AP微观经济知识点

AP MICRO REVIEW

1. Basic Economic Concepts (8%-14%)

A. Scarcity, choice, and opportunity cost

➢ Scarcity: the limited nature of society’s resources

➢ Economics: the study of how society manages its scarce resources ➢ People face trade-off (efficiency or equality)

➢ Opportunity cost: whatever must be given up to obtain some item B. Production possibilities curve

➢ The production possibilities curve shows the combinations of output that the

economy can possibly produce given the available factors of production and the available production technology

Qy

1. The opp cost of Qx equals the slope of curve 2. The opp cost of Qx is higher, the curve is steeper 3. opp cost is constant, the PPF is strict line 4. Technology advance → PPF shift

Inefficient

Qx C. Comparative advantage, absolute advantage, specialization and trade

➢ Comparative advantage: the ability to produce a good at a lower opportunity cost

than another producer

➢ Absolute advantage: the ability to produce a good using fewer inputs than another

producers

➢ Trade can benefit everyone in society because it allows people to specialize in

activities in which they have a comparative advantage.

D. Economic system

E. Property rights and the role of incentives

➢ Property rights: the ability of an individual to own an exercise control over scarce

resources

Market power

➢ Market failure: allocate resources inefficiently ← Negative externality

➢ Incentive: something that induces a person to act (the prospect of a punishment

or a reward) Marginal analysis

➢ Marginal change: a small incremental adjustment to a plan of action ➢ People make choice when marginal benefit ＞ marginal cost

F.

2. The Nature and Functions of Product Markets (55%-70%)

A. Supply and Demand (15%-20%)

a) Market equilibrium

➢ A situation in which the market price has reached the level at which quantity

supplied equals quantity demanded

b) Determinants of supply

➢ Income: income↓, demand of normal goods↓, demand of inferior good↑ ➢ Prices of related goods: price of substitute↓, demand of another good↓

price of complements↓, demand of another good↑ ➢ Tastes

➢ Expectations: expect higher income, demand↑ ➢ Number of buyers: buyers↑, demand↑ c) Determinants of demand

➢ Input price: input price↑, supply↓

➢ Technology: advance in technology, supply↑

➢ Expectations: expect the price of goods↑, supply↑ ➢ Number of sellers: number of sellers↑, supply↑ d) Price and quantity controls ➢ Demand→, price↑, quantity↑ ➢ Supply→, price↓, quantity↑ e) Elasticity

➢ Demand Curve Inelastic: Price↑, total revenue↑ ➢ Demand Curve Elastic: Price↑, total revenue↓ ➢ Normal Goods & Income Elasticity:

The Quantity of Normal Goods moves the same direction with the Percentage of Income 对normal goods的需求量与收入变动同方向运动 The Elasticity of Normal Goods is usually positive ➢ Inferior Goods & Income Elasticity

The Quantity of Inferior Goods moves the opposite direction with the Percentage of Income 对inferior goods的需求量与授予变动反方向运动 The Elasticity of Inferior Goods is usually negative f)

➢ Exy＞1, substitute, Exy＜1, complementary

Consumer surplus, producer surplus, and allocative efficiency

➢ Consumer surplus: the amount a buyer is willing to pay for a good minus the

amount the buyer actually pays for it

➢ Producer surplus: the amount a seller is paid for a good minus the seller’s

cost of providing it

➢ Allocative efficiency: the last unit provides marginal benefit to consumer =

the marginal cost to producer

g) Tax incidence and deadweight loss

➢ Tax incident: the manner in which the burden of a tax is a shared among

participants in a market

➢ Elasticity↑, the tax burden↓

➢ Deadweight loss: the fall in total surplus that results from a market distortion

such as tax

B. Theory of consumer choice (5%-10%)

a) Total utility and marginal utility

➢ Total utility: The aggregate level of satisfaction or fulfillment that a consumer

receives through the consumption of a specific good or service

➢ Marginal utility: gain from an increase, or loss from a decrease, in

the consumption of that good or service

b) Utility maximization: equalizing marginal utility per dollar. (MUX/PX=MUY/PY) c) Income and substitution effects

C. Production and Costs (10%-15%)

a) Production functions

➢ Production function: the relationship between the quantity of inputs used to

make a good and the quantity of output of that good

➢ The quantity of the input↑, the production function gets flatter b) Marginal product and diminishing returns

➢ Marginal product: the increase in the amount of output from an additional

unit of labor

➢ Diminishing return: the property whereby the marginal product of an input

declines as the quantity of the input increases

c) Short-run costs

➢ Fixed cost in the short run

d) Long-run costs and economies of scale

➢ Variable cost in the long run

➢ Economies of scale: the property whereby long-run average total cost↓ as

the quantity of output↑

➢ Diseconomies of scale: the property whereby long-run average total cost↑

as the quantity of output↑

➢ Constant returns to scale: the property whereby long-run average total cost

stays the same as the quantity of output changes

e) Cost minimizing input combination and productive efficiency

➢ Efficient scale: the quantity of output that minimized average total cost ➢ Produces goods in the quantity where MC intersect with ATC (min ATC)

D. Firm behavior and market structure (25%-35%)

a) Profit

➢ Short-run profit: When ATC ＜ (MR=MC) ➢ Long-run profit (Normal profit) = zero

➢ Economic profit: total revenue - total cost (explicit + implicit) ➢ Accounting profit: total revenue - total explicit cost ➢ Profit Maximization: produce where MC=MR b) Perfect competition

➢ Characteristics: Price takes

Free entry & exit

Many sellers & buyers Fully substitutable

Perfectly elastic (demand curve Homogenous Long run: P=ATC MC=MR=P

➢ Profit maximization: MC=MR=P=ATC

➢ Short run supply and shutdown decision: 1. P < ATC: Economic Loss

2. AVC < P Short run but exit in the long run 3.P=AVC/ P4. P< ATC: Exit in the long run.

➢

c) Monopoly

➢ Characteristics: single seller

High barriers to entry

No substitutes (have key resources) Inelastic Price maker

Economics profit (P＞MC=MR)

Short-run supply = MC Market Firm P*

➢ Profit maximization: produce quantity in Q*, price in P*

➢ Natural monopoly: a single firm can produce output at a lower cost than can a

larger number of producers (MC horizontal)

➢ Inefficiency of monopoly: Price＞MR=MC → deadweight loss

➢ Price discrimination: the business practice of selling the same good at

different prices to different customers (reduce consumer surplus → profit) ➢ Social optimal: MC=D

d) Monopoly competition

➢ Characteristics: monopoly＜number of sellers＜competitive market

Imperfect substitutes Imperfect inelasticity Heterogeneous products Price maker

Long-run profit=zero

1. MR=MC 2. Decide P* and Q*

➢ Short-run monopoly competition

1. 2. 3. 4. 5.

➢ Long-run monopoly competition

P* = ATC Eco Profits = 0 P* > min ATC P* > MC P* > MR ➢ Excess capacity: the quantity produced＜efficient scale → excess capacity

the price＞marginal cost → markup ➢ The product-variety externality: positive externality ➢ The business-stealing externality: negative externality

e) Oligopoly

➢ Characteristics: few sellers control the whole market

Fewer substitutes Price maker

Interdependence in pricing Inefficiency Economic profit P＞MC. P＞MR

➢ Collusion: an agreement among firms in a market about quantities to produce

or prices to charge

➢ Cartel: a group of firms acting in unison

➢ Game theory: the study of how people behave in strategic situation

➢ Nash equilibrium: reached when the choices of all firms are such that there is

no other choice that makes any firm better off (increases profits or decrease loss)

➢ Dominant strategy: a strategy that is best for a player in a game regardless of

the strategies chosen by other players ➢ The output effect: P＞MC, output↑, profit↑ ➢ The price effect: Q↑, P↓, profit↓

➢ Output effect ＞ price effect → increase production

3. Factor Markets (10%-18%)

A. Derived factor demand

➢ Demand for a factor of production B. Marginal revenue product

➢ The addition unit of product brings addition revenue C. Hiring decisions in the markets for labor and capital

➢ A competitive, profit-maximizing firm hires workers up to the point where the

VMPL = wage

D. Market distribution of income

➢ Wage =VMPL= Price x MPL E. Labor demand shift

➢ P↑, VMPL↑, labor demand → ➢ Advance in technology ➢ The supply of other factors F. Labor supply shift

➢ Changes in tastes

➢ Changes in alternative opportunities ➢ immigration

4. Market Failure and the Role of Government (12%-18%)

A. Externalities

➢ Positive externality: social benefit＞private benefit ➢ Negative externality: social cost＞private cost

➢ Corrective tax: a tax designed to induce private decision makers to take account

of the social costs that arise from a negative externality ➢ Subsidies B. Public goods

➢ Private goods: excludable & rival in consumption (clothing/congested toll roads) ➢ Public goods: not excludable & not rival in consumption (national

defense/uncongested nontoll roads)

➢ Common resources: not excludable & rival in consumption

(environment/congested nontoll roads)

➢ Club goods: excludable & not rival in consumption (fire protection/cable

TV/uncongested toll roads)

C. Public policy to promote competition

➢ Antitrust law – Sherman Antitrust Act ➢ Regulate the price ➢ Public ownership ➢ Prevent cooperating ➢ Restraint of trade D. Income distribution

➢ Vertical equity: the idea that taxpayers with a greater ability to pay taxes should

pay larger amounts

➢ Horizontal equity: the idea that taxpayers with similar ability to pay taxes should

pay larger amounts

➢ Lump-sum tax: a tax that is the same amount for every person (1. Cause no

deadweight loss 2. Not distort incentive 3. Minimal administrative burden)

➢ Proportional tax: a tax for which high-income and low-income taxpayers pay the

same fraction of income

➢ Regressive tax: a tax for which high-income taxpayers pay a smaller fraction of

their income than do low-income taxpayers

➢ Progressive tax: a tax for which high-income taxpayers pay a larger fraction of

their income than do low-income taxpayers

➢ Tax avoidance → legal Tax evasion → illegal