Economics Review Lecture Notes

Introduction

• Review for AP or introductory college microeconomics.
• Targeted for pre-test preparation.
• Additional resources offered through "Ultimate Review Packet" for practice questions and more detailed videos.

Basic Economic Concepts

Scarcity

• Unlimited wants vs. limited resources.
• Opportunity Costs: Everything has a cost; decision-making involves trade-offs.

Production Possibilities Curve (PPC)

• Graph representing combinations of two goods produced with available resources.
• Efficient: Points on the curve.
• Inefficient: Points inside the curve.
• Impossible: Points outside the curve.
• Shapes:
  • Straight Line: Constant opportunity cost.
  • Bow-Outwards (Concave): Increasing opportunity cost.
• Shifts in PPC due to:
  • More resources or better technology.
  • Trade affecting consumption possibilities beyond PPC.

Comparative Advantage

• Comparative Advantage: Specialize in production with lower opportunity cost.
• Absolute Advantage: Producing more of a good, straightforward comparison.
• Terms of Trade: Beneficial exchange rates between goods for both countries.

Economic Systems

• Overview of free market (capitalism), command, and mixed economies.
• Circular Flow Model: Interaction among businesses, individuals, and government.
  • Product Market: Businesses sell products.
  • Resource Market: Individuals sell resources.

Vocab

• Transfer Payments: Government payments without exchange for goods/services (e.g., welfare).
• Subsidies: Government funds to businesses to increase production.
• Factor Payments: Payments to individuals for resources.

Demand and Supply

Demand

• Law of Demand: Price increase leads to demand decrease and vice versa.
• Reasons for Downward Slope: Substitution effect, income effect, diminishing marginal utility.

Supply

• Law of Supply: Price increase leads to supply increase and vice versa.

Equilibrium

• Price and quantity where demand and supply intersect.
• Price Changes: Lead to movement along the curve, not shifts.

Shifts in Curves

• Demand or supply increase/decrease.
• Double Shifts: Can lead to indeterminate changes in price or quantity.

Elasticity

• Price Elasticity of Demand: Sensitivity of quantity demanded to price changes.
  • Elastic (>1): High sensitivity.
  • Inelastic (<1): Low sensitivity.
• Cross Price Elasticity: Related to substitutes or complements.
• Income Elasticity: Related to normal or inferior goods.
• Total Revenue Test: Determines elasticity based on revenue changes.

Surplus & Deadweight Loss

• Consumer Surplus: Difference between willingness to pay and actual price.
• Producer Surplus: Difference between price received and willingness to sell.
• Deadweight Loss: Loss due to inefficiency or market interventions.

Price Controls

• Ceilings: Set below equilibrium, create shortages.
• Floors: Set above equilibrium, create surpluses.

Market Structures

Perfect Competition

• Many firms, identical products, price takers.
• Profit Maximization: Produce where MR = MC.
• Short run profits lead to long-run normal profits.
• Efficiency: Productive and allocative.

Monopoly

• Single firm, unique product, price maker.
• Natural Monopoly: Justified by economies of scale.
• Price Discrimination: Charging different prices, eliminates consumer surplus and deadweight loss.

Monopolistic Competition

• Many firms, differentiated products.
• Short-term profits, long-run equilibrium resembles perfect competition.

Oligopoly

• Few firms, strategic interactions.
• Game Theory: Nash equilibrium and dominant strategies.

Resource Markets

Labor Market

• Derived Demand: Demand for labor derived from demand for goods.
• Minimum Wage: Affects employment levels.

Calculations

• Marginal Revenue Product (MRP): Additional revenue from hiring an additional worker.
• Marginal Resource Cost (MRC): Cost of hiring another worker.

Monopsony

• Single buyer in a labor market.
• Hiring Rule: MRP = MRC, but pays less than competitive market.

Market Failures

Public Goods

• Characteristics: Non-rivalry and non-excludable.

Externalities

• Negative Externality: Additional costs not accounted for.
• Positive Externality: Additional benefits not accounted for.

Income Inequality

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

Tax Types

• Progressive: Higher income, higher tax rate.
• Regressive: Same amount, larger burden on low-income.
• Proportional: Same percentage regardless of income.

Conclusion

• Provides a comprehensive, high-level overview of introductory microeconomics.
• Emphasizes the importance of understanding key concepts for exams.