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AP Microeconomics

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Tori Crail

on 15 October 2012

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Transcript of AP Microeconomics

by Tori Crail & Taylor Kirk 15 Microeconomics Concepts Scarcity is when the goods available are too few to satisfy individuals desires. Scarcity and Choice The benefit that you might have gained from choosing the next best alternative.
The opportunity cost of your going to college would be the money you could have earned if you worked instead. On the other hand, you lose 4 years of salary while getting your degree.
but on the bright side, you could earn back the lost wages with the help of your degree! Opportunity Cost the ability of a person or a country to produce a particular good or service at a lower marginal and utility cost over another person or country. Comparative Advantage the ability of a country or a person to produce a good or service at a lower cost per unit than the cost at which any other person or country produces that good or service Absolute Advantage a method of production focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses Specialization the amount of goods or services available at a variety of prices Supply Elasticity of Demand
the extent to which a change in price causes a change in quantity demanded Elasticity Consumer Surplus Producer Surplus Allocative Efficiency
achieved when the value consumers place on a good or service (reflected in the price they are willing to pay) equals the cost of the resources used up in production Tax Incidence

the analysis of the effect of a particular tax on the distribution of economic welfare Demand price ceiling
a maximum price sellers are allowed to charge for a good. Price & Quantity Controls The Economic Decision Rule says:
If the marginal benefits of doing something exceed the marginal costs, do it.
If the marginal costs of doing something exceed the marginal benefits, don't do it. economic choice
deciding between different uses of scarce materials.
You have a lot of options in front of you. Which do you choose? It's simple, find which choice gives you the biggest benefit.
marginal & total benefit for example, a worker who is producing with machinery can make 6 units of shirts and 6 units of shoes while another worker who doesn't use machines only makes 4 units of shirts and 2 units of shoes.
-the worker who has machinery has the comparative advantage over the other worker. Income Elasticity of Demand
the percent change in demand divided by the percent change in income Cross-price Elasticity of Demand
the percent change in demand divided by the percent change in price of a related good *If income elasticity is POSITIVE, then it is a NORMAL good. *If income elasticity is NEGATIVE, then it is an INFERIOR good. *If cross-price elasticity is POSITIVE, then the two goods are SUBSTITUTES. *If cross-price elasticity is NEGATIVE, then the two goods and COMPLEMENTS. price floor
a minimum price buyers are required to pay for a good. Total Utility
the overall amount of satisfaction achieved by a consumer due to the purchase and use of a particular good or service. the price a producer sells a product for minus the cost of production *it is represented by the area above the supply curve and above the selling price *Producer Surplus= 1/2(base x height) the value the consumer get from buying a product minus its price *it is represented by the area underneath the demand curve and above the price that an individual pays *consumer surplus= 1/2 (base x height) the desire, willingness and ability to buy a product or service of a varying price Law of Demand
*if the price increases, quantity demand decreases
*if the price decreased, quantity demand increases *income effect
-when the price decreases, consumers feel like they have more money, so they tend to buy more Why is the demand curve downward? *substitution effect
-when the price increases, consumers are more likely to buy that product's cheaper substitute *diminishing marginal utility
-consumers experience decreasing satisfaction(utility) as additional units of a product are acquired 6 factors that cause the demand curve to shift (PRICE DOES NOT CHANGE) *number of consumers
*income
*complements
*expectations
*substitute
*taste
(N.I.C.E.S.T. ) The Law of Supply
-if the price increases, quantity supplied increases
-if the price decreases, quantity supplied decreases 6 factors that cause the supply curve to shift *cost of inputs
*technology/productivity
*taxes & subsidies
*government regulation
*future expectations
*number of suppliers How to Determine Whether it's Comparative or Absolute Advantage Marginal Utility
the amount that utility increases with an increase of one unit of an economic good or service. Deadweight loss
the inefficiency caused by, for example, a tax or monopoly pricing. Bonus *for example, if factory 1 can produce 5 shirts per hour with 3 employees and factory 2 can produce 10 shirts per hour with 3 employees, assuming the employees are paid equal wages then factory 2 would have the Absolute Advantage. > Step 1: determine if it is an input or output problem. * output problem is the assumption that two entities have comparable resources but produce different quantities of output. * an input problem is when equal amounts of output are produced, but different quantities of inputs are used. Step 2: matrix. Bill Tom nachos hot dogs 50 60 25 45 In an output problem the forgone item becomes the numerator and the good that we are calculating the opportunity cost for becomes the denominator. 1 nacho = 25 hot dogs Cory




Issac 50 nachos 1 hot dog = 50 nachos 25 hot dogs = 1/2 hot dog (opportunity cost) = 2 nachos (opportunity cost) Issac 1 nacho = 1 hot dog = 45 hot dogs 60 nachos 45 hot dogs 60 nachos = 3/4 hot dog (opportunity cost) = 4/3 nachos (opportunity cost) * Cory should make nachos.
* Issac should produce hot dogs. Step 3: calculate. *price ceilings create shortages.
*price ceilings create surpluses.
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