AP Microeconomics Exam Review PDF

## AP MICROECONOMICS EXAM REVIEW ### Unit 1: Basic Economic Concepts 1. Draw a PPC graph and be sure to explain the following: * Unemployment * Productive Efficiency * Law of DMR (increasing opportunity costs) * Economic Growth * Factors of Production 2. What are t...

## AP MICROECONOMICS EXAM REVIEW ### Unit 1: Basic Economic Concepts 1. Draw a PPC graph and be sure to explain the following: * Unemployment * Productive Efficiency * Law of DMR (increasing opportunity costs) * Economic Growth * Factors of Production 2. What are the 3 basic economic questions and how are they answered by the following economic systems: * Free Market * Command * Mixed * Traditional 3. Draw an MB and MC graph and be sure to explain the following: * Allocative Efficiency (Social Optimum Output) * Why does MB (demand curve) slope down * Why does MC (supply curve) slope upwards? * If MB does not equal MC, what problem do we have? 4. Draw a CPC and a PPC between 2 countries (firms, or people) * Why are the PPC linear? What does this mean with regards to the opportunity cost between 2 goods? * How do countries (or firms) determine ideal terms of trade? * What is the difference between absolute and comparative advantage? ### Unit 2: Markets 5. Market Graphs (Equilibrium Price and Quantity) * Law of Demand (Price changes causes change in QUANTITY DEMANDED) * Income Effect and Substitution Effect * Law of Supply (Price changes causes change in QUANTITY SUPPLY) * What causes the demand curve to shift right (or left).....FACTORS TO DEMAND. * Inferior Goods vs Normal Goods * What causes the supply curve to shift right (or left).......FACTORS TO SUPPLY. * How do we construct a Market Demand Curve and a Market Supply Curve? 6. Price Elasticity of Demand and Total Revenue * What is the long formula? What is the shorter formula? Why is this the formula? * Draw a graph that shows how elasticity of demand changes on a linear demand curve. Show a corresponding TR graph that aligns with each section of the demand curve. * Elasticity of Supply (when are supply curves unit elastic?) * Income Elasticity * Cross Elasticity 7. Marginal Utility Per Dollar (Understanding the Demand Curve) * What is the equation to determine maximum utility when dealing with a fixed budget? * Draw a TU graph and a corresponding MU graph. Why do both graphs have their unique shapes? * When TU is falling what is happening to the MU graph? * How is MU calculated from TU? 8. Consumer Surplus, Producer Surplus, DWL when the government intervenes: * Show CS, PS, DWL, possible underground economy, and possible tax revenue (or expenditure) for the following types of gov't interventions: * Price Ceiling.... Also show shortage * Price Floor...... Also show surplus * Excise Tax (on producer).....Also show incidence of tax (consumer burden and producer burden) * Subsidy (on Producer)........ Also, show benefit of tax (consumer benefit and producer benefit) * Domestic Quota ### Unit 3: Theory of the Firm and Perfect Competition * Draw a TVC (total variable cost) graph and show areas of "specialization" and "diminishing marginal returns" * Add a TFC (total fixed cost) graph and a TC (total cost) graph (be precise) * Add a TR (total revenue) graph and shade areas of profit and loss. Circle Break-even Points. * Based on your TR and TVC, circle the Shut-down point. * Explain why MC is the slope of TVC and TC. * Show a TP (total production) graph and its corresponding MPP (marginal physical product) graph. * Show areas of specialization and diminishing marginal returns on your total production graph. When TP is falling what is happening to MPP? * Draw a MPP and an AP (average product) graph. Where does MPP intersect AP? * Draw a new corresponding graph for MC and AVC. Where does MC intersect AVC? * Add an ATC graph. Where does MC intersect ATC? * Add an AFC graph. Why does AFC continuously decrease as more output is produced? * Why does the gap between ATC and AVC continue to get smaller? * If the price is constant, then how would you draw an MR graph? * Explain why MR = MC leads to PMO. Explain how Economic Profit is different from Accounting Profit. * Draw a Long-term ATC graph and show economies of scale, constant returns, and diseconomies of scale. ### PERFECT COMPETITION * Draw a market graph and a perfectly competitive firm's graph (side by side) * Show long-run equilibrium * Why is Price = MR for the firm? Why is the demand for the firm perfectly elastic? * Label on the market graph, CS, PS, Qsocial Optimum) * Label on the firm graph (Productive efficiency where P = ATC m = MC = MR = D = AR) * Show that the market's supply curve is the sum of each firm's MC curve starting from the shut-down point) * Draw a new set of graphs showing the effect on the market if the demand curve increased for the good. What would happen to the P, AR, MR, Profit, PMO? * What would eventually happen in the long-run in both the market and the firm? Explain why assuming constant costs. * Explain the difference between constant cost, increasing cost, and decreasing cost. ### Unit 4: Imperfect Competition (Monopolistic, Monopoly, and Oligopoly) #### MONOPOLY * Draw a Monopoly graph * Why is the market graph the same as the firm's graph? * Why is the relationship between MR and Demand curve? * Show CS, PS, Profit, Markup, Excess Capacity. * Why is PMO < Q allocative efficiency? Show the firm's DWL * Show how a government can regulate prices by implementing: * Social Optimum Pricing * Fair Return Pricing * If the regulation causes the firm to lose money, how will the government finance this loss? * Draw a monopoly graph for a firm that can practice perfect price discrimination. * What happens to CS, PS, DWL? * Draw a natural monopoly that is experiencing economies of scale. ### Unit 5: Input Markets (Factors of Production Markets) * What is the Least Cost Rule for firms when working under a fixed budget? * Draw the MPP and the MRP graphs. Why is the MRP graph the Derived Demand for Labour? * What are the 4 factors that can cause MRP (demand for labour) to shift right or left? * Assuming a perfectly competitive labour market, draw the market and the firm * How is the demand curve for the labour market calculated? How is the supply curve determined? * Describe the elasticity of supply for the firm's labour. Why is it perfectly elastic? How was it determined? * Show what happens when the government imposes a minimum wage on a perfectly competitive labour market. * Draw the labour market graph if the firm was a monopsony (Why do we only draw 1 graph)? * What happens to the elasticity of the supply curve? Explain why the supply curve is also the Average Cost for labour. * Why is the Marginal Resource Cost (MRC or MFC) higher than the average cost of labour? * Show what the monopsony will hire and what wage it will pay. Shade the DWL and explain why one can argue the monopsony has the power to exploit labour. * Show the ideal minimum wage that will improve employment. (what happens to employment if you go higher than this wage)? * Explain how labour unions and other labour associations aim to improve wages for their workers (explain how these organisations can influence the MRP and MRC). ### Unit 6: Market Failures * Explain how a public good is different from a private good when it comes to excludability and rivalry. * Explain why public goods often have a "free rider problem" * Explain Coase Theorem and how it relates to externalities * Draw 4 separate graphs and provide an example of each one. Show DWL and Q social optimum. * Negative Production Externality * Positive Production Externality * Negative Consumption Externality * Positive Consumption Externality * Explain how a per-unit tax or a per-unit subsidy can help minimize DWL and bring us closer to Qso. * Draw the Lorenz Curve for both income and wealth distribution. * Show what happens to gini-coefficient when there are: * Progressive Taxes * Regressive Taxes * Proportional Taxes * Tariff * Show Free Trade for exporting countries and importing countries: Show CS, PS when the world price is higher or lower than the domestic price and there is free trade.