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AP Economics
Mr. Bernstein
Micro Graphs Review
May 2014
AP Economics
Mr. Bernstein
The Production Possibilities Curve
2
AP Economics
Mr. Bernstein
Economic Growth
• Concave due to “Law of increasing opportunity costs”
3
AP Economics
Mr. Bernstein
Circular Flow Diagram
4
AP Economics
Mr. Bernstein
Expanded Circular Flow Diagram
5
AP Economics
Mr. Bernstein
Demand Curves
• A Shift in Demand is different from movement along
the Demand Curve!!
6
AP Economics
Mr. Bernstein
Supply Curves
• A Shift in Supply is different from movement along
the Supply Curve!!
7
AP Economics
Mr. Bernstein
Equilibrium
• Price is the adjustment mechanism: falls when
there is a surplus, rises when there is a shortage
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AP Economics
Mr. Bernstein
Simultaneous Shifts of Supply and Demand Curves
• Example: Demand for Justin Beiber tickets decreases and Supply decreases
• Equilibrium Price is ambiguous but Quantity change decreases (awww…)
• Know all four possible combinations
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AP Economics
Mr. Bernstein
Elasticity along the Demand Curve
• Consumers are less price sensitive on inexpensive items
• TR begins to fall as prices rise and Elasticity grows
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AP Economics
Mr. Bernstein
Consumer Surplus and Producer Surplus
• CS is the difference between what a consumer is willing to pay for a good or service
and what they actually have to pay
• PS is the difference between what a producer must receive to sell a unit and the
actual price they receive
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AP Economics
Mr. Bernstein
Deadweight Loss Example: The Effect of Taxes
Dead Weight Loss
P
S1
S
CS
T
T
D
D
PS
D
Qt
Q
• Excise tax causes lower Q, efficiency loss
Q
12
AP Economics
Mr. Bernstein
Price Ceilings
• Price ceiling is below equilibrium, creates shortage
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AP Economics
Mr. Bernstein
Price Floor
• Price floor is above equilibrium; creates surplus
14
AP Economics
Mr. Bernstein
Quotas (Quantity Controls)
• Examples: limits, licenses; creates price “wedge”
15
AP Economics
Mr. Bernstein
Firm’s Cost Curves: Swoosh, Smirk and Smile
• The MC curve intersects the U-shaped AC and AVC
curves at their minimum points
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AP Economics
Mr. Bernstein
Perfectly Competitive Firm
$
• Produce at MR=MC
• Profit = MR – ATC
• In this case, zero
economic profit…
• This is long-run
equilibrium…
• Profit or loss if P > or < ATC
MC
ATC
MR D.AR.P!
Q*
Output
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AP Economics
Mr. Bernstein
The Short-Run Shut-Down Decision
• Shut down when P < AVC
$
MC
P=ATC
ATC
AVC
P=MR=d=AR
Shut-down
Price
Q*
Output
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AP Economics
Mr. Bernstein
Long Run Average Costs
• U-shaped LRATC is a series of U-shaped SRATCs – one
for each level of fixed costs
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AP Economics
Mr. Bernstein
Adjustment toward Long-Run Equil (Perf Comp)
20
AP Economics
Mr. Bernstein
Classic Monopoly Graph
• Q at MR=MC; lower Q and higher P than Perfect Competition;
long-run economic profit exists due to barriers to entry
21
AP Economics
Mr. Bernstein
Monopoly Reduces Societal Welfare
22
AP Economics
Mr. Bernstein
Price Regulation Restores Consumer Surplus
23
AP Economics
Mr. Bernstein
Monopolists will use Price Discrimination
• Without competition, they take advantage of differing elasticities
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AP Economics
Mr. Bernstein
Game Theory
• Each player competes
to maximize individual
payoffs and ignores the
effects of his/her action
on the payoffs received
by the rival
• But Oligopolies engage
in tacit collusion, tit for tat
25
AP Economics
Mr. Bernstein
Monopolistic Competition in the Long Run
• Adjusts to normal profit, as in Perfect Competition
• P*=ATC, tangent to ATC (not at minimum…)
26
AP Economics
Mr. Bernstein
Factor Market: Labor
• Value of W* = MRPL; (MC = W)
Wage
Market Labor
Supply
W*
Market Labor
Demand
Q
27
AP Economics
Mr. Bernstein
Imperfect Competition in the Labor Market
• Hire where
Wage
MPRL = MFCL
• Monopsony pays
W* < MRPL
Remember, whether
Perfect or Imperfect
Markets, firms hire
where MRPL = MFCL
MFCL
Labor Supply
W*
MRPL
E*
Quantity of Labor (workers)
28
AP Economics
Mr. Bernstein
Equilibrium in the Market for Land and Capital
• Supply curve for Land is very steep (inelastic)
29
AP Economics
Mr. Bernstein
Positive Externalities: MSB > MPB
• Market underproduces Price, MSB
vs. socially optimal outcome
• Deadweight loss
Popt
• Policy to eliminate:
Pmkt
Subsidy
Pcons
S
Subsidy
MPB
Qmkt
Qopt
MSB
Qty
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AP Economics
Mr. Bernstein
Negative Externalities: MSC > MPC
Price, MSC
• Market overproduces
vs. socially optimal outcome
• Deadweight loss
• Policy to eliminate:
Popt
Per unit tax
Pmkt
• Lump-sum tax does Pfirm
not affect MC so does not
Qopt
affect Q
MSC
MPC
Tax
D
Qmkt
Electricity
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