AP MICROECONOMICS Graph SUMMARY 2015
Supply & Demand
TIPSEN: shifts Demand & TINE-TP shifts Supply
Price Floor: surplus of supply above mkt equilibrium Price Ceiling: shortage of supply below mkt equilibrium
Floors & Ceilings both produce Deadweight Loss
Market System Equilibrium
P.C. M.C. Olig. Monop
Every firm maximizes profit where MR = MC
Only in perfect competition does P = MC, rest P > MC
Allocative efficiency is when P = MC (no deadweight loss)
Productive efficiency is production at minimum of ATC
All market structures can earn profit in short run
Perfect competition maximizes total welfare
Other market structures produce deadweight lossP ≠ MC
Perfect Competition Long Run
Individual firms are price takers (P = MR = AR)
Demand Curve: flat & equal to MR curve (for 1-firm)
Entire Market Demand Curve is still downward sloping
Short run: can earn profitallocatively efficient(P = MC)
Long run: Economic profit = 0 No incentive to enter/exit
Produce at efficient scale (min ATC) which is productive efficiency. Perfect entry/exit, homogeneous products ensures efficiency & self-regulation
Monopolistic Competition Long Run
Short Run: They can earn profit
Long Run: Due to easy entry/exit—firms enter when profit exist. An Individualfirms demand curve eventually shifts left and Equilibrium is where ATC is tangent to the Demand Curve. While economic Profit = 0 there is still deadweight lossas P > MC and excess capacity
Oligopoly Equilibrium
Similar to monopoly equilibrium. If oligopolies use “perfect” collusion, their equilibrium is identical
Game Theory argues for the non-cooperative equilibrium
Profit in short & long run, deadweight loss
Monopoly Equilibrium
(short run & Long run)
Monopolies earn economic profit in both the long short run. Price > MCrestricted entry/exit prevent entry into the market despite high profit levels. DWL exists.
Only by using “perfect” price discrimination can deadweight loss be completely eliminated as P = MC
Elasticity & MR Curve
Demand curves have both elastic & inelastic ranges
When MR = 0, demand is unit elastic andtotal revenue is maximized. Firms operate in Elastic range. Only if MC = ZERO, then firms would produce at unit elasticity
Elasticity, Taxes & Deadweight Loss
Taxes & Subsidies bothcreate deadweight loss
Taxes shift either S or D curve by size of tax(creates wedge)
Size of DWL is related to elasticity of demand/supply.
Withinelastic curves, deadweight loss is small.(see graph)
New taxes raise tax burden on both buyer & seller.
Tax incidence is not based on who the tax is levied on!
Moreinelastic curve bears most of tax burden (tax incidence!)
Consumer Surplus falls, Deadweight Loss = C + E
Tax Revenue = B + D
Lorenz Curve
Shows distribution of income
Gini-coefficientmeasures inequality and is a number between 0 and 1. Higher number means more inequality
Should not have to draw on test but will have to interpret graph.
Externalities
Efficient equilibrium isMB = MC unless there are
spillover benefitsorcosts (which are not counted)
DWL for society. Tax negative externality to fix
Graph above: negative externality
Since some social costs are not counted, MSC > MC
FACTOR MARKET
All input (factor) markets(labor, capital, etc)find equilibrium when Demand = Supply. All firms become “wage/price takers” at the current market price for a factor.
Competitive Factor Markets (1 firm)
Since Individual firms are wage takers => they see a horizontal MFCL----which means they can hire more workers without affecting wage rate. Market Power Firms(monopoly, oligopoly…) hire less inputs (MRPM< MRPC)
MRP = MPinput * MRoutput MFC = cost of input
If hiring 2 factors use Least cost rule: MPL/PL = MPK/PK
MONOPSONY
Just know the bottom line: A monopsony is a firm that is a monopoly in the LABOR market. This will lead to a MFC curve above a market labor supply curve because to hire more workers => wages must rise for all workers
End Result: higher lessworkers at lowerwage rate