No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

The ulitimate Economics [Macroeconomics and Microeconomics] resource featuring essential questions and explanations. Video lectures, graphs, concepts, and diagrams are included. Click on any topic on the right to get started or search any topic below. Awesome study aid for students taking economics courses. Great resource for teachers to use in their classrooms.

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What is a contractionary fiscal policy?

Posted on April 17, 2014 at 12:00 AM Comments comments (0)

From the Keynesian economic perspective, a contractionary fiscal policy is appropriate if the economy is experiencing inflation in the short run. The government can decrease spending and/or increase income taxes to shift aggregate demand to the left. This will decrease real GDP, decrease the price level, and increase the unemployment rate.

 

This No Bull Review video explains the concept of a contractionary fiscal policy and shows you how to graph the policy using the AD/AS model.

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AP Macroeconomic Unit 3 AD/AS & Fiscal Policy

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.

You need Adobe Flash Player to view this content.


AP Microeconomics Unit 2 Product Markets

What is an expansionary fiscal policy?

Posted on April 16, 2014 at 11:55 AM Comments comments (0)

From the Keynesian perspective, an expansionary fiscal policy is appropriate if the economy is experiencing a recession in the short run. The government can increase spending and/or decrease income taxes to shift aggregate demand to the right. This will increase real GDP, increase the price level, and decrease the unemployment rate.


This No Bull Review video explains the concept of an expansionary fiscal policy and shows you how to graph the policy using the AD/AS model.

You need Adobe Flash Player to view this content.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

How do interest rates affect the value of currency?

Posted on April 16, 2014 at 11:45 AM Comments comments (0)

Interest rates are an important determinant to the international value of a country's currency and net exports.


When interest rates increase, foreigners demand more interest-bearing bonds and more currency to purchase the bonds. This appreciates the value of the currency, which makes the country's goods look more expensive to foreigners. Exports will decrease and imports will increase.


When interest rates decrease, foreigners demand fewer interest-bearing bonds and less currency to purchase the bonds. This depreciates the value of the currency, which makes the country's goods look cheaper to foreigners*. Exports will increase and imports will decrease.

*This also makes imported economic resources to appear more expensive, which raises the costs of production in certain industries. Depending on the scale, this can be detrimental to the short-run aggregate supply curve.


AP Macroeconomics Unit 6 International Trade

How does savings affect the loanable funds market?

Posted on April 16, 2014 at 11:40 AM Comments comments (0)

The loanable funds market shows the relationship between the real interest rate and quantity of loanable funds.


More savings: If there is an increase in savings by the private sector, the supply of loanable funds increases (shifts right) causing the real interest rate to fall. When the real interest rate decreases, investment spending increases. This is good for the growth of capital stock and long run economic growth.


Low real interest rates also depreciate the value of currency as foreigners are not attracted to the lower returns on bonds. When the currency depreciates, net exports increase as the goods look cheaper to foreigners.


Less savings: If there is a decrease in savings by the private sector, the supply of loanable funds decreases (shifts left) causing the real interest rate to rise. When the real interest rate increases, investment spending decreases. This is bad for the growth of capital stock and slows down the rate of long run economic growth.


High real interest rates also appreciate the value of currency as foreigners are more attracted to the higher returns on bonds. When the currency appreciates, net exports decrease as the goods look more expensive to foreigners.


AP Macroeconomics Unit 5 Macroeconomic Theory

How do you graph an economy with inflation?

Posted on April 16, 2014 at 11:35 AM Comments comments (0)

To graph an economy experience inflation in the short run, the short-run aggregate supply curve and aggregate demand curve should intersect to the right of the long-run aggregate supply curve (full-employment level of output).


The No Bull Review diagram shows how to graph an economy experiencing high inflation in the short run using the AD/AS model.


AP Macroeconomic Unit 3 AD/AS & Fiscal Policy

How do you graph an economy in recession?

Posted on April 16, 2014 at 11:30 AM Comments comments (0)

To graph an economy experiencing a recession in the short run, the short-run aggregate supply curve and aggregate demand curve should intersect to the left of the long-run aggregate supply curve (full-employment level of output).


This No Bull Review diagram shows how to graph an economy in recession using the AD/AS model.


AP Macroeconomic Unit 3 AD/AS & Fiscal Policy

How do you graph an economy at full employment?

Posted on April 16, 2014 at 11:25 AM Comments comments (0)

To graph an economy that is fully employed, use the aggregate demand and aggregate supply model. The short-run aggregate supply curve, long-run aggregate supply curve, and aggregate demand curve should all intersect at the same spot. Price Level should be labeled on the y-axis and Real GDP should be labeled on the x-axis.


This No Bull Review graph illustrates a fully employed economy using the AD/AS Model. This is also known as an economy's long run equilibrium.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

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 components of gross investment?

Posted on April 16, 2014 at 10:50 AM Comments comments (0)

In economics courses, investment generally refers to business expenditures on capital goods. There are three components to gross investment when calculating the gross domestic product:


1. Fixed investment on capital goods (tools, machinery)

2. Residential and nonresidential investment (houses, apartments, stores)

3. Adjustments to inventories (accounting for unsold goods produced in the current year)


Net Investment = Gross Investment - Depreciation (AKA Consumption of Fixed Capital)


AP Macroeconomics Unit 2 Measuring Economic Performance


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