Transcript for:
AP Microeconomics Review Lecture

hey how you doing econ students this is Jacob Clifford welcome to ACDC econ now in this summary video I'm going to go over everything you need to know for an AP or college introductory microeconomics class I'm going to go super fast but keep in mind this is not designed to retach you all the concepts it's designed to help you get ready right before you walk into the big AP test your big final also it's a great way to review what you know and don't know by watching the entire class over again you can spot the things that you have to go back and study and if you've been watching my videos you know I sell something called the ultimate review pack it has a bunch of practice questions and access to Hidden videos that help you learn economics these summary videos they cover everything in Greater detail than this video I'm doing right now now I was going to make this video available only of people who buy the packet but then I thought you know I can trust people man if you like my videos if these videos are helping you learn economics please go get the packet I'm going to make this video available to everyone but if you like my stuff please support my channel and help me continue to make great Ecom videos okay let's start it up now whether or not you're enrolled in a microeconomics class or a macroeconomics class it all starts the same for a basic introductory econ course it starts with the idea of scarcity scarcity idea is we have unlimited wants and limited resources also you going to learn the idea of opportunity costs that's the idea that everything has a cost right it doesn't matter what you're producing you got to give up something to produce it any decision you make has a cost now those Concepts come together with the production possibili is curve it's the first graph you learn in economics it shows the different combinations of producing two different Goods using all of your resources so any point on the curve is efficient like you're using all of your resources to the fullest any point inside the curve is inefficient any point out here outside the curve is impossible given your current resources and there's two different shapes you have to remember if it's a straight line production possibilities curve that means there's constant opportunity cost which means the resources to produce the different products are very similar so similar resources if it's a straight line if it's a boat outline concave to the origin that means the resources are not very similar so when you produce more of one you have to give more and more of the other one that's called The Law of increasing opportunity cost now this curve can shift if you have more resources like land labor and capital or less resources or better technology that can shift the curve another thing that shifts the curve is trade if another country trades with another country that can shift out their production possibly curve but it shows how much they can consume not actually produce so it doesn't actually change how much you can make but you can uh consume beyond your production possibly as curve and that brings us to the hardest part of this unit the idea of comparative advantage comparative advantage is the idea that country should specialize in the product where they have a lower opportunity cost so if you're producing one thing and I'm producing something else if I can produce a lower opportunity cost then you I should produce this you should produce other thing and then we should trade now there's two different things you got to remember absolute advantage and comparative advantage absolute Advantage is a joke it's easy you just figure out who produces more that means they have an absolute Advantage comparative advantage requires you to do some calculations or the quick and dirty if you saw my unit summary video and it tells you who should specialize in what now another thing you have to learn is the have terms of trade which means how many units of one product should they trade for the other product that would benefit both countries that's the idea of terms of trade in this unit you also get a basic overview of different economics systems like the free market system capitalism and the idea of a command economy and a mixed economy we're going to focus on capitalism in this class and so you learn the circular flow model the circular flow model shows you that there's businesses and individuals and the government and how they interact with each other just remember businesses both sell and buy two different things they sell products and they buy resources so there's a product market and there's a resource market and individuals you and me we buy products and we sell our resources and the government does some stuff as well another thing you're going to learn here is some vocab like transfer payments this is when the government pays individuals like welfare but it's not to buy anything it's just to provide some public service and you also learn the idea of subsidies when the government provides businesses money to produce more and also you're going to talk about the idea of factor payments so individuals sell the resources and businesses pay the factor payments to those individuals overall unit one is quick and easy to learn I give it about a three on the difficulty level out of 10 it's a fast unit makes you get it makes you get compared Advantage now unit 2 sets a foundation for everything you're going to be doing later on you start with demand and Supply remember demand is a downward sloping curve that shows you the law of demand when price goes up people buy less of stuff right when price goes down people buy more that's the idea of price and quantity demanded understand the idea that this curve is downward sloping for three reasons substitution effect income effect and the law diminishing margin utility there's also a law of supply when the price goes up people produce more price goes down people produce less right price goes up quantity Supply goes up price goes down quantity Supply goes down now together they form equilibrium please note if price goes up there is no shift price does not shift the curve it just moves along the curve creates either shortage when the price is low or a surplus when the price is higher you should also understand when there's actual individual shifts so there's only four things that can happen demand can go up demand can go down Supply can go up or Supply can go down and you just watch the graph draw the graph tells you exactly what happens to the price and quantity every single time now there's a double shift when two curves shift at the same time there's a double shift rule when two curves shift remember something is going to be indeterminant right you can't tell what's going to happen either price or quantity the trick here is draw the graph draw the shift that occurs and that's going to tell you where you end up whichever one looks the same right means that's indeterminate because you can't tell price will go up or down another trick really quick is you can actually separate it out so if demand goes up and Supply goes up you can actually separate those two things out put those results together and that tells you which thing is indeterminate price or quantity the next thing you're talk about is the idea of substitutes and compliments remember substitutes are two products you buy in place of each other compens are two things you buy together the price of one affects the demand for the other there's also normal and inferior normal goods are when the income goes up people buy more of it inferior Goods when income goes up people buy less of it the hardest part probably in this entire unit is the idea of elasticity elasticity shows how quantity changes when there's a change in price elastic means when price goes up a little bit people buy a whole lot less so quantity is very sensitive to a change in price and when the price goes down people buy a whole lot more sensitive to change in price in elastic looks like this this is the idea when price goes up people don't buy that much less when price goes down people buy just a little bit more so in elastic demand means quantity is insensitive to a change in price in this unit you also learn about the elasticity of demand coefficient which sounds hard but it's not hard it's just the percent change in quantity divided by the percent change in price this number tells you how elastic the demand is if it gives you the absolute value is a number greater than one that means it's elastic demand and if it's less than one that makes it an inelastic demand also you should understand the idea of cross price elasticity which is the same kind of equation but it's a percent change in quantity of one product relative to the percent change in price of a completely different product and it tells you if they're compliments or substitutes a positive number means they're substitutes a negative number means they complement there's also the income elasticity coefficient which is the same idea except it's percent change in quantity divided by the percent change income a positive number means a normal good a negative number means an inferior good now when you talk about elasticity there there's also something called the total revenue test this only applies to demand don't worry about with the supply it doesn't work with Supply the idea is if price goes up and total revenue goes up that means the demand must be inelastic if price goes down total revenue goes down then it must be in elastic now if price goes up and the total revenue goes down that means it's elastic and it has to do with the size of this box here so side by side you can tell over here this is in elastic demand over here it's elastic demand when the price Falls in elastic demand total revenue gets smaller that box gets smaller over here when price Falls total revenue gets bigger that must be El elastic demand total revenue test back to supply and demand make sure you can spot consumer and producer Surplus consumer surplus is right here producer Surplus is right there consumer surplus is the difference between what you're willing to pay and what you did pay and producer Surplus is the difference between the price and what somebody's want to sell it for competitive efficient market maximizes consumer and producer Surplus so there's no thing called Dead weight loss now let's talk about ceilings and Floors when the government comes in and sets prices when it's not at equilibrium that's the idea of price price controls a ceiling looks like this remember a ceiling always goes below equilibrium if it's binding if the question says the ceiling's above equilibrium just remember nothing's going to change price in quantity they don't change a floor looks like this right there it is a floor always goes above equilibrium so there's a price floor you should also be able to spot consumer and producer Surplus on each one of them consumer surplus and produc surplus deadweight loss look like this for a ceiling on a floor right that's the idea dead weight loss is the idea of lost consumer improved Surplus or we're not being efficient in the market a competitive market efficient no dead weight loss ceilings floors monopolies other Concepts you learn later on create this idea of dead weight loss another concept you might see that looks like this but it's different is the idea of international trade if we can buy other products at a cheaper world price that means the price will fall and that means producer Surplus will get smaller but consumer surplus will get bigger consumers willing to pay did pay can buy more we're going to import the amount of shortage that would normally exist that doesn't exist anymore you might see a question about a tariff if this world price goes up because the government says Ah we don't like that you know low price let's put a tariff on it that creates dead weight loss like this and there's a tariff Revenue box right there in the middle next up is the idea of taxes got a supply curve shifting to the left this is a per unit tax you got to be a to spot the box of tax revenue note the vertical distance between the two Supply curves is the amount of tax per unit the Box on the top tells you how much consumers pay of the tax box on the bottom tells how much producers pay the tax you can also find the total expenditures spent on whatever product this is and how much of that that producers get to keep this is the net revenue that producers actually get to keep also should be spot what happens when the elasticity changes to this graph and who ends up paying the taxes so right here shows you when the demand is different shapes and different elasticities who ends up paying for the tax remember when the demand is perfectly inelastic consumers pay all the tax right the more elastic it gets the more that producers pay of the tax that's a lot of stuff but there's still one more thing you have to learn it's a little different it's the idea of consumer choice this is the idea that you have two different products and you have different additional satisfactions for each one and you got to figure out what you actually want to buy keeping in mind that they're two different prices so you have to actually use an equation here it's the margin utility per dollar of one of them till it equals the margin utility per dollar of the other one and another words you figure out how much additional satisfaction you're getting divided by the price of one of them and the additional satisfaction you're getting from the other one divided by the price of the other one and that puts them in like terms and you just keep buying the one that gives you the most additional satisfaction divided by the price right the test might give you a question like this where it asks you okay what should they buy if they only had $30 and there's a special combination combination that maximizes the total utility you use this rule unit 2 is super important it's got a lot of stuff but it's not like hard stuff so I give this five out of 10 difficulty level for unit 2 but make sure you really get it because you're going to add on to the stuff later on now unit 3 is really the meat and potatoes of microeconomics this is where you talk about cost curves you start doing some calculations you start putting together the theory of the firm it gets hard but it starts off easy you start off by learning about the idea of inputs and outputs and as you hire more workers uh this is the total product you can calculate the marginal product which shows you the additional output that these producers produce so this shows you the relationship between inputs and outputs and you find out the law of diminishing marginal returns this means as you hire more workers and there's fixed resources you're going to get less and less additional output there's three stages of returns this is happened because of specialization this is happening of fixed resources and this happening because workers are stumbling over each other in each other's way you take that concept and you catapult now into cost we talk about the three types of costs there's fixed cost variable cost and total cost variable plus fix equal total that also gives us the per unit cost curves like average total cost average variable cost average fixed cost marginal cost make sure you calculate them and make sure you understand what they look like on a graph graph looks like this at any given quantity all you can do is go straight up and that tells you the cost per unit of that unit you can also Al convert those per unit cost to total cost just multiply the know average total cost of producing a certain number of units times the quantity that gives you a box that box is the total cost you can do the same thing for the variable cost and for the fixed cost now the shape of these curves isn't just random they look like this for a reason marginal cost goes down and up because as you hire more workers they specialize so the additional cost those units are going to fall but as you hire more workers they produce less and less additional stuff and so the cost of those additional units are going to start going up so marginal cost goes down and then it goes right back up again also you should recognize the idea that ATC hits marginal cost at atc's minimum when marginal is below the ATC it pulls it down when marginal is above the ATC it pulls it right back up again now it's important to keep in mind that the cost curves I'm talking about these are short run cost curves which is different than the long run the long run is the idea that all resources are variable the short run there's some resource that's fixed in the long run all resources are variable so the law of diminishing margin returns does need apply instead we have a different graph and a different concept it's right here as you're producing more you can use mass production techniques mass production means your average cost the long run average total cost will fall that's the idea of economies of scale at some point your costs don't fall in lower you can't use any more mass production techniques and so it levels off that's called constant returns of scale and eventually as you're producing so much stuff your long run costs go back up again your average costs go back up and that's called disarms the scale again that's the idea of the long run costs long run costs are these short run costs look like those now in this unit you're going to be introduced the idea of the theory of the firm which shows you these cost curves except now with some Revenue curves on top you start off with perfect competition the idea that there are many small firms thousands of firms they all have the same exact products they have low barriers so other firms can enter really easy or exit and the most important one they are price takers that means they got to take the price that's set by the market so that gives you the graph the graph we already learned back in unit 2 supply and demand there it is an individual firm looks like this it starts off the horizontal demand curve that's equal to the marginal revenue because if they want to sell another unit they don't have to change the price the price is set so horizontal demand curve and which is the marginal revenue curve which is Mr darp if you've seen that before then you take your cost curves bam throw your cost curves on there now you can spot if there's profit or a long run or making a loss these Concepts you have to be able to draw as well probably for a free response make sure you recognize this is the idea of profit that is the idea of a loss and that is the idea of the long run this is also when you're introduced the most important Concept in all of my microeconomics you produce where Mr equals MC you get a tattoo on your arm produce Mr equals MC that tells you exactly how much to produce whether you're Monopoly monop competition perfect competition you always produce where Mr equals MC because if you produce or the marginal cost is greater than the marginal revenue then you're not maximizing profit if you produce where the marginal cost is less than marginal revenue again you're not maximizing profit you can still earn more profit so produce the same spot everywhere every time Mr equals MC don't forget it another skill you need to be able to do is actually do the calculations of average total cost average fixed cost do those things and then figure out how many units you should produce so calculate the marginal cost and figure out they gave you the price how many un they should produce and how much profit you're actually making so you should be able to use the chart to maximize Profit just as much as using a graph now let's go back to that loss notice the ATC is above the price which makes sense if the price is down here and the average total cost is higher that means you're making a loss per unit now if your loss gets big enough you should shut down means you tell your workers to go home and don't produce anything at all because you rather have your fixed cost be your loss as to a bigger cost bigger than your fixed cost the rule is this if the price Falls below AVC you should shut down it's called the shut down rule one more time the Only Rule that trumps The Profit maximizing rule is the shutdown rule so what that means is that marginal cost is actually a supply curve the marginal cost upward sloping curve is a supply curve you've been drawing ever since back in unit 2 also you should know not all of it not all of that supply curve own the portion that's above the ABC cuz if the price Falls below ABC you shut down you don't produce anything at all now let's go back to the long run graph really quickly you remember this this is the idea of long run equilibrium total revenue equals total cost that means they're making no profit remember there's two types of profit economic profit and accounting profit in this case they're making no economic profit they're not cover they're not making money up and above their opportunity cost their total revenue equals their total cost including their explicit costs and implicit cost their opportunity costs in other words this is not a bad thing this means they're breaking even they can't make more money doing something else and they're not losing any money this is the idea of a normal profit but they are making positive accounting profit now the question is how does it look like this well take a look in the short run here's we're going to do short run to Long Run they're making profit what happens well firms because there's low barriers jump in Supply shifts to the right lowering the price back down boom long run you can go the same way with a loss so here's the loss firms going to leave when they leave shift in the supply curve to the left price goes back up or it goes back to uh new long run bam long run now the last thing in this unit is the idea of efficiency remember there's two different types productive and allocative perfect competition in the long run has both they're producing at the productively efficient quantity which means they're producing the lowest ATC their cost are the lowest they can be and they're also allocatively efficient or socially optimal because they're producing where the marginal cost hits the demand in other words people are willing to pay or the price people are willing to pay exactly what the marginal cost equals uh that tells you the society actually wants those units produce right if I'm want to pay $10 and it cost you $10 to produce it you produce the right amount if I'm want to pay $10 and it cost you $20 to prod it then you obviously produce the wrong quantity again that's the idea of efficiency remember efficiency has more to do with Society than the firm so a monopoly is not efficient not because they're not making profit and doing well for themselves but they're not efficient with society's resources unit three by far is the hardest unit it's when you're introduced to all these cost curves you got to practice make sure you get it I give this a nine out of 10 difficulty level spend your time practice this unit now here we go in unit four remember there's four Market structures perfect competition and three others in this unit we're going to going to learn the three others we've got monopolies oligopolies monopol competition so let's jump into these things first thing Monopoly obviously one firm they've got a unique product and uh there's High barriers and the market is the firm which makes the graph a whole lot easier there's not two side-by-side graphs there's one graph we've got a downward opening demand and a marginal revenue that's less than that for all imperfect competition monopolies monopol competition the reason why is if they want to sell another unit they got to lower the price they're not price takers they're price makers you should also recognize the elastic and the inelastic ranges of this demand curve over on this side that's the elastic range because when the price is falling total revenue is going up and when the price is going down on this side total revenue is going down that's the idea of the total revenue test now we take the cost curves that we've already learned put them on the Monopoly you identify the profit maximizing quantity Mr equal MC charge a price up to demand and now you can spot the profit the total revenue and the total cost you should also be able to draw this using a loss now that's a monopoly there's also a natural monopoly the idea that there's smarter to have just one firm producing it because at the quantity soci optimal we've got the average total cost is still falling that means they can produce at the lowest possible cost now that's the idea of Regulation the government can come in and regulate this right here is unregulated that's if the firm is left to its own device it will choose to produce where marles MC maximize profit right here is the idea of socially optimal where there be no deadweight loss and right here's something called Fair return that's the idea that they're making no economic profit they're breaking even right there where the price hits the ATC you should also be able to recognize consumer surplus for the Monopoly and also the dead weight loss now here's a trick really quick dead weight loss will always point to socially optimal remember socially optimal is well marginal cost hits the demand or hits the price so right there is what we want produce and a Monopoly underproduce Monopoly charges a higher price and produces less output so right there is the amount Society actually wants the dead weight loss will always point to it like that and it shows you what we should do we should be producing more output Society wants more now the same concept of of pointing to social optimal applies to ceilings and Floors and laters will find out with positive and negative externalities you might also see another type of Monopoly this is a price discriminating Monopoly this means they're charging multiple prices not just one price the marginal revenue actually becomes the demand curve so they're produce where Mr equal MC but they're going to charge multiple different prices that means the profit gets a whole lot bigger consumer surplus disappears and deadweight loss disappears they're producing actually the socially optimal quantity then you start learning about oligopolies the idea that there's many small firms who've got a really high barriers and they have strategic pricing they got to worry about the pricing of the other guy you can see we've got a game theory Matrix right here you should be able to spot dominant strategy for each one of the two different firms and identify something called Nash equilibrium I'm not going to do the details now but I got a ton of videos that show you actually how to do that skill also understand the idea of monopolistic competition this is the idea that it's like a monopoly because they're a price maker but it's like perfect competition because firms can enter right so what you have is the same graph as before Monopoly graph in this case making profit but it doesn't stay there right right because firms can enter so in the long run firms will enter when they enter that means the demand's going to go down demand's going to fall this monopolis competitive firm because now they have to share more customers with the new firms that jumped in so now we're in the long run that's a graph to do that's monopolis competition and long run equilibrium unit four is a bear there's the Monopoly graph a lot of different concepts you have to learn but since you already did perfect competition it should help you out in fact you should actually learn more about perfect competition when you do monopolies because it kind of puts Concepts together in your brain I give an eight out of 10 difficulty okay now we're talking about the resource Market unit five it talks about supply and demand now for labor remember just like we mentioned before in the circular flow model businesses sell products in the product Market but they also hire resources in the resource market so now the demand is the demand by firms for workers and Supply is by you and me so me and you are supplying individuals are supplying and businesses are demanding the first concept you have to know is the idea of derive demand the demand for labor depends on the product that that labor produces so if the demand goes up for pizza then the demand's going to go up for pizza delivery drivers that's the idea of derived demand you should also be able to recognize shifts in this curve and the idea of minimum wage minimum wage is a binding floor and so the price goes up in this case the wage goes up the Quan demand Falls the quanity supply increases and we have unemployment of resources also recognize the idea of MRP and MRC the first thing you have to be able to do is do the chart right here you have the number of workers you have the total they produce you learn this back in unit 3 but then you have to calculate the additional Revenue these workers generate you do that by doing the marginal product then you calculate the marginal revenue product the additional Revenue they generate what you do is you multiply the product the additional output the marginal product times the price and then you compare that to the marginal resource cost which is the cost of highing number worker now in a perfect competitive uh resource Market each worker costs the same and that tells you that you should hire a certain number of workers now that concept also applies to a graph you take that chart put on a graph you get this side-by-side graphs we've got that market graph from before horizontal supply curve which equals the marginal resource cost and a downward sloping marginal revenue product because each worker is worth less and less Revenue to your company you hire where MRP hits MRC just like before instead of producing now though we're hiring it's important to see that a perfect competitive firm in the resource Market is just the flip version of a perfect competitive firm in the product Market we have a horizontal curve except now at Supply and a downward sloping curve as opposed to an upward sloping curve from before so if you can draw one just turn around and flip it and draw the other one now that same concept applies to something called A monopsony a monopsony is a monopoly for labor so instead of having a downward demand curve and a downward Mr that's below it we have an upward soping supply curve and an MRC that's above it the reason why is they can't wage discriminate when they hire another worker they're going to charge that worker the wage and the workers they were paying less the higher wage so the MRC is actually higher they're going to hire where MRP hits MRC always except they're going to pay pay a wage below uh the down to the supply curve what people are actually willing to work for monopsony graph now the last Concept in this unit is the idea the least cost rule this is like margin utility except now we're talking about marginal product you have two different resources labor and machines and you're trying to figure out what's the right combination of hiring and the idea is you have to calculate the additional output that each one of these generates divided by the price this puts them again in like terms so I want to know what's the additional output I get from another unit of Labor and what's the price of that labor what's the additional output from another machine or another Capital divided by the price of that machine if they're equal perfect I'm got the least possible cost if one's higher I should keep doing that one right and that number is going to fall because it's diminishing marginal returns and right that's going to fall if this one's higher than I do that one instead and this is called the least cost rule that is the equation now unit five is actually pretty short and it's actually kind of easy but the problem is is different than all the other units we are looking at supply and demand but we've never really seen a horizontal supply curve very often so I give this one a six out of 10 difficulty only because it's the one that students haven't often they often forget right they often forget there's really very few graphs here and just one major skill figure out how many workers you can hire okay the last unit unit six we talk about market failures market failures the idea the free market is awesome it's great but sometimes it fails it ends up producing the wrong stuff the Invisible Hand of the free market ends up getting the wrong quantity and the socially optimal quantity is different than what uh the free market it's actually providing the first one is the idea of public goods public goods have two characteristics number one shared consumption or what's called non-rivalry when I use it you can use it we can all use it your consumption of it doesn't destroy it for me and most importantly this idea of non-exclusion you cannot exclude people from enjoying it uh if they didn't pay their taxes so non-exclusion shared consumption mean that it's a true public good obviously the free Market's not going to provide it if they can't get people to buy and pay for it if you know you can't exclude people from enjoying the benefits free market can't make it cuz they can't make profit so the government's going to step it in said the next thing you're going to learn is the idea of externalities externalities is when there's additional cost or benefits on some of the person so the free market assumes that the people who buy and sell things to each other are paying all the costs and receiving all the benefits but what if somebody else pays those costs or receives those benefits well that gives you the idea of negative externalities and positive externalities a negative externality is when there's additional cost on another person notice we have two cost curves one's the marginal private cost the other one's the marginal social cost and that tells you the social costs are above the private cost the firm's not recognizing these additional costs you've got a qualtity quantity free market and right here's the quantity socially optimal the free Market's messing it up so where is dead weight loss well it's right there notice it's pointing to socially optimal great positive externality is the idea there's additional benefits so not two cost curves but two benefit curves we've got a demand curve down here which is the marginal private benefit we also have a marginal social benefit that's right there and that tells you that Society wants more of this this but the free market is not recognizing those additional benefits to other people so again we've got a quantity free market quantity soci optimal free Market's messing it up and the benefits are spilling over to some other person the deadweight loss is right here to solve the problem you can do a perun subsidy to either consumers or producers to produce more by the way for a negative externality you want to do a perun tax to get them to produce less the last thing you learn is the idea about the Loren curve and the idea of income inequality it's a graph looks like this you've got the percent of families percent of income and this diagonal line right there tells you perfect equality the actual curvy curve line right there shows actual distribution of income the bigger the ba banana I tell my students the banana graph the bigger the banana the more income inequality you can also learn about the genie coefficient and actually calculate the area of a relative to the area of A and B combined the last thing you learn here is the idea of types of taxes there's three different types Progressive regressive RVE proportional now $2 tax on consumers $2 tax on all consumers is actually a regressive tax because $2 is a larger percent income for poor people so even even though everyone's paying the same dollar amount they're paying different percents of their income so a progressive tax means uh rich people pay a higher percent of their income like a income tax in the United States uh proportional means they pay the same percent of income like everyone pays 10% of their income and regressive tax is the idea that poor people pay a higher percent of income so a $2 tax although it seems Progressive it's not it's regressive because poor people pay a higher percent of their income when they pay just $2 unit six is actually pretty easy because it's just the application of supply and demand which you learned earlier it's got a few definitions uh there's not that much to do calculation wise so I give this a four out of 10 difficulty level to finish off the class hey thank you so much for watching this video I wish you all the best of luck on the AP test or on your big final exam hey you're going to do awesome okay thanks for watching till next time