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AP Econ Final Review
Review of most key terms from across the units, concepts covered in glance sheet, and text book reading.
Terms in this set (123)
- entrepreneurial ability
- there are limited resources but UNlimited wants
- Alternatives that must be given up when one option is chosen rather than another
- The next best thing given up
- amount CONSUMERS pays for product
- amount it takes for PRODUCER to manufacturer item
- the particular mix of goods and services most highly valued by society
- price = MC
- the production of any particular good in the least costly way
- price = mimimum ATC
law of increasing opportunity cost
- as the production of a particular good increases, the opportunity cost of producing an additional unit rises as well
- a market in which households sell and firms buy resources or the services of resources
- A market in which products are sold by firms and bought by households.
Consumer WILLINGNESS and ABILITY to buy products
Law of demand
- as price falls, the quantity demanded rises
- as price rises, the quantity demanded falls
Law of supply
- as price increase, quantity supplied increases
- as price falls, quantity supplied falls
law of diminishing marginal utility
- the more you buy of the same product, the less satisfaction you gain from consuming additional units. This means in order to buy more, firms need to charge less
- entrepreneurial ability
- prevents the product from being sold at a higher price
- causes shortage
- goes UNDER equilibrium
- prevents product from being sold at a lower price
- causes surplus
- goes ABOVE equilibrium
- A government payment that supports a business or market
- consumers are sensitive to a price change
- price increases too much, consumers stop buying
cross-price elasticity of demand
- shows how sensitive a product is to a change in price of another good
- if coefficient is negative, goods are substitutes
- if coefficient is positive, goods are complimentary
- how sensitive a change in income is
- if coefficient is negative, good is inferior
- if coefficient is positive, good is normal
- consumer demand stays the same regardless (an essential good)
Total revenue test
- a method of measuring elasticity by comparing total revenues
- TR (total Revenue) = Price x Quantity
- Elastic: an (+) in price causes a (-) in TR
a (-) in price causes an (+) in TR
- Inelastic: an (+) in price causes an (+) in TR
a (-) in price causes a (-) in TR
Total Revenue Test for elasticity shows that...
- if prices are (-) but TR is still (+), demand is ELASTIC
- if prices are (-) and TR is ALSO (-), demand is INELASTIC
- price of resources/production
- producer expectations
- opportunity cost for alternative products
- number of other sellers
Marginal revenue (MR) test for elasticity states...
- if MR is decreasing but STILL positive, demand is ELASTIC
- if MR is decreasing and NEGATIVE, demand is INELASTIC
- consumer preference
- number of buyers in market
- consumer income
- price of related goods
- consumer expectations (sales)
For substitute goods...
- as price of A (+); demand for B (-)
- as price for A (-); demand for B (+)
For complementary goods...
- as price of A (+); demand for B (+)
- as price for A (-); demand for B (-)
For normal goods...
- as INCOME (+); demand (+)
- as INCOME (-); demand (-)
For inferior goods...
- as INCOME (+); demand (-)
- as INCOME (-); demand (+)
Economic growth is the result of ...
- increase in supply/resources
- improvement in resource quality
- technological advancements
- chance in trades (right time, right place)
- The difference between the MAXIMUM amount a person is willing to pay versus the actual amount the consumer paid
- ex.) you go in willing to pay 1000 for a new computer but only pay 200. Consumer surplus = 800
- the difference between the MINIMUM amount a seller is willing to sell a product for versus what it actually sold for
- ex. ) you must sell a car for 100 but actually sell at 1000. Producer surplus = 900
- The actual payments a firm makes to its factors of production and other suppliers.
Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
The short-run period
At least one factor of production is fixed whilst others can be varied-supply can be increased but only by a small amount
All factors of production are fully flexible although the state of technology is fixed. Output can be significantly increased
Law of Diminishing Marginal Returns
- as each successive unit/worker is hired, the additional benefits decrease and become negative
- too many cooks in the kitchen
What are the stages of Marginal Returns?
- Stage 1: Increasing Marginal Returns
- MP and TP are rising (shows specialization of labor)
- Stage 2: Decreasing Marginal Returns
- MP is decreasing but TP is still rising at a slower rate
- Stage 3: Negative Marginal Returns
- MP is negative and TP is decreasing (workers are not
producing outputs to their worth)
what are the 5 characteristics of a free market?
- little government involvement
- individuals own resources
- the opportunity to make a profit gives incentive to produce quality good efficiently
- wide variety of goods available for consumers
- competition/self-interest regulate market (invisible hand)
utility maximizing rule
- consumer money should be spent so that the marginal utility per dollar of each good is maximized
- additional product gained by adding an additional worker
- Δ in TP/ Δ in output
constant returns to scale
- if you double input, you proportionally double output
- long-run ATC is as low as it should get (warning light)
Economies of scale
- if you double input, the quantity of a good will more than double (specialization of labor)
- long-run ATC is falling due to specialization of labor
diseconomies of scale
- if you double the input, the quantity of goods is less than double (too big too fast)
- long-run ATC increases as firm gets too big to manage
- graph shows all 3 scales
characteristics of a perfectly competitive market
- many small firms
- identical products (perfect substitution)
- easy for firms to enter/exit industry (low entry barriers)
- no need to advertise (no non-price competition)
- sellers are "price takers" (have no control over prices)
what is the profit maximizing rule?
- MR=MC determines quantity
- it applies to all market structures
if price is equal to or above the AVC, firms should...
- continue to produce
when price is below the AVC, firms should
- minimize losses by temporarily shutting down (shut-down rule)
- this is because they still have to pay for fixed costs and no longer pay variable cost
- a single firm is the sole producer of a product
- no close substitutes
Characteristics of a pure monopoly
- single seller (a single firm is the sole producer or supplier, firm = industry)
- no close substitutes
- price makers (can control total quantity supplied and therefore price)
- blocked entry (no immediate competition)
Barriers to entry
- factors that prohibit firms from entering an industry
- weak barriers allow for oligopolies to occer
For a monopoly, marginal revenue is less than price because
- the law of diminishing marginal utility still applies and demand is still downward sloping
For a monopoly, when TR is at its maximum, Marginal Revenue is...
For a monopoly, when TR is decreasing, MR is...
What are the characteristics of Price Competition?
- price takers
- many small firms in the industry
- identical products
- low barriers (easy entry and exit)
- no need to advertise
What are the characteristics of Monopolistic Competition?
- relatively large number of sellers
- different products
- control over prices
- easy entry/exit, low barriers to entry
- non-price competition
What are the characteristics of an Oligopoly ?
- a few large firms
- both identical and differentiated products
- control over prices
- high barrier to entry
- mutually interdependence
- firms must take into consideration their competitor's pricing
- the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost
Why are monopolies inefficient?
- little incentive to innovate
- don't produce at the quantity demanded so there is a shortage
- charge above MR = MC
Elastic and Inelastic range
light blue = elastic
dark blue = inelastic
- costs that do not change (rent)
- costs that change with levels of output
- fixed costs + variable costs
- The demand for resources is determined (derived) by the products they help produce (i.e. if there's increase in demand for pizza, what will happen to cheese)
Perfectly competitive resource market characteristics
- many firms hiring similar workers (before differentiation)
- many workers with identical skills
- wage is constant (wage taker/MR. DARP)
firms in resource markets equal
workers in a resource market equal
shifters of labor demand
- demand for product
- changes in productivity (educational/technological advances)
- changes in price of other resource
shifters of labor supply
- number of qualified workers
- government regulation/licensing
- personal values regarding leisure time/societal roles
Marginal Revenue Product (MRP)
- additional revenue generated by an additional worker
Marginal Resource Cost (MRC)
- additional costs of hiring an additional worker
what is a market imperfection?
- differences in wages
how does insufficient/misleading job information affect wages?
- prevents workers from seeking better employment
how does geographical immobility affect wages?
- many people are reluctant or too impoverished to move so they must accept a lower wage
How do Unions affect wages?
- collective bargaining/threats to strike will bump up wages above equilibrium
- people getting paid differently for doing the exact same job (i.e. gender, race, age, etc.)
what is the goal of a labor union?
- increase wages and benefits by convincing consumers to buy ONLY union products or increase price of substitute products like implementing tariffs
- only one firm controlling the job market
for a monopsony, MRC = MRP but...
- price it DOWN to "d" (demand)
when should the government get involved with the economy?
- when the free-market system fails to satisfy society's wants (invisible hand doesn't work)
what are the four market failures?
- public goods
- externalities (third party side effects)
- unequal distribution of income
Why are public goods a market failure?
- there is little opportunity or incentive to earn a profit
what are the requirements in order to be considered a 'public good'?
- non exclusion; everyone can use
- shared consumption; one person's consumption doesn't take away usefulness to the next consumer
how does the government determine the quantity of public goods that should be produced?
- the sum of all peoples' willingness to pay compared to marginal social costs (MSC)
marginal social cost (MSC)
- supply curve for public goods (elastic)
- the additional cost to society for adding an additional unit
marginal social benefit (MSB)
- the additional benefit society gains from an additional unit consumed
- demand of public goods
- citizens willingness to pay
what are the types of externalities?
- negative (i.e. pollution)
- positive (i.e. vaccine)
how does the government remedy NEGATIVE externalities?
how does the government remedy POSITIVE externalities?
what are third-person side effects?
- external benefits or costs to someone other than the original decision maker
how does a negative externality effect the market?
- there is an over allocation of products (represented by dead weight loss)
- MSC is GREATER than MSB, there is too much being produced.
- government must tax market (supply)
for a negative externality, the amount of tax...
- makes up for the numerical value of the negative externaility
how does a positive externality effect the market?
- there is an under allocation of resources represented by dead weight loss
- Marginal private benefit (MPB) is LOWER than MSB
- government subsidizes market (demand)
tragedy of commons
- goods that are available to everyone are often polluted since no one has monetary incentive to keep them clean
- a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them.
- pure competition's index score = 0
- pure monopoly's index score = 10,000
At what herfindahl index score does the government get involved?
- at an HI of 1,800 for firms OR if a merge would result in a +100 for the industry
why are public goods a market failure?
- there is very little opportunity to earn profit meaning essential services would be under produced
what are two characteristics of public goods
- nonexclusion and shared consumption
- everyone can use the good regardless of pay
- consumption by 1 consumer does not change usefulness for next consumer
- larger percent of income is taken from higher income group
- a flat rate tax where the same percent is taken across income groups
- larger percent taken from low income groups (sales tax)
Sherman Antitrust Act
- first anti-trust act of 1890
- not very effective
- companies used it against employees
- 1914, clarified Sherman act
- stated monopolies could not engage in price discrimination, entering an exclusive dealer agreement, or buying stocks with the intention to reduce competition
- division of all income earning families into five equal groups (20%) from poorest to richest
- the unequal distribution of income
- the curve that illustrates income distribution
- movement of individuals or families from one income quintile to another over time
- extremely rare to move up
growing income inequality
- the distance between the top quintile and the bottom quintile are increasing because the rich are getting richer and the poor are getting poorer
- the numerical measure of the overall dispersion of income
for the gini ration:
- the closer to 0, the more equal the distribution
- the closer 1, the more UNequal the distribution
- shows the relationship between tax rates and tax revenue
if the government increases tax rates, tax revenue will
If the tax rate becomes too high, tax revenue
- will eventually fall because workers will loose the incentive to work
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