burden o See page 195 for diagrams o Determine who bears the tax if demand or supply is perfectly inelastic or perfectly elastic o If the demand is perfectly inelastic the buyer pays and it is ef cient o If the demand is perfectly elastic the seller pays and it is inefficient o If the supply is perfectly inelastic the seller pays and it is efficient o If the supply is perfectly elastic the buyer pays and it is inefficient o Diagrams of this can be found on pages 197198 Chapter 9 Key Terms o Marginal Social Benefit 0 the private marginal bene t a good provides plus any external benefits it creates the total marginal benefit of the good to society as a whole Chapter 9 Objectives o Explain the relationship between marginal private benefit marginal external benefit and marginal social benefit 0 MSB MB marginal external benefit pg 230 o Describe how public provision private subsidies vouchers patents and copyrights can lead to efficiency in a market with an external benefit 0 They either increase or decrease the amount paid by by a taxpayer student etc to move it closer to efficiency p233 Chapter 10 Key Terms Free Rider 0 Someone who obtains a good or service without paying ie not giving a donation to a service used Chapter 10 Objectives Explain the free rider problem an t o With free riders because everyone consumes the same quantity of a public good and no one can be excluded from enjoying its bene ts no one has an incentive to pay for it Chapter 11 Key Terms Utility 0 The benefit or satisfaction a person gets from consuming a good or service Marginal Utility 0 The change in total utility based upon the consumption of one more unit Utility Maximizing Rule 0 1 Allocate the entire available budget 0 2 Make the marginal utility per dollar equal for all goods Diminishing Marginal Utility o The general tendency for marginal utility to decrease as the quantity of a good consumed increases Marginal Utility per dollar 0 The marginal utility from a good relative to the price of the good Total Utility 0 The total bene t that a person gets from the consumption of a good or service Chapter 11 Objectives Show the effects of an increase or decrease in the consumer s budget on the budget line o see diagram on page 267 Define utility and total utility o See above for definitions Explain the principle of diminishing marginal utility 0 As the quantity of a good increases the marginal utility decreases 0 Use the utilitymaximizing rule to choose the consumption combination that maximizes utility o Choose the affordable combination of goods at which the sum of the utilities obtained from all goods consumed is as large as possible p276 Chapter 12 Key Terms 0 Explicit Cost o A cost paid in money 0 Implicit Cost o What a firm uses when it uses a factor of production but does not make a direct money payment for its use 0 Normal Profit o The return to entrepreneurship 0 Economic Profit o For a firm this equals total revenue minus total cost 0 Short Run o The time frame in which the quantities of some resources are xed 0 Long Run o The time frame in which the quantities of all resources can be varied o Marginal Product o The change in total product that results from a oneunit increase in the quantity of labor employed 0 Marginal Cost o The change in total cost that results from a oneunit increase in output 0 Economies of Scale o What firm experiences when it increases its plant size and labor employed by the same percentage its output increases by a larger percentage the firm s average total cost decreases 0 Average fixed cost o Total xed cost per unit of output 0 Average variable cost o The cost of a rm s variable factor of production labor Chapter 12 Objectives o Compare the economic view and the accounting view of cost and profit o Economists measure economic profit as total revenue minus opportunity cost explicit costs and implicit costsnormal pro t Accountants measure pro t as total revenue minus explicit costs costs paid in money and depreciation 0 Define the short run and the long run o See definitions above 0 Define and calculate marginal product o The change in total product TP that results from a oneunit increase in the quantity of labor employed o A in TPA in QofLabor MP o Define average total cost average variable cost and average fixed cost and illustrate the average cost curves and the marginal cost curve o See diagram on page 310 o Define economies of scale diseconomies of scale and constant returns to scale o Economies of scale when a rm increases its plant size and labor employed by the same percentage its output increases by a larger percentage and its average total cost decreases o Diseconomies of Scale when a firm increases its plant size and labor employed by the same percentage its output increases by a smaller percentage and its average total cost increases o Constant returns to scale when a firm increases its plant size and labor employed by the same percentage its output increases by the same percentage and its average total cost remains the same Chapter 13 Key Terms 0 Perfect Competition o A market in which there are many rms each sell an identical product many buyers no restrictions on the entry of new firms into the industry no advantage to established firms and buyers and sellers are well informed about prices 0 Price taker o A firm that cannot influence the price of the good or service that it produces Chapter 13 Objectives 0 Explain why a firm in perfect competition is a price taker o Because all firms in perfect competition look the same to the buyer they produce goods and services that have no characteristics that are unique o Describe the market demand curve and a firm s demand curve in perfect competition o The market demand curve is downward sloping and the firm demand curve perfectly horizontal o Discuss how a perfectly competitive firm determines its profitmaximizing output o Where marginal cost equals marginal revenue o Explain how output price and profit are determined in the short run o see page 333 o Illustrate a perfectly competitive firm that is earning an economic profit and calculate the amount of economic profit o see page 333 o except ATC would be below MR o Explain how output price and profit are determined in the long run and explain why perfect competition is efficient o see page 336 o ATC MR MC zero economic pro t Chapter 14 Key Terms 0 Singleprice monopoly o A monopoly that must sell each unit of its output for the same price to all customers Chapter 14 Objectives o Explain how a singleprice monopoly determines its output and price o Where marginal revenue equals marginal cost 0 Calculate marginal revenue and explain why marginal revenue is less than price for a singleprice monopoly o This is because when the price is lowered to sell one more unit two opposing forces affect total revenue The lower price results in a revenue loss and the increased quantity sold results in a revenue gain p 354 o Explain the relationship between marginal revenue and elasticity o If price and total revenue change in opposite directions demand is elastic and marginal revenue is positive o If a price change leaves total revenue unchanged demand is unit elastic and marginal revenue is zero o If price and total revenue change in the same direction demand is inelastic and marginal revenue is inelastic 0 Use a marginal revenue curve a marginal cost curve and a demand curve to find the profitmaximizing level of output and price for a singleprice monopoly o Where marginal cost equals marginal revenue must go up to the demand curve to get the price p357 o Compare the output and price of perfect competition and singleprice monopoly o Compared to perfect competition a single price monopoly produces a smaller output and charges a higher price o Explain why monopolies can sometimes achieve a better allocation of resources than competition can o This is because if there is economic profit it will cause rent seeking Competition among rent seekers pushes up the cost of rent seeking until it leaves the monopoly only earning a normal profit after paying the rent seeking costs p 362 Chapter 15 Objectives o Explain how a firm in monopolistic competition determines its output and price in the short run and the long run o In the short run the firm will produce where marginal revenue equals marginal cost and charge the highest price buyers are willing to pay In the long run the monopoly will produce where ATC D o Illustrate the firm s profitmaximizing decision in monopolistic competition in the short run and the long run o see page 386 o Explain why firms in monopolistic competition earn zero economic profit in the long run o absence of barriers to entry economic pro t induces entry and economic loss induces exit Chapter 16 Key Terms o Game Theory o The tool that economists use to analyze strategic behavior behavior that recognizes mutual interdependence and takes account of the expected behavior of others All games feature rules strategies and payoffs o Duopoly o A market with only 2 firms o Prisoner s Dilemma o A game between two prisoners that shows why it is hard to cooperate even when it would be beneficial to both players to do so Chapter 16 Objectives o Define oligopoly and explain how one firm s actions can decrease the profits of the other firms o A market with a small number of competitive rms and natural or legal barriers which prevent the entry of new firms o Explore the range of possible price and quantity outcomes and describe the dilemma faced by firms in oligopoly o Monopoly outcome marginal revenue equals marginal cost o Perfect competition outcome marginal cost demand 0 p406 o Define game theory and discuss the three features of games Describe the prisoner s dilemma o Definitions are above o More on prisoner s dilemma Although there is a fairly good outcome for both if they cooperate it is very tempting for one prisoner rm to cheat because then they will receive the best payoff Chapter 17 Key Terms 0 Average Cost Pricing Rule o A rule that sets price equal to average total cost 0 Marginal Cost Pricing Rule o Sets price equal to marginal cost achieves an efficient output in a regulated industry Chapter 17 Objectives o Explain the marginal cost pricing rule and show that it achieves an efficient output in a regulated industry o Definition above It is explained well on page 427 0 Explain the average cost pricing rule and show the deadweight loss created by it as the result of restricting output and raising price o Definition above See page 428 for a diagram Chapter 18 Key Terms 0 Value of Marginal Product o the value to a firm of hiring one more unit of a factor of production which equals price of a unit of output multiplied by the marginal product of the FOP P x MP VMP o Derived Demand o The demand for a FOP which is derived from the demand for the goods and services it is used to produce Chapter 18 Objectives o Explain how the value of marginal product determines the demand for a factor of production o The value in marginal product is the value to hiring one more unit of a factor of production which equals price of a unit of output multiplied by the marginal product of the factor of production p 449 o Explain why the demand for a factor of production is a derived demand o The value of marginal product of labor and the wage rate determine the quantity of labor demanded by a rm The value of marginal product of labor tells us the additional revenue the rm earns by hiring one more worker and the wage rate tells us the additional cost the rm earns by hiring one more Worker 0 Calculate the value of marginal product o Px MP VMP p 449 Chapter 19 Key Terms 0 Lorenz Curve o A curve that graphs the cumulative percentage of income or wealth against the cumulative percentage of households Chapter 19 Objectives o Describe the distribution of wealth and income and explain how they have changed over time 0 Income is not distributed equally if it were each 1 percent of household would receive 1 percent of total income Inequality has increased overtime o Define construct and interpret a Lorenz Curve o See page 473 fora diagram
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