Hey, how you doing, econ students? This is Jacob Clifford. Welcome to ACDC Econ. Now, in this summary video, I'm gonna go over everything you need to know for an AP. or college introductory microeconomics class.
I'm gonna go super fast, but keep in mind this is not designed to reteach you all the concepts. It's designed to help you get ready right before you walk into the big AP test or 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 gonna make this video available only to people who buy the packet but then I thought you know I can trust people man if you like my videos if these videos help you learn economics please go get the packet I'm gonna make this video available to everyone but if you like my stuff please support my channel and help me continue to make great econ 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 ideas we have unlimited wants and limited resources Also, you're going to learn the idea of opportunity cost. That's the idea that everything has a cost, right? It doesn't matter what you're producing.
You've got to give up something to produce it, or any decision you make has a cost. Now, those concepts come together with the production possibilities 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. and a 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 possibly is curved, 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 up 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 the production possibilities 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 consume beyond your production possibilities curve.
And that brings us to the hardest part of this unit, the idea of comparative advantage. Comparative advantage is the idea that countries 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 than you, I should produce this, you should produce another thing, and then we should trade.
Now, there's two different things you've 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 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 idea of 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 economic systems, like the free market system, capitalism, and the idea of a command economy and a mixed economy.
We're gonna 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 gonna 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 their resources and businesses pay the factor payments to those individuals. Overall, Unit 1 is quick and easy to learn.
I give it about a 3 on the difficulty level out of 10. It's a fast unit, makes you get it, makes you get comparative advantage. Now, Unit 2 sets the 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. 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 of 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 a 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's gonna be indeterminate, right? You can't tell what's gonna happen, either price or quantity. The trick here is draw the graph, draw the shift that occurs, and that's gonna tell you where you end up. Whichever one looks the same, Right?
Means that's indeterminate because you can't tell if 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 we're talking about is the idea of substitutes and complements. Remember, substitutes are two products you buy in place of each other.
Components 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 inelastic 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 inelastic man 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 the 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 complements or substitutes. A positive number means they're substitutes. A negative number means they're complements. There's also the income elasticity coefficient, which is the same idea except it's percent change in quantity divided by the percent change in income. A positive number means a normal good.
A negative number means an inferior good. Now, when you talk about elasticity, there's also something called the total revenue test. This only applies to demand.
Don't worry about what's at 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 inelastic. 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 should tell over here, this is inelastic demand.
Over here, it's elastic demand. If the price falls... Inelastic demand, total revenue gets smaller.
That box gets smaller. Over here when price falls, total revenue gets bigger. That must be 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 someone's willing to sell it for. Competitive efficient market maximizes consumer and producer surplus, so there's no thing called deadweight 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 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 and 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 producer surplus, deadweight loss look like this.
for a ceiling and a floor, right? That's the idea. Deadweight loss is the idea of lost consumer and produced surplus, or we're not being efficient in the market.
A competitive market, efficient, no deadweight loss, ceilings, floors, monopolies, other concepts you learn later on create this idea of deadweight 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.
And we're gonna 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, eh, we don't like that, you know, low price, let's put a tariff on it. That creates deadweight 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're gonna be able 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.
The box in 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 producers get to keep. This is the net revenue that producers actually get to keep.
Also, you should be able to 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. Whoo, 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 gotta figure out what you actually wanna 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. In other 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. 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 or a combination that maximizes the total utility. You use this rule. Unit two 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 two, but make sure you really get it because you're gonna add on to this stuff later on. Now, unit three 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, 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 has happened because of specialization. This is happening because of fixed resources, and this is 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 cost.
There's fixed cost, variable cost, and total cost. Variable plus fixed 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 can calculate them, and make sure you understand what they look like on a graph. The graph looks like this. At any given quantity, all you can do is go straight up, and that tells you the cost per unit.
that unit you can also convert those per unit cost to total cost just multiply the 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 and 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 gonna 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 only 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 doesn't 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 lower. You can't use any more mass production techniques, and so it levels off. That's called constant returns of scale. 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 disciplines of 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 to 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, 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 to the most important concept in all of 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 a monopoly, monopoly competition, perfect competition. You always produce where MR equals MC, because if you produce where 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 at 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 units 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.
It means you tell your workers to go home and don't produce anything at all because you'd rather have your fixed costs be your loss as opposed 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 shutdown 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 because 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. 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 making money up and above their opportunity cost. Their total revenue equals their total cost, including their explicit cost and implicit cost, their opportunity cost. In other words, this is not a bad thing. This means they're breaking even.
They can't make more money doing something else. 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, 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. It can go the same way with a loss. So here's the loss.
Firms are going to leave. When they leave, shift new supply curve to the left. Price goes back up or goes back to 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 costs 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. that tells you the society actually wants those units produced.
If I'm going to pay $10 and it costs you $10 to produce it, you produce the right amount. If I'm going to pay you $10 and it costs you $20 to produce 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've got to practice. Make sure you get it.
I give this a 9 out of 10 difficulty level. Spend your time. Practice this unit.
Now, here we go in Unit 4. Remember, there's four market structures, perfect competition and three others. In this unit, we're going to learn the three others. We've got monopolies, oligopolies, monopolies, competition.
So let's jump into these things. First thing, monopoly, obviously one firm. You've got a unique product, and 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 downless open demand and a marginal revenue that's less than that for all imperfect competition, monopolies, monopolist competition.
The reason why is if they want to sell another unit, they've 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 a monopoly.
You identify the profit maximizing quantity, MR equals MC, charge your 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 it's smarter to have just one firm producing it, because at the quantity sociocomal, we've got the average total cost is still falling. That means they can produce it 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 America's MC, maximize profit. Right here is the idea of socially optimal, where there'd 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 deadweight loss. Now here's a trick really quick.
Deadweight loss will always point to socially optimal. Remember, socially optimal is where marginal cost hits the demand or hits the price. So right there is where we want to produce and a monopoly under produce.
Monopoly charges a higher price and produces less output. So right there is the amount society actually wants. The debit 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 pointing to socially optimal applies to ceilings and floors, and later we'll 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 can produce where M equals MC, but they're gonna charge multiple different prices.
That means the profit gets a whole lot bigger, consumer surplus disappears, and debit loss disappears. They're producing actually the socially optimal quantity. Then you start learning about oligopolies, the idea that there's many small firms, they've got really high barriers, and they have strategic pricing.
They don't 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 gonna 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? 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 for this monopolist 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 the graph you need to do. That's monopolist competition in a 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 it an 8 out of 10 difficulty.
Okay, now we're talking about the resource market. Unit 5, 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 we have to know is the idea of derived 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 gonna 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 quantity of demand falls, the quantity of 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 product 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 hiring a number of workers. Now, in a perfect competitive... a 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 it 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 downsloping 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 perfectly competitive firm in the resource market is just the flip version of a perfectly competitive firm in the product market. We have a horizontal curve, except now it's supply, and a downward sloping curve as opposed to an upward sloping curve from before. So if we can draw one, just turn around and flip it and draw the other one. 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 sloping 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 that are 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 a wage 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 of the least cost rule. This is like marginal 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've got the least possible cost. If one's higher, I should keep doing that one, right? And that number is going to fall because initially marginal returns. And That's gonna fall.
If this one's higher, then 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 it's 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 are the idea that 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 the free market is 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 if they didn't pay their taxes so non-exclusion Shared consumption mean that it's a true public good Obviously the free markets not can 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 because I can't make profit So the government's gonna step it instead the next thing you learn is the idea of externalities Externalities when there's additional costs 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 costs 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 costs. The firm's not recognizing these additional costs.
You've got a quantity-to-quantity free market. And right here's the quantity socially optimal. The free market's messing it up. So where's deadweight 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, but the free market's not recognizing those additional benefits to other people.
So again, we've got a quantity free market, quantity socially optimal, free market's messing it up, and the benefits are spilling over to some other person. The debit loss is right here. To solve the problem, you can do a per unit subsidy to either consumers or producers to produce more.
By the way, for a negative externality, you want to do a per unit tax to get them to produce less. The last thing you're going to learn is the idea about the Lorenz curve and the idea of income inequality. It's a graph that 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 banana, I tell my students the banana graph, the bigger the banana, the more income inequality. You can also learn about the Gini 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, proportional. Now, $2 tax on consumers.
$2 tax on all consumers is actually a regressive tax. Because... $2 is a larger percent of income for poor people.
So even though everyone's paying the same dollar amount, they're paying different percents of their income. So a progressive tax means rich people pay a higher percent of their income, like an income tax in the United States. 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. 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 gonna do awesome, okay? Thanks for watching. Till next time!