1. The document covers various microeconomics concepts including price elasticity of demand, production costs, profit maximization, market structures, and resource markets. 2. Key graphs show the relationships between marginal revenue and marginal cost in determining profit-maximizing output for different market structures like perfect competition, monopoly, and oligopoly. 3. Labor market graphs illustrate the equilibrium wage rate and employment level under conditions of perfect competition and monopsony.

1. AP MICRO REVIEW

2.  Q % d  % P PRICE ELASTICITY OF DEMAND Commonly Expressed as… The percentage change in quantity P The percentage change in price P2 P1 Elasticity is .5 D Q Q1 Q2

3. PRICE ELASTICITY & TOTAL REVENUE Total revenue rises with price to a point... then declines P TR Unit Elastic Elastic Demand Inelastic Demand D Elastic Demand Inelastic Demand Q Quantity Demanded

4. MU of product B MU of product A Price of A Price of B 16 Utils 8 Utils = $1 $2 UTILITY MAXIMIZING COMBINATION Algebraic Restatement of the Utility Maximization Rule =

5. SHORT-RUN COSTS GRAPHICALLY MC Plotting Average and Marginal Costs ATC AVC Costs (dollars) AFC Quantity

6. ECONOMIC COSTS Economic Profit Accounting Profit Implicit costs (including a normal profit) Accounting costs (explicit costs only) Explicit Costs Profits to an Economist Profits to an Accountant T O T A L R E V E N U E Economic (opportunity) Costs

7. SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Total Product, TP Increasing Marginal Returns Quantity of Labor Average Product, AP, and Marginal Product, MP Average Product Marginal Product Quantity of Labor

8. SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Total Product, TP Diminishing Marginal Returns Quantity of Labor Average Product, AP, and Marginal Product, MP Average Product Marginal Product Quantity of Labor

9. SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Total Product, TP Negative Marginal Returns Quantity of Labor Average Product, AP, and Marginal Product, MP Average Product Marginal Product Quantity of Labor

10. ECONOMIES AND DISECONOMIES OF SCALE Diseconomies of scale Constant returns to scale Economies of scale Unit Costs long-run ATC Output

11. MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position $200 150 100 50 0 Economic Profit MC MR $131.00 ATC Cost and Revenue AVC $97.78 1 2 3 4 5 6 7 8 9 10

12. MR = MC Optimum Solution MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position $200 150 100 50 0 Economic Profit MC MR $131.00 ATC Cost and Revenue AVC $97.78 1 2 3 4 5 6 7 8 9 10

13. MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position $200 150 100 50 0 Economic Loss MC ATC Cost and Revenue AVC $91.67 MR $81.00 1 2 3 4 5 6 7 8 9 10

14. MARGINAL REVENUE-MARGINAL COST APPROACH Short-Run Shut Down Point $200 150 100 50 0 MC ATC Cost and Revenue AVC MR $71.00 Minimum AVC is the Shut-Down Point 1 2 3 4 5 6 7 8 9 10

15. PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC

16. MONOPOLY REVENUES & COSTS Inelastic Elastic $200 150 200 50 Inelastic Portion MR is Negative Dollars A Monopolist will always operate on the Elastic Portion of the Demand Curve MR D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $750 500 250 Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

17. OUTPUT AND PRICE DETERMINATION 200 175 150 125 100 75 50 25 Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 9 10 Profit Maximization Under Monopoly Remember the MR=MC Rule? Profit Per Unit MC $122 Profit ATC $94 D MR = MC MR

18. INEFFICIENCY OF PURE MONOPOLY An industry in pure competition sells where supply and demand are equal P S = MC At MR=MC A monopolist will sell less units at a higher price than in competition Pm Pc D MR Q Qc Qm

19. MONOPOLISTIC COMPETITION AND EFFICIENCY Price is Not = Minimum ATC Price  MC MC Long-Run Equilibrium ATC P3 = A3 Price and Costs D MR Q3 Quantity

20. OLIGOPOLY BEHAVIOR High Low A B $12 $15 High $12 $6 D C $6 $8 Low $8 $15 A Game-Theory Overview RareAir’s Price Strategy Uptown’s Price Strategy

21. High Low A B $12 $15 High $12 $6 D C $6 $8 Low $8 $15 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Greatest Combined Profit Uptown’s Price Strategy

22. High Low A B $12 $15 High $12 $6 D C $6 $8 Low $8 $15 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Independent Actions Stimulate Response Uptown’s Price Strategy

23. High Low A B $12 $15 High $12 $6 D C $6 $8 Low $8 $15 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Independent Actions Stimulate Response Uptown’s Price Strategy Gravitating to the Worst Case

24. High Low A B $12 $15 High $12 $6 D C $6 $8 Low $8 $15 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Independent Actions Stimulate Response Uptown’s Price Strategy Gravitating to the Worst Case

25. OLIGOPOLY BEHAVIOR High Low A B $12 $15 High $12 $6 D C $6 $8 Low $8 $15 A Game-Theory Overview RareAir’s Price Strategy Collusion Invites a Different Solution. Uptown’s Price Strategy

26. High Low A B $12 $15 High $12 $6 D C $6 $8 Low $8 $15 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Collusion Invites a Different Solution. But, the incentive to cheat is very real. Uptown’s Price Strategy

27. Marginal Resource Cost Change in Total (Resource) Cost Unit change in Resource Quantity = MARGINAL PRODUCTIVITY THEORY OF RESOURCE DEMAND Rule for Employing Resources: MRP = MRC

28. MP of Capital MP of Labor Price of Capital Price of Labor MRPC MRPL 1 PC PL OPTIMUM COMBINATION OF RESOURCES Least-Cost Rule Least-Cost Combination of Resources Profit-Maximizing Combination

29. PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM Non- Labor Costs Wage Rate (dollars) Quantity of Labor Quantity of Labor S Includes Normal Profit S = MRC Wc ($10) $10 $10 $10 $10 $10 $10 Wc Labor Costs D = MRP ( mrp’s) d = mrp (1000) (5) Individual Firm Labor Market

30. MONOPSONISTICLABOR MARKET MRC S The competitive solution would result in a higher wage and greater employment. Wage Rate (dollars) Wc Wm MRP Qm Qc Quantity of Labor

31. OPTIMAL AMOUNT OF A PUBLIC GOOD P $ 9 7 5 3 1 S Yields the optimum amount of the public good MB = MC DC Q 0 1 2 3 4 5

32. COST-BENEFIT ANALYSIS Marginal Cost = Marginal Benefit Rule Externalities Spillover Costs Overallocation Spillover Benefits Underallocation