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MICRO AP Review

MICRO AP Review. Demand Elasticity. Elastic -- % Δ Q > % Δ P; % Δ Q / % Δ P > 1 (luxuries, cruises, restaurant meals) Unit Elastic -- % Δ Q = % Δ P; % Δ Q / % Δ P = 1 Inelastic -- % Δ Q < % Δ P; % Δ Q / % Δ P < 1 (electricity, newspapers, salt). Market Structures.

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MICRO AP Review

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  1. MICRO AP Review

  2. Demand Elasticity • Elastic -- %ΔQ > %ΔP; %ΔQ / %ΔP > 1 (luxuries, cruises, restaurant meals) • Unit Elastic -- %ΔQ = %ΔP; %ΔQ / %ΔP = 1 • Inelastic -- %ΔQ < %ΔP; %ΔQ / %ΔP < 1 (electricity, newspapers, salt)

  3. Market Structures

  4. Pure CompetitionIndustry (Market) Firm MC P P MR = MC intersects ATC at its. min. S ATC P1 P1 P1=MR D Q1 Qf Q Q

  5. Pure CompetitionIndustry (Market) Firm MC Shaded area Represents area of loss to firm P P S ATC P1 P1 P2 P2=MR P2 New P = P2 but costs are still at ATC D1 D2 Q2 Q1 Qf1 Q Qf2 Q

  6. Pure Monopoly Industry graph Is firm graph! MR < D b/c a lower P reduces revenue for all sold! P MC P=$10 ATC=$8 so $2 x 20 = $40 is economic profit! $10 ATC $8 All businesses produce where MR = MC! D MR 20 Q

  7. Monopolistic Competition MR < D b/c a lower P reduces revenue for all sold! P MC P=$9 ATC=$8 so $1 x 20 = $20 is economic profit! New firms enter industry! ATC $9 $8 All businesses produce where MR = MC! D MR 20 Q

  8. Monopolistic Competition ATC P MC P=$11 ATC=$13 so $2 x 20 = $40 is loss to firms! Firms will leave industry! $13 $11 All businesses produce where MR = MC! D MR 20 Q

  9. Monopolistic Competition MC P P=$12 ATC=$12 so in long-run, there are no economic profits! ATC $12 D All businesses produce where MR = MC! MR 20 Q

  10. Labor Market • Marginal Product of Labor (MP) = additional output produced by adding 1 more worker • Marginal Revenue Product (MRP) = MP x product price OR Δ total revenue / Δ output • Demand for labor = MRP • Firms will hire workers until MRP = MRC OR until value of output produced by add’l worker = cost of hiring that worker

  11. Consumer Surplus CS = all the benefit that consumers receive from consuming the good If P changes, CS will change! CS before Δin D = A+B; CS after Δin D = B + C. P P S S CS A B P1 D C D D1 D2 Q Q

  12. Producer Surplus PS = all the benefit that producers receive from selling the good at P1 If P changes, PS will change! PS before Δin D = C+D+E; PS after Δin D = E. P P S S PS = B A A B P1 D C B E D D1 D2 Q Q

  13. Deadweight Loss Also called efficiency loss is the efficiency the economy loses from a tax or from monopoly St P S E Pt F Before tax: CS=E+F+G+H; PS=I+J+K; After tax: CS=E; PS=F+K; DWL=H+I H G P1 K I J D Q1 Qt Q

  14. Deadweight Loss and Monopoly P = $10 ATC = $8 P MC DWL caused by monopoly $10 ATC $8 D MR 20 Q

  15. Positive Externalities (Spillover Benefits) Govt. may correct for underallocation by: Dm = market demand Do = optimal demand P P S S Qo – Qm represents an underallocation of that good Qt=Qo Dt Do Can ↑ D by Giving subsidies To consumers (tax credits, coupons) D1 Dm Q Q1 Qt Qo Qm Q

  16. Positive Externalities (Spillover Benefits) Govt. may correct for underallocation by: Dm = market demand Do = optimal demand P P Can ↑ S by giving subsidies to producers S S St Qo – Qm represents an underallocation of that good Qt=Qo Do D1 Dm Q Q1 Qt Qo Qm Q

  17. Negative Externalities (Spillover Costs) Govt. may correct for overallocation by: Sm = market supply So = optimal supply P P Can ↓S by taxing producers St So S Sm Qo – Qm represents an overallocation of that good Qt=Qo Do D1 D Q Qt Q1 Qo Qm Q

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