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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

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    1. AP Economics Mr. Bernstein Micro Graphs Review May 2014

    2. AP EconomicsMr. Bernstein The Production Possibilities Curve

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

    4. AP EconomicsMr. Bernstein Circular Flow Diagram

    5. AP EconomicsMr. Bernstein Expanded Circular Flow Diagram

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

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

    8. AP EconomicsMr. Bernstein Equilibrium • Price is the adjustment mechanism: falls when there is a surplus, rises when there is a shortage

    9. 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

    10. 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

    11. 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

    12. 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

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

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

    15. AP EconomicsMr. Bernstein Quotas (Quantity Controls) • Examples: limits, licenses; creates price “wedge”

    16. 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

    17. $ 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

    18. 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

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

    20. AP EconomicsMr. Bernstein Adjustment toward Long-Run Equil(Perf Comp)

    21. 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

    22. AP EconomicsMr. Bernstein Monopoly Reduces Societal Welfare

    23. AP EconomicsMr. Bernstein Price Regulation Restores Consumer Surplus

    24. AP EconomicsMr. Bernstein Monopolists will use Price Discrimination • Without competition, they take advantage of differing elasticities

    25. 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

    26. 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…)

    27. Wage Market Labor Supply AP EconomicsMr. Bernstein W* Factor Market: Labor • Value of W* = MRPL; (MC = W) Market Labor Demand Q

    28. 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*

    29. AP EconomicsMr. Bernstein Equilibrium in the Market for Land and Capital • Supply curve for Land is very steep (inelastic)

    30. 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

    31. 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