No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

How does a monopoly affect consumer surplus?

Posted on April 17, 2014 at 12:30 AM Comments comments (0)

A monopolist charges a price higher than a competitive market structure and produces fewer units than a competitive market structure. Because of the higher monopoly price, the area of consumer surplus decreases. Part of the original consumer surplus under competitve conditions will be transferred to the producer. The rest becomes part of the deadweight loss.


This No Bull Review video shows the area of consumer surplus under a monopoly and how it compares to consumer surplus under a perfectly competitive market.

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AP Microeconomics Unit 2 Product Markets

How do you graph a monopoly taking an economic loss?

Posted on April 17, 2014 at 12:25 AM Comments comments (0)

To graph a monopoly taking an economic loss, the price must be less than the average total cost curve at the marginal revenue equals marginal cost level of output.


This No Bull Review video explains exactly how to graph a monopoly with short-run losses.

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AP Microeconomics Unit 2 Product Markets

What is a prisoner's dilemma in game theory?

Posted on April 16, 2014 at 8:45 PM Comments comments (0)

A prisoner dilemma occurs when each firm's respective payouts are greater if each firm does NOT play its dominant strategy. In the game theory matrix below, the dominant strategy for both firms are to play Strategy A and the cell outlined in red is the Nash equilibrium.


However, if both firms play Strategy B then their payout are greater. If the firms collude and agree to play Startegy B, the dilemma is whether each firm can trust the other to play Strategy B and not Strategy A. Without a commitment device, each firm has an incentive to cheat to gain greater profit. The likely outcome is that they will both cheat and end up in the original Nash equilibrium.



AP Microeconomics Unit 2 Product Markets

How do you find a firm's dominant strategy?

Posted on April 16, 2014 at 8:30 PM Comments comments (0)

Game theory is an important topic that comes up in the discussion of oligopoly (more specifically for this course, duopoly) behavior. One of your goals is to determine a firm's dominant strategy, or best strategy regardless of the opposing firm's strategy. This will help you find the Nash equilibrium.


When reading a game theory matrix, the firm on the left has its payouts on the left in each cell. The firm on the top typically has its payouts on the right in each cell.


In the diagram below, Totally Inc.'s dominant strategy is Strategy A because $2,305 > $2,272 and $2,350 > $2,325.

Awesome LLC.'s dominant strategy is also Strategy A because $2,305 > $2,272 and $2,350 > $2,325.


Therefore, the Nash equilibrium is the cell where both firms play Strategy A. We know that each firm will earn $2,305 when they play their dominant strategies. As long as one firm has a dominant strategy, you can find the Nash equilibrium.


AP Microeconomics Unit 2 Product Markets

What is a cartel?

Posted on April 16, 2014 at 8:25 PM Comments comments (0)

The subject of cartel formation arises when talking about an oligopolistic (a few powerful firms) market structure. If these firms collude and coordinate all business decisions, then a cartel is formed. The cartel acts like a monopoly as it controls the price and output in the industry. It's highly inefficient, the consumers lose, and the cartel's profits rise. OPEC is a cartel.


AP Microeconomics Unit 2 Product Markets

What is the relationship between average product and marginal product?

Posted on April 16, 2014 at 8:15 PM Comments comments (0)

The marginal product and average product curves initially increase then decrease due to the law of diminishing marginal returns.


Marginal product is the change in total product divided by the change in quantity of resources (or inputs).

Average product is the total product divided by the quantity of economic resources (or inputs).


The average product reaches its peak when it intersects the marginal product curve.


See the curves in the No Bull Review graph below.


AP Microeconomics Unit 2 Product Markets

How do you sketch the cost curves of a firm?

Posted on April 16, 2014 at 8:05 PM Comments comments (0)

Whether you are drawing a perfectly competitive firm or a monopolist, the per-unit cost curves all look the same. Here is what you should remember when sketching the curves:


1. The marginal cost (MC) curve looks like a check mark (or Nike swoosh) because of the law of diminishing marginal returns.

2. The average total cost (ATC) curve is u-shaped and must intersect the MC curve when ATC is at its lowest point.

3. The average variable cost (AVC) curve is also u-shaped, but must be below the ATC. The AVC will intersect the MC curve at the AVC's minimum. The distance between the AVC and the ATC should narrow as output increases because this distance represents the firm's average fixed costs.


This No Bull Review graph shows what the ATC, AVC, and MC look like. Always begin by drawing the MC curve first.


AP Microeconomics Unit 2 Product Markets

How do you calculate the per-unit costs of a firm?

Posted on April 16, 2014 at 8:00 PM Comments comments (0)

There are three types of total costs that all firms face: fixed costs (FC), variable costs (VC), and total costs (TC). Fixed costs must be paid to resource suppliers regardless of output and variable costs change with output. Fixed costs plus variable costs will equal a firm's total cost.


Per-unit costs are used to derive the firm's average cost curves, which you are expected to sketch on the AP Microeconomics exam. To get average costs, simply divide the total costs by the quantities being produced.


Average Fixed Cost = FC/Q

Average Variable Cost = VC/Q

Average Total Cost = TC/Q

Marginal Cost = Change in TC/Change in Q


AP Microeconomics Unit 2 Product Markets

How do you graph a firm taking a loss under monopolistic competition?

Posted on April 16, 2014 at 7:55 PM Comments comments (0)

The cost curves of a monopolistically competitive firm look similar to a monopoly firm's curves. However, by definition monopolistic competition (many firms) is very different from a monopoly (one firm).

 

To graph a monopolistically competitive firm taking a short-run economic loss, the price must be less than the average total cost curve at the MR=MC level of output. Price must exceed the average variable cost curve.

 

In the long run, firms will exit the industry casuing the firm to break even.

 

In this No Bull Review video, you will learn how to graph a firm taking a short-run loss under monopolistic competition.

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AP Microeconomics Unit 2 Product Markets

How do you graph a monopolistically competitive firm with a short-run profit?

Posted on April 16, 2014 at 7:45 PM Comments comments (0)

The cost curves of a monopolistically competitive firm look similar to a monopoly firm's curves. However, by definition monopolistic competition (many firms) is very different from a monopoly (one firm).


To graph a monopolistically competitive firm earning a short-run economic profit, the price must exceed the average total cost curve at the MR=MC level of output.


In the long run, more firms will enter the industry casuing the firm to break even.


In this No Bull Review video, you will learn how to graph a firm with a short-run profit under monopolistic competition.

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AP Microeconomics Unit 2 Product Markets 

How do you graph a perfectly competitive firm with economic losses?

Posted on April 16, 2014 at 7:40 PM Comments comments (0)

When graphing perfect competition, it is a good idea to graph the market and firm side-by-side so that the market equilibrium is lined up with the firm's horizontal marginal revenue curve. The market (or industry) graph is a simple supply and demand graph. For the firm, the price equals the marginal revenue equals the marginal cost output point must be less than the average total cost curve. The price must exceed the average variable cost curve.

 

In the long run, the least efficient firms will exit the market (supply shifts left) causing the price to increase and the individual firm to break even (AKA normal profit AKA long run equilibrium AKA zero economic profit)

 

This No Bull Review video shows you how to draw correctly labeled short-run loss graphs for perfect competition.

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AP Microeconomics Unit 2 Product Markets

How do you graph a perfectly competitive firm earning short-run economic profits?

Posted on April 16, 2014 at 1:00 PM Comments comments (0)

When graphing perfect competition, it is a good idea to graph the market and firm side-by-side so that the market equilibrium is lined up with the firm's horizontal marginal revenue curve. The market (industry) graph is a simple supply and demand graph. For the firm, the price equals the marginal revenue equals the marginal cost output point must exceed the average total cost curve.


In the long run, more firms will enter the market (supply shifts right) causing the price to fall and the firm to break even (AKA normal profit AKA long run equilibrium AKA zero economic profit)


This No Bull Review video shows you how to draw correctly labeled graphs for perfect competition.

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AP Microeconomics Unit 2 Product Markets

How does elasticity of demand and supply affect tax incidence?

Posted on April 16, 2014 at 11:10 AM Comments comments (0)

When the price elasticity of demand and supply are the same, then the buyer and seller share the tax burden equally.


Tax incidence on the buyer: If the demand curve is more inelastic (relatively steeper) than the supply curve, the buyer will pay a greater portion of the tax than the seller.


Tax incidence on the seller: If the supply curve is more inelastic than the demand curve, the seller will pay a greater portion of the tax than the buyer.


AP Microeconomics Unit 4 Role of Government

What are the effects of a per-unit tax?

Posted on April 16, 2014 at 10:55 AM Comments comments (0)

When the government imposes a per-unit tax, marginal costs increase and supply shifts to the left. The producer and consumer both share the burden of the tax. As a result of the tax, the producer surplus and consumer surplus decrease. Assuming no externalities, the tax creates deadweight loss (inefficiency).


The No Bull Review diagram below illustrates the effects of a per-unit tax. P represents price before the tax, P1 is the price after the tax, Ps is the price the seller receives. The yellow region is the part of the tax that the buyer pays to the government and the green region represents what the seller pays to the government. Yellow region + green region = total tax revenue. The purple region represents the deadweight loss.

AP Microeconomics Unit 4 Role of Government

What are the characteristics of a public good?

Posted on April 15, 2014 at 6:55 PM Comments comments (0)

A public good is a good that is typically provided by the government - such as national defense and street lights - and contains the following two characteristics:


1. Shared consumption (non-rivalrous): one person's use of the good does not prevent someone else from using it.

2. Non-exclusion: cannot restrict anyone from using the good.


AP Microeconomics Unit 4 Role of Government

How does the law of diminishing marginal returns work?

Posted on April 15, 2014 at 6:45 PM Comments comments (0)

The law of diminishing marginal returns states that as an additional worker is added to a fixed set of resources, the additional output produced by the new worker will decrease. In other words, the marginal product falls. To calculate the marginal product, divide the change in total product by the change in resources units.

 

According to the No Bull Review chart below, diminishing marginal returns begins after the second worker is hired. The marginal product falls from 24 units to 19 units as a result of employing the third worker.

AP Microeconomics Unit 2 Product Markets

What are marginal costs?

Posted on April 14, 2014 at 8:30 PM Comments comments (0)

Marginal costs are the most important costs that a firm faces because these costs help determine profit maximization at the margin. Marginal costs are the change in total costs resulting from a change in output (change in total costs/change in output). It's the additional cost of producing one more unit.


You can also estimate marginal costs by dividing the wage by marginal product (W/MP).


AP Microeconomics Unit 2 Product Markets

How is total revenue related to price elasticity of demand?

Posted on April 14, 2014 at 8:20 PM Comments comments (0)

The total revenue test is a great way to estimate whether a good's demand is price elastic or inelastic. You need to see how the price changes relative to total revenue (price x quantity).


If price and total revenue move in opposite directions, consumers are responsive to changes in price and demand is price elastic (Ed>1). If price and total revenue move in the same direction, consumers are not very responsive to the change in price and demand is price inleastic (Ed<1). If total revenue is constant when the price changes, then demand is unit elastic (Ed=1).


AP Microeconomics Unit 1 Basic Economic Concepts

What is the relationship between elasticity of demand and marginal revenue?

Posted on April 14, 2014 at 8:20 PM Comments comments (0)

When marginal revenue is greater than zero, demand is price elastic. When marginal revenue is less than zero, demand is price inelastice. When marginal revenue equals zero, demand is unit elastic.


This No Bull Review video illustrates how this conceprt is linked to a firm selling output in an imperfectly competitive market such as a monopoly.

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AP Microeconomics Unit 2 Product Markets

Where will a firm maximize economic profits?

Posted on April 14, 2014 at 8:05 PM Comments comments (0)

A firm will maximize its economic profit (or minimize its losses) when it produces at a level of output where the marginal cost equals the marginal revenue (MR=MC). The price it charges its customers can be found on the corresponding demand curve.


AP Microeconomics Unit 2 Product Markets


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