AP微观经济知识点精析

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　　AP微观经济知识点精析

　　Micro Econ

　　Economic growth

　　▪Extensive growth: have more resource

　　▪Intensive growth: technology advance. Do more with same amount of resource

　　▪Graphs of both king of growth are the same

　　▪Law of increasing opportunity cost: specialize resource: when you produce only one product, you are using inefficient resources.

　　▪If a country does not specialize, production possibility curve should be a straight line

　　Comparative advantage: the reason trade can make both sides better off. Price is set between two opportunity costs.

　　Demand curve

　　▪D= MB. Marginal benefit comes from utility, income and other opportunities.

　　▪Diminishing marginal utility: the utility decreases when you have more of one thing causes diminishing marginal benefit. It is a tendency but may not be true for the first several units.

　　▪MB is what you want to pay and normally cannot be higher than income.

　　▪Factors affect demand: (1) income: D of normal good increases when income increases but that of inferior good is the opposite.

　　-price of related good: complement and substitute

　　-tastes and preferences

　　-number of buyers

　　-expectations

　　Supply curve

　　▪S=MC

　　▪Factors affect supply: (1) input price

　　(2) Expectation

　　(3) Technology

　　(4) Number of sellers

　　(5) Price of production substitute

　　(6) Nature: drought, earthquake, good rainfall

　　▪Price ceiling: below equilibrium price, create shortage

　　▪Price floor: above equilibrium price, create surplus

　　▪Total surplus, total utility, total benefit is maximized at equilibrium: TNB= TB-TC→TNB’= MB-MC=0

　　▪MB=P. everything is priced to be the least utility.

　　9

　　Taxation

　　▪Tax will shift either D downward or S upward and create dwl

　　▪Elasticity and taxation

　　▪In normal good, both seller and buyer pay the tax despite who the tax is put on. The amount is decided by elasticity.

　　▪Tax on elastic demand and supply will create more dwl

　　▪Lump sum taxation: a tax without special intension and not related to consume or produce. This tax won’t change people’s behavior as it is sunk cost.

　　Trade

　　▪Domestic price>world price→export→comparative advantage→not affect world price

　　▪Domestic price

　　▪When export, consumer surplus↓，producer surplus↑，total surplus↑

　　When import, consumer surplus↑，producer surplus↓，total surplus↓

　　▪Graph

　　▪Tariff: decrease consumer surplus and create dwl. Graph

　　▪Quota: a certain amount permitted to import

　　▪Graph

　　▪Bias about trade: (1) unfair competition: one country reduces tax on domestic products to export them, but the import country will receive the benefit from this action.

　　(2) National security argument: use tariff to protect domestic industry. This sometimes happens in real world.

　　(3) Jobs argument: world trade won’t cause unemployment because it is creating jobs and at the same time destroying some.

　　(4) Infant-industry argument: infant-industry argues that they need tariff to protect to grow. However, it is hard to decide the country has comparative advantage in which industry.

　　(5) Protection-as-a-bargain-chip argument: country A can threaten country B to decrease tariff or A will increase tariff. However this threaten won’t work as B can threaten A the same way.

　　Cost curve

　　▪Economic cost= accounting cost+ opportunity cost= implicit cost+ explicit cost.

　　▪TC’=MC=VC’ =VC=TC-FC

　　▪Diminishing marginal return: hold other input constant, too much of one resource will reduce marginal return as it is inefficient.

　　▪MC intersects ATC and AVC at their lowest point.

　　▪There is no fixed cost in the long run

　　▪Short run and long run ATC: The short run ATC curve is upward sloping because increase a single resource while hold the others constant will cause inefficiency. Thus the cost of producing another product is higher than average and cause the ATC to go up. However, due to definition, nothing is constant in the long run. A firm will no longer put all input into one resource while holding the others constant. Instead, the reason for long run ATC curve to slope upward is diseconomies of scale. When a company is way too big, it is hard to get everything under control and people in this firm will have different incentives which add to the difficult of keeping the organization work. The efficiency in this case will decrease dramatically and will cause much higher to produce another unit.

　　In the first few units, additional resources enable producers to specialize and increase the efficiency. Consequently, output increases and cause AVC to fall. Even when AVC stops falling and begins to act in opposite way, the ATC may still decrease and additional output cause AFC to decrease. It is only when AVC increases greater than AFC decreases than ATC begin to slope upward. In the long run, when input increases, people are enabled to specialize and this will increase the efficiency and cause the output to rise faster than input. Also, when number of consumer increases, the cost of some equipment that can be used by many can be divided by a larger number. Thus the cost for producing each good lowers.

　　Perfect competitive market

　　1. Four market structure and their characteristics

　　2. Firms cannot enter or exit a market in the short run but they can in the long run.

　　3. MR=P=MC market price=firm price

　　4. Supply curve is always horizontal sum of firms’ section of MC curve above MVC

　　5. Long run supply curve is a horizontal straight line

　　6. in the long run ATC=MC=MR=P, no total profit

　　7. It is both allocative efficient and productive efficient: (1) allocative efficient: MC=MB no dwl created.

　　(2) Productive efficient: ATC=MC. Produce at lowest cost.

　　8. Graph

　　Monopoly

　　▪MR is lower than D and P. monopoly firm will produce when MR=MC

　　▪Profit= Q*(P-ATC)

　　▪It is in long run equilibrium because there is not entry.

　　▪Monopoly can use advertisement to increase total demand.

　　▪Reasons of monopoly: (1) Natural monopoly; MC is lower than ATC for the whole duration of demand curve.

　　(2) Sole ownership of resource or technology

　　(3) Government regulation (sometimes it is good, for example patents and copyright)

　　6. Monopoly is not allocative efficient but may be in some special situation productive efficient.

　　7. Government monopoly regulation: (1) P=MC: it is allocative efficient and create no dwl

　　(2) P=ATC: the firm will lose its incentive to lower price and cost will rise

　　8. Antitrust law: Clayton act and Sherman act. They encourage competition and prevent predatory pricing (lower price to get other firms away and rises price after acquired monopoly power. The firm does so will lose money as it need lots of initial capital and cannot prevent other firms from entering.)

　　9. Price discrimination: charging different price from reasons unjustified by cost difference. Set P=D and seller get all the benefit.

　　Requirement: (1) know exact MB of consumer (2) have much power over price (3) can separate buyer will different MB (4) prevent resell

　　Inter-temporal price discrimination: first sell something with high price and lower the price later

　　Monopolistic competition

　　▪It is first a monopoly. Then other firms come into the market until D is tangent to ATC, or no profit.

　　▪A monopolistic competition will produce MR=MC but has no profit in the long run.

　　▪It is neither allocative efficient nor productive efficient.

　　▪Excess capacity: the quantity between productive efficient quantity and current producing quantity.

　　Oligopoly

　　▪Reasons of oligopoly: (1) economic of scale: it is not efficient for other firms to exist in this market.

　　(2) License

　　(1) Limit of resource

　　2. Oligopoly can make long run economic profit.

　　3. It is the market structure in which non-price competition is very important and every firm has high incentive to cheat after collusion.

　　4. To prevent cheating: government regulation, merger, have new enterer to join the collusion.

　　5. Price of oligopoly is between monopoly price and allocative efficient price.

　　6. Measurement of four market structures:

　　(1) four-firm concentration ratio: *100. But it cannot identify monopoly and oligopoly.

　　(2) Hanfindal index: 0-10000

　　7. Advertisement: (1) adversarial: compete with other company.

　　(2) Informational: change people’s tastes to increase total demand.

　　Game theory

　　▪Game theory is a strategic way of analyzing human behavior.

　　▪Assumption: human are rational, people maximize their expected payout.

　　▪Backward induction: decisions are made due to result. People use backward induction to decide.

　　▪Time inconsistency problem: want somebody to believe something in the first round that will not happen in the second round.

　　▪Dum day device example: by using something you cannot control to start a spontaneous action in the second round will solve the time inconsistency problem.

　　▪Prisoner dilemma:

　　▪Dominate strategy: is a strategy that you are always better off doing so despite the choice of the other person.

　　▪Nash equilibrium: occur when neither player can make them better off. In many rounds games, both sides will corporate with each other. (No player will change their choice given the choice of the other player.)

　　▪The Corporation will end as soon as they know when the game is going to end. If know the end of game, it’s the same as one round game and no one will corporate. (There is no difference between defeat someone today and defeat someone tomorrow.)

　　▪Misstrategy Nash equilibrium: the Nash equilibrium occurs when you mix two or more rounds.

　　Factor market

　　1. Derived demand: a demand based on the product of the good instead of the goods themselves.

　　2. Marginal product: product can be produced when hiring an additional worker

　　3. Marginal revenue product: MP*P

　　4. A firm will continue to hire workers until MRP=W

　　5. Product function: Q=L^a*K^b (a+b=1)

　　6. MPk=bL^a/K^a MPl=aK^b/L^b

　　7. When business minimize their cost MPl/wage=MPk/rent

　　8. Why is supply curve upward sloping: (1) higher wage will attract worker in other industry

　　(2) People will work more when given a higher wage until a point

　　Increasing marginal disutility

　　9. A firm factor supply curve in horizontal because a firm is too small to affect the whole factor market

　　10. Factors affect supply: (1) location (2) other opportunities (3) status (4) working condition

　　11. Factors affect demand: (1) number of firms (2) price of product (3) MP (technology)

　　12. When =number of firm does not change, the demand curve in firm graph and market graph will change together.

　　13. Wage will not change until the wage of the second best job changes

　　14. Monopsony: a situation that only one buyer exist

　　15. Marginal factor cost is always above supply as you have to increase wage for all to hire one additional worker. (Increasing marginal disutility)

　　16. Bilateral monopoly: only a single buyer and seller exist

　　17. Wage discrimination: (1) customer discriminating (2) educational (3) job (women for nurse and man for doctor) (4) wage gap (different field of job)

　　Equity

　　Why we need utility: diminishing marginal return. The same amount of goods has greater utility to poor people than it has to rich.

　　Equity will decrease efficiency as it affects incentive of working hard.

　　Equity of opportunity: income mobility. It is good for entire society as it does not generate dwl but it cannot be fully equality.

　　Solution to make society more equal:

　　tax system: a progressive tax system charges more when one earns more, a proportional system is when everyone pays the same, a regressive system is when poor people pays more. Tax can be on: income, consumption, head, estate, and payroll

　　Measurement of equity: Lorenz curve: Gini coefficient: a/ (a+b) bigger means more unequal.

　　Indifference principle: the marginal person should be indifference about the decision in any equilibrium.

　　Externalities

　　Definition: extern harm or benefit exert on one who is not participant.

　　Attention: be sure to remember the graph and dwl. (Without limitation, with tax, with subsidy, positive externality)

　　Public good and common good

　　1.

　　Rival: marginal cost is not zero

　　Excludable: can charge people on this

　　Public good: ex: national defense. One marginal person will not raise the cost of national defense and no one can be excluded from the defense.

　　Free rider: when an additional individual’s contribute will not make much different for the society, and then no one will contribute.

　　Graph of public good

　　Solution of public good: (1) taxing and subsidizing

　　(2) Quantity restriction: will cause dwl and losing the product will greatest efficiency (can be improved by tradable permit)

　　(3) Regulation: most firms will not agree

　　(4) direct provision: 直接供给

　　(5)privatization: Make somebody own the resource

　　Coase theorem: given low transaction cost people will bargain to the efficient solution and the initial allocation of property right will not matter.

　　Transaction cost; cost need to make trade happen but benefit does not go to both parties.

　　Prove of Coase theorem: use pollution as example: if the polluted river belongs to polluting company, they will stop producing so much and spontaneously produce the efficient amount. If the river belongs to polluted people, the firm will pay those people marginal cost and the PMC rises and equals SMC. The firm will produce efficient amount.

　　Fallacy ( Optional )

　　▪ Fallacy: common logical mistake

　　▪Composition: what is good for one is good for the group

　　▪Post hos ergo propt hoc (after this because of this): A follows B then B causes A

　　▪Correlation: a statistical relationship between two variables. Common sense idea.

　　▪Causation: when things make the other happen

　　-Reverse causation: B causes A

　　-Common causation: C causes A, C causes B

　　-Coincidence

　　▪Omitted variable bias: A→B C→B C→A then the power of A may be biased

　　Ex: students go to new oriental has higher grade

　　▪Common economic bias:

　　-the world is a fixed pie of wealth

　　-there are fixed number of jobs

　　-trade is zero sums

　　▪To avoid bias

　　-sunk costs are sunk

　　-based on opportunity cost

　　-think on the margin (ex: people tend to eat more in buffet)

　　▪Rationality: (1) preference is transitive

　　(2) People are able to rank order

　　(3) People maximize their utility. They will only perform an action if they think they can be better off.

　　▪Analysis: (1) Positive analysis: descriptive. Objective

　　(2) Normative analysis: Prescriptive. Subjective

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