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AP Economics. Mr. Bernstein Micro Graphs Review May 2014. AP Economics Mr. Bernstein. The Production Possibilities Curve. AP Economics Mr. Bernstein. Economic Growth Concave due to “Law of increasing opportunity costs”. AP Economics Mr. Bernstein. Circular Flow Diagram.

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ap economics

AP Economics

Mr. Bernstein

Micro Graphs Review

May 2014

ap economics mr bernstein
AP EconomicsMr. Bernstein

The Production Possibilities Curve

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AP EconomicsMr. Bernstein

Economic Growth

  • Concave due to “Law of increasing opportunity costs”
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AP EconomicsMr. Bernstein

Circular Flow Diagram

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AP EconomicsMr. Bernstein

Expanded Circular Flow Diagram

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AP EconomicsMr. Bernstein

Demand Curves

  • A Shift in Demand is different from movement along the Demand Curve!!
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AP EconomicsMr. Bernstein

Supply Curves

  • A Shift in Supply is different from movement along the Supply Curve!!
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AP EconomicsMr. Bernstein

Equilibrium

  • Price is the adjustment mechanism: falls when

there is a surplus, rises when there is a shortage

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AP EconomicsMr. Bernstein

Simultaneous Shifts of Supply and Demand Curves

  • Example: Demand for Justin Beiber tickets decreases and Supply decreases
  • Equilibrium Price is ambiguous but Quantity change decreases (awww…)
  • Know all four possible combinations
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AP EconomicsMr. Bernstein

Elasticity along the Demand Curve

  • Consumers are less price sensitive on inexpensive items
  • TR begins to fall as prices rise and Elasticity grows
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AP EconomicsMr. Bernstein

Consumer Surplus and Producer Surplus

  • CS is the difference between what a consumer is willing to pay for a good or service and what they actually have to pay
  • PS is the difference between what a producer must receive to sell a unit and the actual price they receive
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Dead Weight Loss

P

D

Q

QtQ

AP EconomicsMr. Bernstein

Deadweight Loss Example: The Effect of Taxes

  • Excise tax causes lower Q, efficiency loss

S1

S

CS

T

D

D

T

PS

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AP EconomicsMr. Bernstein

Price Ceilings

  • Price ceiling is below equilibrium, creates shortage
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AP EconomicsMr. Bernstein

Price Floor

  • Price floor is above equilibrium; creates surplus
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AP EconomicsMr. Bernstein

Quotas (Quantity Controls)

  • Examples: limits, licenses; creates price “wedge”
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AP EconomicsMr. Bernstein

Firm’s Cost Curves: Swoosh, Smirk and Smile

  • The MC curve intersects the U-shaped AC and AVC curves at their minimum points
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$

MC

ATC

MR D.AR.P!

Output

Q*

AP EconomicsMr. Bernstein

Perfectly Competitive Firm

  • Produce at MR=MC
  • Profit = MR – ATC
  • In this case, zero

economic profit…

  • This is long-run

equilibrium…

  • Profit or loss if P > or < ATC
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MC

$

ATC

P=ATC

P=MR=d=AR

Output

Q*

AP EconomicsMr. Bernstein

The Short-Run Shut-Down Decision

  • Shut down when P < AVC

AVC

Shut-down

Price

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AP EconomicsMr. Bernstein

Long Run Average Costs

  • U-shaped LRATC is a series of U-shaped SRATCs – one for each level of fixed costs
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AP EconomicsMr. Bernstein

Adjustment toward Long-Run Equil(Perf Comp)

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AP EconomicsMr. Bernstein

Classic Monopoly Graph

  • Q at MR=MC; lower Q and higher P than Perfect Competition; long-run economic profit exists due to barriers to entry
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AP EconomicsMr. Bernstein

Monopoly Reduces Societal Welfare

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AP EconomicsMr. Bernstein

Price Regulation Restores Consumer Surplus

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AP EconomicsMr. Bernstein

Monopolists will use Price Discrimination

  • Without competition, they take advantage of differing elasticities
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AP EconomicsMr. Bernstein

Game Theory

  • Each player competes

to maximize individual

payoffs and ignores the

effects of his/her action

on the payoffs received

by the rival

  • But Oligopolies engage

in tacit collusion, tit for tat

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AP EconomicsMr. Bernstein

Monopolistic Competition in the Long Run

  • Adjusts to normal profit, as in Perfect Competition
  • P*=ATC, tangent to ATC (not at minimum…)
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Wage

Market Labor Supply

AP EconomicsMr. Bernstein

W*

Factor Market: Labor

  • Value of W* = MRPL; (MC = W)

Market Labor Demand

Q

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AP EconomicsMr. Bernstein

MFCL

Labor Supply

Imperfect Competition in the Labor Market

  • Hire where

MPRL = MFCL

  • Monopsony pays

W* < MRPL

Remember, whether

Perfect or Imperfect

Markets, firms hire

where MRPL = MFCL

W*

Wage

MRPL

Quantity of Labor (workers)

E*

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AP EconomicsMr. Bernstein

Equilibrium in the Market for Land and Capital

  • Supply curve for Land is very steep (inelastic)
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AP EconomicsMr. Bernstein

S

Popt

Positive Externalities: MSB > MPB

  • Market underproduces

vs. socially optimal outcome

  • Deadweight loss
  • Policy to eliminate:

Subsidy

Pmkt

Subsidy

Pcons

MSB

Price, MSB

MPB

Qmkt

Qopt

Qty

ap economics mr bernstein29
AP EconomicsMr. Bernstein

MSC

MPC

Negative Externalities: MSC > MPC

  • Market overproduces

vs. socially optimal outcome

  • Deadweight loss
  • Policy to eliminate:

Per unit tax

  • Lump-sum tax does

not affect MC so does not

affect Q

Popt

Tax

Pmkt

Pfirm

Price, MSC

D

Qopt

Qmkt

Electricity

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