AP Microeconomics

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AP Microeconomics

• Warm Up On a ½ sheet I am collecting for a
  grade 5 minutes after bell rings!!
• Illustrate a side-by-side perfectly competitive
  labor market.
• Identify both the market and firms price and
  quantity for labor.
• On the same graph illustrate and then explain the
  effect a plague would have on this market and the
  number of workers the firm would employ.

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• The Key Efficiency Condition Price Equals
  Marginal Cost
• If PX gt MCX, society gains value by producing
  more X.
• If PX lt MCX, society gains value by producing
  less X.

MCX Market-determined value of resources needed to produce a marginal unit of X. This is equal to the opportunity cost of those resources lost production of other goods or the value of the resources left unemployed (leisure time).
The value placed on good X by society through the market, or the social value of a marginal unit of X. PX

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Efficiency in Perfect Competition
Follows from a weighing of values by both
households and firm
Goal Maximize Profits!!
Goal Maximize Utility!!
MRPL
MRCL
Labor
Leisure
FIRMS
HOUSEHOLDS
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The Market in Perfect Competition

• We have been learning about individual markets in
  perfect competition. This is the ideal situation
  where we can apply certain economic rules
• 1. _____________________ and _____________________
  in the industry (market) determine price for
  each individual firm.
• 2. Therefore the firms are Price -
  ___________________

Supply
Demand
Takers
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The Market in Perfect Competition

• 3. All firms will maximize profits in both the
  short and long run when
• Output Market Input Market
• 4. Markets want to be at ___________________ and
  will work hard (sometimes even against
  _________________________ forces) to be there.

Marginal RESOURCE Cost
MRC MRP PL MRPL
MC MR PX MR
Equilibrium
Government
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Analysis in Perfect Competition

• When economists study the market and how the
  forces of supply and demand shift the equilibrium
  price and quantity of one market they are doing
  _______________________________________.
• However, that would be just looking at the little
  picture. Economists need to study further how
  markets affect one another more specifically,
  they need to study all markets and how they
  achieve equilibrium together. This is the
  ___________________________, when all markets
  will find equilibrium.

Partial Equilibrium Analysis
General Equilibrium
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One Market

• The U.S. government deports all illegal
  immigrants. How will this affect the citrus
  industry? What changes will occur in price and
  quantity?

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This one market change will affect other
markets!! It will hurt some industries and help
others. List three of each be able to explain
your answers

• Industries Hurt
• 1.
• 2.
• 3.

• Industries Helped
• 1.
• 2.
• 3.

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General Equilibrium

• However, the General Equilibrium is constantly
  changing because markets that are neither
  substitutes nor complements to one another can
  still have an effect on each other!! For
  example, I will buy fruit juices still even if
  prices are increased because of the above stated
  government policy. However if my income doesnt
  change, I must then sacrifice spending elsewhere
  because I have less money to spend (so no new
  shoes)!! So a strike in the citrus industry
  leads to me buying less shoes!!! ?

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This final observation leads to the

• Pareto Efficiency (Pareto Optimality)
• A condition in which no change is possible that
  will make some members of society better off
  without making some other members of society
  worse off.

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Pareto Efficiency

• If an economic system is Pareto efficient, then
  it is the case that no individual can be made
  better off without another being made worse off.
  It is commonly accepted that outcomes that are
  not Pareto efficient are to be avoided, and
  therefore Pareto efficiency is an important
  criterion for evaluating economic systems and
  political policies.

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Pareto Efficiency

• If economic allocation in any system is not
  Pareto efficient, there is potential for a Pareto
  improvement, an increase in its efficiency
  through reallocation, improvements to at least
  one participants well-being can be made without
  reducing any other participants well-being. A
  change is said to be efficient if it makes some
  members of society better off without making
  other members of society worse off. An
  efficient, or Pareto optimal, system is one in
  which no such changes are possible. However we
  must weigh the gains and the losses a decision
  is then efficient if the gains are greater than
  the losses.

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Real World Application

• 1 Why does the government collect taxes?
• So therefore, when taxes are cut, we can assume
  that
• Non-essential services are always the first to
  be cut. So citizens of a local area are pleased
  to see that taxes were cut for this fiscal year.
  However, in return for this tax cut, clerical
  positions at the DMV were also cut. Therefore,
  citizens have to wait in much longer lines in
  order to do business.

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Real World Application

• The average wait time was ninety minutes
• It was calculated that to reinstate the clerks
  each tax payer would need to increase their
  yearly taxes by 2.00.
• Who would gain by this decision?
• Who would lose by this decision?
• Does the gain outweigh the loss making it a
  Pareto-efficient change? Explain.

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2 USA vs. Microsoft

• In the year 2000 a federal judge ordered that
  Microsoft be split into two separate companies
  because it had violated the antitrust laws of the
  United States. Some argue that the antitrust
  laws are justified on the grounds of the
  efficiency of competition. That is, breaking up
  a monopoly should result in a Pareto-efficiency
  change. This cannot be so because breaking up
  Microsoft clearly makes its shareholders worse
  off. Do you agree or disagree? Explain