Ap Micro Study Guide

STUDY GUIDE

COSTS OF PRODUCTION:

Total Physical Product (TP)- total output or quantity produced
Marginal Product (MP)- the additional output generated by additional inputs (workers).
Average Product (AP)- the output per unit of input.

Stage 1: Increasing Marginal Returns
Stage 2: Decreasing Marginal Returns
Stage 3: Negative Marginal Returns

TC- Total Costs: Sum of Fixed and Variable Costs
VC- Variable Costs: Costs for variable resources that do change with the amount produced.
FC- Fixed Costs: Costs for fixed resources that don't change with the amount produced.

AFC

AVC

ATC

MC

MC = Change in Total Cost/Change in Quantity
ATC = Total Costs/Quantity
AVC= Variable Costs/Quantity
AFC= Fixed Costs/Quantity

Long-Run ATC:

Economies
Of
Scale
Constant
Returns
To
Scale
Diseconomies of
Scale

ATC

II. PERFECT COMPETITION:

Characteristics: Many Small Firms Identical Products (Perfect Substitutes) Easy for firms to enter and exit the industry Seller has no need to advertise Firms are price takers: the seller has no control over price

Firm and Industry in Short-Run Making Profit: Firm and Industry in Short-Run Making Loss:

MC

AVC
ATC

MC

AVC ATC

Firm and Industry in Long-Run Equilibrium:

ATC
MC

MR=D

How Economic Profit and Loss disappear in the Long-Run:

MR=D
ATC
MC

TC = TR

III. MONOPOLIES:

Characteristics: Single Seller: One firm controls the market and the firm is the industry Unique good with no close substitutes “Price Maker”: The firm can manipulate the price by changing the quantity it produces.

Demand and MR for imperfectly competitive firms (Elastic and Inelastic Range):

Q

TR
D

Q

MR

P
Elastic
Inelastic

TR

Monopoly making a profit (Graph- Label Profit, Consumer Surplus, and DWL)

D S = MC

MR

CS
PS

Perfectly Price Discriminating Monopoly:

D
=MR

MC
ATC

Regulating Monopolies: Fair Return and Socially Optimal Fair-Return Price (Break-Even) P=ATC (Normal Profit) Socially Optimal Price P=MC (Allocative Efficiency)

IV. MONOPOLISTIC COMPETITION

Characteristics: Relatively Large Number of Sellers Differentiated Products Some control over price Easy Entry and Exit (Low Barriers) A lot of non-price competition (Advertising)

Firm Making Short-Run Profit:

D
MR

MC
ATC

P1

Firm Making Short-Run Loss:
ATC

D
MR

MC

Q1
P1

Firm in Long-Run Equilibrium:

D
MR

MC

ATC

QLR
PLR

V. OLIGOPOLIES

Characteristics: A few large producers (less than 10) Identical or Differentiated Products High Barriers to Entry Control Over Price (Price Maker) Mutual Interdependence Firms use Strategic Pricing

Firm 2 Firm 1
$100, $50
High
Low
High
Low
$50, $90
$80, $40
$20, $10
Game Theory Model (Matrix)

D

Pe
Qe

P2
Q2

P1
Q1

Kinked Demand Curve: ELASTIC

INELASTIC

Profit Maximization with Collusion:

D

MC
ATC

MR