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# AP Micro Econ

question
Elasticity
Measure of how sensitive quantity is to a change in price
question
Inelastic demand
Quantity is insensitive to a change in price.
Means there are not a lot of substitutes and tends to be a necessity. Coefficient is less than 1
question
% change in quantity / % change in price
Elasticity of demand coefficient formula
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Elastic demand
Quantity is sensitive to a change in price. Has a lot of substitutes and has a coefficient greater than 1.
question
Unit elastic demand
When the coefficient is 1
question
Perfectly inelastic
vertical line and the coefficient is 0
question
perfectly elastic
horizontal line
question
total revenue test
if inelastic then the revenue goes up. Ex. Gas station

If elastic then the revenue goes down. Ex. clothing store
question
consumer surplus
difference between what consumers are willing to pay and what they do pay
question
Producer surplus
Difference between the price and what sellers are willing to sell for
question
total surplus
Producer surplus + consumer surplus
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Lost efficiency when the optimal quantity is not being produced
question
Price ceiling
when the fixed government price is lower than the equilibrium price
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Price floor
if the fixed gov price is greater than the equilibrium price
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Input
workers
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Output
Products
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Fixed resources
Doesn't change as you increase output
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Variable resources
Changes as you increase output
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short run
When a firm has at least 1 fixed resource
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long run
When a firm has all variable resources
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Specialization
as you have more workers, they can specialize in different things
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law of diminishing marginal returns
As you add more variable resources the additional output will eventually increase
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Marginal product
How much the output increases when you add a new worker. This initially increases and the increases at a slower rate, then decreases
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total costs
fixed costs + variable costs
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Marginal cost
question
when a company experiences a more than double output
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Constant returns to scale
when a company double output
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decreasing returns to scale
when a company less than doubles output
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economies of scale
Long run average costs falls as more output is produced. Bigger companies can produce bigger which allows them to produce cheaper though machines and bulk buying
question
diseconomies of scale
It is possible where eventually the average cost might go up and companies have to hire new people and tech and etc
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Explicit costs
The money spent in a business not considering the time value
question
Accountant profit
total revenue - explicit costs
question
implicit costs
question
economic profit
total revenue - explicit costs - implicit costs
question
MR = MC
profit maximizing rule
question
normal profit
when there is no economic profit (total revenue = total costs)
question
shut down rule
A firm should shut down if the price falls below the minimum AVC
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perfect competition
Many small firms, Low barriers to entry and exit, identical products, firms are price takers
question
allocative efficiency
the firm is producing the amount society wants which is where the price = MC
question
productive efficiency
a firm is producing at the lowest cost where ATC is minimized
question
constant cost industry
when other firms enter the market, it didn't increase the price of the resources of the products
question
Imperfect competition
When MR is less than demand
question
Monopoly
Unique with no close subs, price makers, high barriers to entry
question
monopolistic competition
Price makers but other firms can join with few barriers. Different but similar products
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dominant strategy
When a firm does something regardless what the other competitor does
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Resource market
question
Public goods
Non exclusive, shared consumption, no profit
question
Externalities
external cost or benefit to someone other than that person involved in that transaction
question
Regulating monopolies
Regulate price so that ATC hits the demand
1 of 49
question
Elasticity
Measure of how sensitive quantity is to a change in price
question
Inelastic demand
Quantity is insensitive to a change in price.
Means there are not a lot of substitutes and tends to be a necessity. Coefficient is less than 1
question
% change in quantity / % change in price
Elasticity of demand coefficient formula
question
Elastic demand
Quantity is sensitive to a change in price. Has a lot of substitutes and has a coefficient greater than 1.
question
Unit elastic demand
When the coefficient is 1
question
Perfectly inelastic
vertical line and the coefficient is 0
question
perfectly elastic
horizontal line
question
total revenue test
if inelastic then the revenue goes up. Ex. Gas station

If elastic then the revenue goes down. Ex. clothing store
question
consumer surplus
difference between what consumers are willing to pay and what they do pay
question
Producer surplus
Difference between the price and what sellers are willing to sell for
question
total surplus
Producer surplus + consumer surplus
question
Lost efficiency when the optimal quantity is not being produced
question
Price ceiling
when the fixed government price is lower than the equilibrium price
question
Price floor
if the fixed gov price is greater than the equilibrium price
question
Input
workers
question
Output
Products
question
Fixed resources
Doesn't change as you increase output
question
Variable resources
Changes as you increase output
question
short run
When a firm has at least 1 fixed resource
question
long run
When a firm has all variable resources
question
Specialization
as you have more workers, they can specialize in different things
question
law of diminishing marginal returns
As you add more variable resources the additional output will eventually increase
question
Marginal product
How much the output increases when you add a new worker. This initially increases and the increases at a slower rate, then decreases
question
total costs
fixed costs + variable costs
question
Marginal cost
question
when a company experiences a more than double output
question
Constant returns to scale
when a company double output
question
decreasing returns to scale
when a company less than doubles output
question
economies of scale
Long run average costs falls as more output is produced. Bigger companies can produce bigger which allows them to produce cheaper though machines and bulk buying
question
diseconomies of scale
It is possible where eventually the average cost might go up and companies have to hire new people and tech and etc
question
Explicit costs
The money spent in a business not considering the time value
question
Accountant profit
total revenue - explicit costs
question
implicit costs
question
economic profit
total revenue - explicit costs - implicit costs
question
MR = MC
profit maximizing rule
question
normal profit
when there is no economic profit (total revenue = total costs)
question
shut down rule
A firm should shut down if the price falls below the minimum AVC
question
perfect competition
Many small firms, Low barriers to entry and exit, identical products, firms are price takers
question
allocative efficiency
the firm is producing the amount society wants which is where the price = MC
question
productive efficiency
a firm is producing at the lowest cost where ATC is minimized
question
constant cost industry
when other firms enter the market, it didn't increase the price of the resources of the products
question
Imperfect competition
When MR is less than demand
question
Monopoly
Unique with no close subs, price makers, high barriers to entry
question
monopolistic competition
Price makers but other firms can join with few barriers. Different but similar products
question
dominant strategy
When a firm does something regardless what the other competitor does
question
Resource market
question
Public goods
Non exclusive, shared consumption, no profit
question
Externalities
external cost or benefit to someone other than that person involved in that transaction
question
Regulating monopolies
Regulate price so that ATC hits the demand

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