AP/Introductory Microeconomics Summary

Introduction

• Presenter: Jacob Clifford from ACDC Econ.
• Purpose: Quick review for pre-exam preparation (AP test or college final).
• Mentioned resource: Ultimate Review Packet.

Basic Economic Concepts

Scarcity and Opportunity Cost

• Scarcity: Unlimited wants vs. limited resources.
• Opportunity Cost: Cost of any decision (giving up the next best alternative).
• Production Possibilities Curve (PPC): Graph showing different combinations of producing two goods using all resources.
  • Efficient: Points on the curve.
  • Inefficient: Points inside the curve.
  • Impossible: Points outside the curve.
  • Shapes: Straight line (constant opportunity cost); bowed out (increasing opportunity cost).
• Shifts in PPC: More/less resources, better technology, trade.

Comparative and Absolute Advantage

• Absolute Advantage: Who produces more.
• Comparative Advantage: Who produces at a lower opportunity cost.
  • Leads to specialization and trade.
• Terms of Trade: How much of one product for another benefits both parties.

Economic Systems

• Free Market System (Capitalism)
• Command Economy
• Mixed Economy
• Circular Flow Model: Interaction between businesses, individuals, and government.
  • Businesses: Buy resources, sell products.
  • Individuals: Sell resources, buy products.
  • Government: Provides services (transfer payments, subsidies).

Demand and Supply

Fundamentals

• Demand Curve: Downward sloping (Price ↑, Quantity Demanded ↓ and vice versa).
  • Reasons: Substitution effect, income effect, law of diminishing marginal utility.
• Supply Curve: Upward sloping (Price ↑, Quantity Supplied ↑ and vice versa).
• Equilibrium: Intersection of demand and supply curves (determines market price and quantity).
• Shifts in Curves: Demand ↑ or ↓; Supply ↑ or ↓.
• Double Shifts: Both curves shift, leading to one variable being indeterminate.
• Substitutes and Complements
  • Substitutes: Can be used in place of each other.
  • Complements: Used together.
• Normal and Inferior Goods
  • Normal: Income ↑, Demand ↑.
  • Inferior: Income ↑, Demand ↓.

Elasticity

• Elasticity of Demand: How quantity demanded responds to price changes.
  • Elastic: Quantity responds significantly to price changes.
  • Inelastic: Quantity responds minimally to price changes.
• Elasticity Coefficient: >1 (elastic), <1 (inelastic).
• Cross Price Elasticity: Effect of price change in one good on the demand of another.

  • 0: Substitutes.

  • <0: Complements.
• Income Elasticity: Effect of income change on demand.
  • Positive: Normal goods.
  • Negative: Inferior goods.
• Total Revenue Test: Determines if demand is elastic or inelastic based on price and total revenue changes.

Market Interventions

• Consumer and Producer Surplus: Difference between willing price and actual price.
• Price Ceilings and Floors:
  • Ceiling: Below equilibrium (causes shortage).
  • Floor: Above equilibrium (causes surplus).
• International Trade: World price, tariffs, and their impacts on surplus and deadweight loss.
• Taxes: Supply shifts, tax incidence (who bears the tax).
• Consumer Choice Theory: Maximizing satisfaction with a given budget.

Costs and Production

Cost Structures and Theories

• Short-run Costs:
  • Fixed Costs: Do not vary with production.
  • Variable Costs: Vary with production.
  • Total Costs: Fixed + Variable.
  • Marginal Cost: Cost of producing one more unit.
  • Average Costs: Per unit costs (ATC, AVC, AFC).
• Long-run Costs:
  • Economies of Scale: Cost per unit decreases with increase in production.
  • Constant Returns to Scale: Cost per unit remains constant.
  • Diseconomies of Scale: Cost per unit increases with increase in production.
• Theory of the Firm: Cost curves with revenue curves (MR = MC).
  • Perfect Competition: Many firms, identical products, price takers, no barriers.
  • Monopoly: One firm, unique product, high barriers, price makers.
  • Monopolistic Competition: Many firms, differentiated products, some barriers.
  • Oligopoly: Few firms, high barriers, mutual interdependence.

Resource Markets

Labor Market

• Derived Demand: Demand for labor depends on the product's demand.
• Minimum Wage: Price floor in labor market causing surplus (unemployment).
• Marginal Revenue Product (MRP): Additional revenue from hiring one more worker.
• Marginal Resource Cost (MRC): Additional cost of hiring one more worker.
• Monopsony: Single buyer in a labor market, wage setters.
• Least-Cost Combination: Optimal combination of resources to minimize cost.

Market Failures and Government Role

Public Goods

• Characteristics:
  • Non-rivalry: One's consumption doesn't affect another's.
  • Non-excludability: Cannot exclude those who don't pay.
• Solution: Government provision.

Externalities

• Negative Externality: Additional costs on third parties.
  • Solution: Taxes to reduce production.
• Positive Externality: Additional benefits to third parties.
  • Solution: Subsidies to increase production.
• Deadweight Loss: Inefficiency caused by externalities.

Income Inequality

• Lorenz Curve: Depicts income distribution.
• Gini Coefficient: Measures income inequality.

Types of Taxes

• Progressive Tax: Higher percent for higher income.
• Regressive Tax: Higher percent for lower income.
• Proportional Tax: Same percent for all income levels.

Conclusion

• Best of luck for the AP exam or final.
• Emphasis on practice and understanding key concepts.