Hey Internet, this is Jacob Clifford. Now you're currently enrolled in a microeconomics class and it's time to get ready for your final or FAPE exam. I made this video to help you get all those graphs back in your head.
And if you already saw my video on macroeconomics, then you know that macro has about six... key graphs. But here in microeconomics, there's about 1200. There are so many more graphs to learn and master in microeconomics. But the good news is a lot of them use the same sort of concepts. So I'm going to cover them all in this video.
All right, that's That's enough for the intro, here we go. Let's jump into the graphs of microeconomics. The first graph that you learn in any economics class is the production possibilities curve or frontier.
It shows you can produce two different goods. Any point outside the curve is impossible. Any point inside the curve is inefficient.
And any point on the curve is efficient. Now the truth is you won't draw this graph very often in a microeconomics class, but it does introduce a general concept that you're gonna see a whole lot later. That idea about a efficiency and that there's two types of efficiency.
Yes, it is true that any point on the curve is efficient because we're using all of our resources to the fullest, but that doesn't tell us exactly what combination is best for society. So all these points are efficient, but if society wants fewer cars and more bikes, then that combination is the one that society actually wants. This introduces the idea of the socially optimal or allocatively efficient quantity, the amount that society actually wants produced.
Now put that in the back of your brain because you're going to see that concept of socially optimal. or allocatively efficient a lot in the other graphs of microeconomics. And speaking of other graphs, here it is.
This is the most important graph in all of micro supply and demand showing a competitive market. There it is, it shows equilibrium. You should also be able to spot disequilibrium with a shortage and a surplus and understand that the curves can shift and double shift. But basic supply and demand is something you learn in any economics class.
What makes micro different is the details inside this graph. For example, the idea of consumer. This is a difference between what people are willing to pay for a good and what they actually did pay.
And producer surplus, the difference between the price that the people pay and how much sellers are willing to sell it for. And together, consumer surplus and producer surplus give us total surplus. And when that changes, we can find out there's something wrong with this market. For example, let's say the government puts a price ceiling on this market, keeping the price low.
That causes the producer surplus to be smaller. Consumer surplus is here. And there's a new concept called deadweight loss. That's the idea that we're...
we're not producing the socially optimal or allocatively efficient quantity. That quantity at QE is amount the society actually wants. If we produce less than that, then we're not producing what society wants. We're not being allocatively efficient.
We have deadweight loss. And it's the same thing if the government had a binding price floor. If the price can't fall, consumer surplus would be here, producer surplus would be here.
And again, we have deadweight loss. The market is not producing the amount that society wants, which means it's not allocatively efficient. And you see that same concept when you put an excise tax on a market.
Supply shifts to the left, consumer surplus is here, producer surplus is here, and we have deadweight loss. And this box right here is the tax revenue that goes to the government. By the way, I know I'm covering this super quick, but remember, I have free videos on YouTube that cover all the details.
So if you're like, I don't know that graph, watch the video, it'll explain it. Point here is though, you see the same concepts. You see consumer surplus, producer surplus, and here, deadweight loss.
And we can take those concepts and show the result of international. Let's say that PE is the domestic price of whatever product this is. P1 is the price we can get it if we buy it from other countries. That's gonna change things up.
That means this is the consumer surplus and this is the producer surplus and there's no deadweight loss. And this explains why economists in general like international trade. It benefits consumers even though it's worse for domestic producers. But overall, there's more total surplus. Okay, cool.
Now everything I talked about with supply and demand is covered in in microeconomics unit two. And there's another concept you have to know called elasticity, but it's not really a graph. It's calculation stuff, but you gotta know it. Again, I have free videos on YouTube that explain the details.
And inside the ultimate review packet, I have a practice sheet that allow you to practice and do all those calculations. The link is in the description below. Okay, here we go.
Now we're jumping in to the graphs that you learn in unit three. There's a lot of them and they look totally different than anything you've seen in macroeconomics or any other economics class. This is pure. Micro.
It all starts off with the idea of diminishing marginal returns. As you hire more workers, the additional output from each additional worker is gonna eventually fall. And that creates a graph, it looks like this. The total product is the total amount produced.
And as you hire more workers, it increases at an increasing rate, then it increases at a decreasing rate, then eventually it starts to go down. Now, although this is an important concept, this is not likely one of the graphs you'll see on a free response. This just shows you an idea.
You might see it in multiple choice, but you never expected to actually draw this out. Instead, you're gonna be expected to Take those concepts and see how they're related to the cost curve. And again, I made videos with all the details, but there's basically four per unit cost curves that you need to know.
Marginal cost, average total cost, average variable cost, and the average fixed cost. The good news is the graphs will always look the same. Marginal cost always goes down, then goes back up.
The average total cost, because of math, has to go down, hit a minimum, and then go back up. The average variable cost is going to go down below the ATC, then go back and get closer and closer to the ATC, and then the average fixed cost is an asymptote, and it looks like this. Now, when you first learn these, your head was probably spinning, but then you soon realize that they're not equally all important.
The average fixed cost, you're never going to draw it. You're not going to see it on any graphs, so we'll get rid of that one. And the average variable cost you only need if you're trying to find the shutdown point. So really, there's only two cost curves that you absolutely have to know.
The marginal cost tells you how much to produce, and the average total cost tells you how much profit or loss you're making. But again, those are called the per... unit cost curves.
They show you how much each unit costs. You can actually take this and find the total cost curves. They look like this.
But keep in mind, this is not a very important graph. You're not expected to be able to draw this. Just understand the idea because it shows you some key concepts. For example, the idea of fixed costs.
For every single quantity, we still pay the same exact... total fixed cost. It's always the same.
The variable cost looks like this, and the total cost is the fixed cost plus the variable cost. The point here is there's a total cost curves graph and the per unit cost curves graph, but this is the one that you need to be able to use because that's the one you're going to see in the rest of the unit. And to make things a little bit more complicated, these are all the short run costs, but there's also a graph showing the long run costs. In the long run, if all of our resources are variable, then we end up with a situation like this.
This shows all the short run curves. If we add them all together, we end up with a long run average total cost curve that goes down, flattens out, then goes back up. Again, it's not the most important graph. You're not gonna be expected to draw it, but understand the idea of economies of scale, constant returns to scale, and diseconomies of scale. Now it's at this point where students are most frustrated in a microeconomics class.
They learn the per unit cost curves, but they're like, okay, who cares? Why does this matter? I'm not really learning or doing anything with it until you finally learn the idea of perfect competition. Now in unit two, you learned about supply and demand in a competitive market, but here in unit three, we're adding the D.
details of a firm inside that market. The first thing you learn was the idea the price is set by the market. They are price takers, so we have a horizontal demand, which is equal to the marginal revenue curve. You also add in those per unit cost curves, marginal cost and an ATC, and now we're getting somewhere. This is a perfectly competitive firm in long run equilibrium.
And this is the graph where you learn the most important concept in all of microeconomics. You always produce where the MR equals the MC. That is the profit max. There's no reason to produce anywhere else because that's gonna bring in the most profit or minimize your losses. This firm is making no economic profit and they're both allocatively and productively efficient.
They're producing the amount society wants because they're producing where the price equals the marginal cost. And they're also producing the productively efficient quantity because they're producing at the lowest possible cost, the minimum ATC. The point is perfectly competitive firms in the long run are extremely efficient.
There's no deadweight loss. Now, up to this point, I've been saying, well, that graph's not really that important and that one's not important, but these graphs are super important. In fact, they're probably the most important. Your microeconomics teacher or professor is gonna expect you to be able to draw side-by-side graphs for a market and a perfect competitive firm in both the long run and showing the idea of profit and showing a loss. And you're gonna be expected to draw from long run to short run to long run.
For example, if we're in a long run equilibrium, then demand goes up. then the firm is making profit, then other firms enter, supply goes up, we go back to where we were before. Now, before we go too much further, it's a good idea for you to stop this video and actually draw these graphs to make sure that you actually know them. In fact, if you have my cheat sheet from the Ultimate Review Packet, I would suggest stopping right now and drawing as many graphs I covered so far to verify that you have them. Now, these side-by-side graphs that you use to draw perfect competition is what you learn in Unit 3, and you take those same concepts to draw monopolies.
monopolist competition and oligopolies in unit four this is the graph for a non-price discriminating monopoly you can see the difference here is it's not a horizontal demand curve it's a downward sloping demand curve with a downward sloping marginal revenue curve but the marginal cost and the average total cost are exactly the same shape. And the idea of finding the quantity, we produce where M equals MC, and you can find the box of profit by doing the same things that you did back in perfect competition. And another key difference, we're not looking at two side-by-side graphs because in a monopoly, the market is the firm.
So there's no going from short run to long run. It's all the same. We're looking at a monopoly making a profit. And you should also know the graph for a monopoly making a loss. Then you should also be able to spot consumer surplus and deadweight loss for monopoly.
Notice a monopoly is not allocatively efficient. It's not producing what society wants. It's holding back production to maximize profit.
And the good news is this monopoly graph is the same for monopolist competition in the short run. A monopoly making a profit is. the same as a monopolistically competitive firm making a profit in the short run. And a loss is a loss that's easy except for the long run.
A monopolistically competitive firm in the long run looks like this. There's the price. There's the quantity.
The ATC is is tangent to the demand curve, showing no economic profit in the long run. So for this unit, drawing a monopoly and drawing monopolist competition in the long run are the key graphs that you have to know. You're definitely gonna see them on a free response. And there's a couple other small details you might see.
For example, a natural monopoly looks like this. Now to the untrained eye, it looks exactly the same as a regular monopoly, but in this case, you can see where the marginal cost hits the demand curve, the socially optimal quantity, the average total cost is still falling. This means that this one firm can.
can produce whatever product this is at the lowest possible cost. It makes more sense for only one producer to produce it than having three or four smaller firms. It's one of those little details that you might need to know, but this one you definitely need to know.
It's a price discriminating monopoly. In this case, the monopoly is charging each consumer exactly how much they're willing to pay. So the demand curve equals the marginal revenue curve, and there's no consumer surplus.
All of it becomes profit. So for key graphs, you've gotta know monopoly, profit, and loss. monopolist competition, and definitely price discrimination.
And there's one more, but it's not really a graph. It's the idea of oligopolies and game theory. This is a payoff matrix, and it shows the results of decisions made by two different players. The point is, you gotta be able to find things like dominant strategy and Nash equilibrium. I'm not gonna cover it here, but it's definitely one of those things you gotta know.
here in unit four. Now in unit five, we're going back to supply and demand. Instead of looking at products, we're looking at labor. So we have wage and quantity of workers, and this can show the idea of a minimum wage.
It's the same idea as a price floor, except it's a wage floor. But that's just supply and demand over again. The real key graph you need to know is a perfectly competitive firm in the resource market. This is a firm hiring workers.
The graph looks like this. So in this case, the wage for the firm is set by the market. So that gives you a horizontal supply curve that's equal to the margin. marginal resource cost.
And if you calculate how much revenue each worker generates, you get the marginal revenue product, which is downward sloping. And that tells you exactly how many workers to hire, where MRP equals MRC. The good news about this graph is there's no ATC or box of profit. There's none of that stuff you have to draw. This is the graph, a perfect competitive firm in the labor market.
But what if there's an imperfect labor market? Well, that's a different graph called a monopsony. In this case, there's only one firm hiring.
So the supply of labor is upward sloping. There's an upward or sloping marginal resource cost, and we hire where the MRP equals the MRC. And you'll notice that the wage is below the equilibrium wage that would exist at perfect competition. In other words, these are firms that hire workers at a lower wage because the workers really aren't going anywhere, and they're the only firm hiring.
Think of it like a monopoly for labor. And hopefully that's something that you notice when you drew these graphs. If you take the monopoly graph we learned back in Unit 4, and you flip it, you see that shows you the same idea as the monopsony graph.
And the same idea is here for a per competitive firm. If you flip that graph, you end up with a per competitive firm in the resource market. Here is the product market, here is the resource market.
Here, product market, resource market. Yay, cool, all right. And now for the last unit, unit six, there's really only two key graphs you need to know, the idea of externalities.
The good news is just supply and demand over again. We've got supply and demand showing you the quantity that's produced in the free market, but this free market quantity is wrong. If this product creates a negative externality and there's additional costs on society, we end up with a marginal social cost, which is here.
The marginal social cost hits the marginal social benefit right there, that's the quantity socially- optimal, the amount society actually wants, which is less than what the free market's making. And the result is deadweight loss. These are units that should never have been produced. We're overproducing this because we're not factoring in these additional costs on society.
And it's the same idea with a positive externality. Right here, this is the quantity the free market's producing, but they're not factoring in all these additional benefits that society gets from this product. That means the socially optimal quantity should be here. And again, we have deadweight loss.
The free market... is underproducing something that society wants more of. But notice it's all just the same stuff over again. It's just showing this idea of allocative efficiency.
But for unit six, those are the key graphs that you absolutely need to know. There's one more called the Lorenz curve that you might see on a multiple choice, but it's definitely not something you're expected to draw. The good news is I covered that graph in detail in my Econ Movies end game video.
Now, I threw a lot of graphs at you, but keep in mind, they're not all equally as important. But remember, not only do you have to draw the graphs, but you have to do some- and calculations and some practice with them. So if you need more help, take a look at my ultimate review packet and take a look at the other videos I have here on YouTube. And if you like this video, make sure to like and subscribe. Thanks for watching, till next time.