Microeconomics- Everything You Need to Know
Summary
TLDRThis video by Jacob Clifford offers a comprehensive review for AP and college-level microeconomics students. It covers key concepts like scarcity, opportunity costs, production possibility curves, and comparative advantage. The summary also touches on economic systems, market structures, consumer and producer surplus, and market failures. It's designed for last-minute review before exams and to identify knowledge gaps. The video also promotes the 'Ultimate Review Pack' for further study materials.
Takeaways
- 📚 The video is an introductory microeconomics summary by Jacob Clifford for AP or college-level students, aiming to prepare them for exams and identify areas for further study.
- 🛍 Scarcity and opportunity costs are fundamental concepts, emphasizing that unlimited wants are met with limited resources, and every decision involves trade-offs.
- 📈 The production possibility curve illustrates efficient and inefficient production levels, with different shapes indicating constant or increasing opportunity costs.
- 🔄 Comparative advantage is a core principle, suggesting countries should specialize in products where they have lower opportunity costs and engage in trade for mutual benefit.
- 🌐 Trade can shift a country's production possibility curve, allowing for consumption beyond current resources without actually changing production capabilities.
- 💡 The circular flow model of the economy highlights the interactions between businesses, individuals, and the government in product and resource markets.
- 📉 The law of demand and supply explains the relationship between price and quantity, with equilibrium being established where supply meets demand.
- 🔗 Elasticity measures the sensitivity of quantity demanded to price changes, with elastic and inelastic demands having distinct impacts on total revenue.
- 💰 Consumer and producer surplus, as well as deadweight loss, are important concepts for understanding the efficiency of markets and the effects of price controls.
- 🏭 The theory of the firm in microeconomics involves understanding cost curves, inputs and outputs, and the principle of producing where marginal revenue equals marginal cost for maximum profit.
- 📊 Different market structures, such as perfect competition, monopolies, oligopolies, and monopolistic competition, each have unique characteristics and implications for pricing and output.
Q & A
What is the primary purpose of the video 'ACDC econ' by Jacob Clifford?
-The video is designed to provide a summary of essential concepts for an AP or college introductory microeconomics class, aiming to help students prepare right before their AP test or final exam and to review what they know and don't know.
What is the 'ultimate review pack' mentioned by Jacob Clifford?
-The 'ultimate review pack' is a product sold by Jacob Clifford that includes a bunch of practice questions and access to hidden videos to help students learn economics in greater detail than what is covered in the summary video.
What is the economic concept of scarcity?
-Scarcity refers to the idea that we have unlimited wants and limited resources, which means that every decision made has an opportunity cost, as resources are finite and choices must be made on how to allocate them.
Can you explain the production possibility curve and its significance in economics?
-The production possibility curve illustrates the different combinations of two different goods that can be produced using all available resources. Points on the curve represent efficient production levels, while points inside the curve are inefficient, and points outside the curve are currently impossible with the given resources.
What does the Law of Increasing Opportunity Cost imply about resource allocation?
-The Law of Increasing Opportunity Cost implies that as more of one product is produced, the opportunity cost of producing the other product increases. This occurs when resources are not similar, and producing more of one good requires giving up increasingly more of the other good.
What is the concept of comparative advantage and why is it important in international trade?
-Comparative advantage is the idea that a country should specialize in producing the product where it has a lower opportunity cost compared to other countries. This specialization leads to more efficient production and trade, benefiting all parties involved.
What is the difference between absolute advantage and comparative advantage in the context of trade?
-Absolute advantage is straightforward and refers to a country producing more of a good than another country. Comparative advantage, however, requires calculations and indicates which country should specialize in producing a particular good based on lower opportunity costs.
What is the significance of the circular flow model in understanding economic systems?
-The circular flow model shows the interactions between businesses, individuals, and the government in an economy. It illustrates the product market, where businesses sell products, and the resource market, where individuals sell their resources to businesses.
What is the concept of elasticity in economics and why is it important?
-Elasticity in economics measures how sensitive the quantity demanded or supplied is to a change in price. It is important because it helps predict how changes in price will affect consumer behavior and market outcomes.
What are the implications of price ceilings and price floors on market efficiency?
-Price ceilings and floors can lead to market inefficiencies by setting prices above or below the equilibrium level, causing shortages or surpluses. This can result in deadweight loss, which represents a loss of consumer and producer surplus and a reduction in overall market efficiency.
What is the significance of the 'MR=MC' rule in the theory of the firm?
-The 'MR=MC' rule, which stands for Marginal Revenue equals Marginal Cost, is a fundamental principle in the theory of the firm. It dictates the quantity a firm should produce to maximize profit, regardless of market structure.
What are the key differences between perfect competition and monopoly market structures?
-In perfect competition, there are many small firms with identical products, low barriers to entry, and they are price takers. In a monopoly, there is only one firm with a unique product, high barriers to entry, and the firm is a price maker, setting prices above marginal costs.
What is the concept of price discrimination in the context of monopoly markets?
-Price discrimination occurs when a monopoly charges different prices for the same product to different consumers or in different markets. This increases the firm's profit as it captures more consumer surplus.
What is the least cost rule and how does it apply to resource allocation?
-The least cost rule is a principle that helps firms determine the optimal combination of inputs (like labor and capital) to minimize production costs. It involves comparing the additional output (marginal product) of each input divided by its price, and adjusting the mix until the marginal utility per dollar is equal for all inputs.
What are market failures and why do they occur?
-Market failures occur when the free market does not allocate resources efficiently, leading to a divergence between the socially optimal quantity and the quantity produced by the market. This can happen due to externalities, public goods, or income inequality, among other factors.
What is the difference between positive and negative externalities?
-Positive externalities occur when an activity generates additional benefits to third parties who are not directly involved in the market transaction. Negative externalities occur when an activity imposes additional costs on third parties outside of the market transaction.
What is the significance of the Lorenz curve and Gini coefficient in measuring income inequality?
-The Lorenz curve visually represents the distribution of income within a population, with a 'banana' shape indicating a high level of inequality. The Gini coefficient is a numerical measure derived from the Lorenz curve, with a value of 0 representing perfect equality and 1 representing maximum inequality.
Outlines
📚 Introduction to Microeconomics and Study Tips
Jacob Clifford introduces the video as a summary for AP or college-level microeconomics students. The video aims to quickly cover key points for exams, emphasizing it's not a comprehensive re-teach but a review and readiness tool for the AP test or final exams. The presenter mentions the 'Ultimate Review Pack' for deeper practice and study. The video promises to cover microeconomics from scarcity and opportunity costs to comparative advantage, touching on economic systems and the circular flow model, with a call to action to support the channel for continued content creation.
📉 Fundamentals of Economics: Demand, Supply, and Elasticity
This section delves into the foundational concepts of demand and supply, explaining the downward-sloping demand curve and upward-sloping supply curve, and how they intersect to form market equilibrium. It discusses the impact of shifts in these curves due to various factors and introduces the concepts of substitutes and complements, normal and inferior goods. The paragraph also covers the intricacies of elasticity, including its calculation and implications for price sensitivity. Consumer and producer surpluses, as well as price controls like ceilings and floors, are explained, alongside strategies for identifying deadweight loss and the effects of international trade, tariffs, and taxes on market dynamics.
🔍 Microeconomic Analysis: Consumer Choice and Production Decisions
The script explores consumer choice theory, where consumers maximize utility by balancing the marginal utility per dollar spent on different goods. It transitions into a discussion on production decisions, starting with the relationship between inputs and outputs, and the concept of diminishing marginal returns. The importance of understanding cost curves (fixed, variable, total) and their behavior on a graph is highlighted. The paragraph also introduces the theory of the firm, emphasizing the significance of producing where marginal revenue equals marginal cost for profit maximization, and the shutdown rule for minimizing losses.
🏭 Market Structures and Firm Behavior in Microeconomics
This paragraph examines different market structures, starting with perfect competition and moving on to monopolies, oligopolies, and monopolistic competition. It explains how firms in these structures make pricing and production decisions, with a focus on the monopoly's ability to set prices and the implications of high barriers to entry. The concept of price discrimination in monopolies is introduced, along with the strategic considerations of oligopolies and the long-run equilibrium in monopolistic competition. The importance of recognizing the socially optimal output and the inefficiency of monopolies is also discussed.
👷 Labor Market Dynamics: Demand, Supply, and Wages
The focus shifts to the labor market, discussing the supply and demand dynamics that determine wages and employment. Derived demand for labor is introduced, along with the impact of minimum wage laws on unemployment. The concept of marginal revenue product (MRP) and marginal resource cost (MRC) are used to explain firm hiring decisions. The paragraph also covers the least cost rule for combining labor and capital efficiently, and the challenges of monopsony power in labor markets, concluding with the importance of understanding labor market equilibrium.
🛑 Addressing Market Failures and Income Inequality
The final paragraph addresses market failures, where the free market does not produce the socially optimal quantity of goods or services. Public goods and externalities are discussed, with examples of how government intervention can correct for negative and positive externalities through subsidies and taxes. The paragraph also introduces the concepts of income inequality, the Lorenz curve, and the Gini coefficient, explaining how different types of taxes can be progressive, regressive, or proportional. The summary concludes with an encouragement for students as they prepare for their exams.
Mindmap
Keywords
💡Scarcity
💡Opportunity Cost
💡Production Possibilities Curve
💡Comparative Advantage
💡Demand and Supply
💡Elasticity
💡Consumer Surplus
💡Producer Surplus
💡Price Ceiling and Price Floor
💡Market Equilibrium
💡Marginal Cost
Highlights
Introduction to the video by Jacob Clifford, aimed at preparing students for AP Microeconomics tests.
Scarcity as the fundamental economic concept with unlimited wants and limited resources.
Explanation of opportunity costs and the production possibilities curve.
The Law of Increasing Opportunity Costs and its impact on the shape of the production possibilities curve.
Comparative advantage and its importance in international trade.
Different economic systems such as capitalism, command economy, and mixed economy.
The circular flow model illustrating the interaction between businesses, individuals, and the government.
Demand and supply dynamics, including the law of demand and substitutes and complements.
Elasticity of demand and its calculation using the price and quantity changes.
Consumer and producer surplus, and the concept of deadweight loss.
Price controls like price ceilings and floors, and their effects on market efficiency.
International trade and the impact of tariffs and trade barriers on consumer and producer surplus.
Taxation and its effects on supply, demand, and the distribution of tax burden between consumers and producers.
Consumer choice theory and the application of the least cost rule in resource allocation.
Cost curves and the theory of the firm, including fixed, variable, and total costs.
Profit maximization and the shutdown rule in the context of marginal cost and average total cost.
Market structures beyond perfect competition: monopolies, oligopolies, and monopolistic competition.
Labor market analysis including derived demand, the concept of a monopsony, and the least cost rule.
Market failures due to public goods, externalities, and income inequality.
Solutions to market failures such as per-unit subsidies and taxes to correct externalities.
Income inequality measurement using the Lorenz curve and Gini coefficient.
Types of taxes and their impact on income distribution, including progressive, regressive, and proportional taxes.
Conclusion and encouragement for students preparing for exams, highlighting the importance of understanding the material.
Transcripts
hey how you doing econ students this is
Jacob Clifford welcome to ACDC econ now
in this summary video I'm going to go
over everything you need to know for an
AP or college introductory
microeconomics class I'm going to go
super fast but keep in mind this is not
designed to retach you all the concepts
it's designed to help you get ready
right before you walk into the big AP
test your big final also it's a great
way to review what you know and don't
know by watching the entire class over
again you can spot the things that you
have to go back and study and if you've
been watching my videos you know I sell
something called the ultimate review
pack it has a bunch of practice
questions and access to Hidden videos
that help you learn economics these
summary videos they cover everything in
Greater detail than this video I'm doing
right now now I was going to make this
video available only of people who buy
the packet but then I thought you know I
can trust people man if you like my
videos if these videos are helping you
learn economics please go get the packet
I'm going to make this video available
to everyone but if you like my stuff
please support my channel and help me
continue to make great Ecom videos okay
let's start it up now whether or not
you're enrolled in a microeconomics
class or a macroeconomics class it all
starts the same for a basic introductory
econ course it starts with the idea of
scarcity scarcity idea is we have
unlimited wants and limited resources
also you going to learn the idea of
opportunity costs that's the idea that
everything has a cost right it doesn't
matter what you're producing you got to
give up something to produce it any
decision you make has a cost now those
Concepts come together with the
production possibili is curve it's the
first graph you learn in economics it
shows the different combinations of
producing two different Goods using all
of your resources so any point on the
curve is efficient like you're using all
of your resources to the fullest any
point inside the curve is inefficient
any point out here outside the curve is
impossible given your current resources
and there's two different shapes you
have to remember if it's a straight line
production possibilities curve that
means there's constant opportunity cost
which means the resources to produce the
different products are very similar so
similar resources if it's a straight
line if it's a boat outline concave to
the origin that means the resources are
not very similar so when you produce
more of one you have to give more and
more of the other one that's called The
Law of increasing opportunity cost now
this curve can shift if you have more
resources like land labor and capital or
less resources or better technology that
can shift the curve another thing that
shifts the curve is trade if another
country trades with another country that
can shift out their production possibly
curve but it shows how much they can
consume not actually produce so it
doesn't actually change how much you can
make but you can uh consume beyond your
production possibly as curve and that
brings us to the hardest part of this
unit the idea of comparative advantage
comparative advantage is the idea that
country should specialize in the product
where they have a lower opportunity cost
so if you're producing one thing and I'm
producing something else if I can
produce a lower opportunity cost then
you I should produce this you should
produce other thing and then we should
trade now there's two different things
you got to remember absolute advantage
and comparative advantage absolute
Advantage is a joke it's easy you just
figure out who produces more that means
they have an absolute Advantage
comparative advantage requires you to do
some calculations or the quick and dirty
if you saw my unit summary video and it
tells you who should specialize in what
now another thing you have to learn is
the have terms of trade which means how
many units of one product should they
trade for the other product that would
benefit both countries that's the idea
of terms of trade in this unit you also
get a basic overview of different
economics systems like the free market
system capitalism and the idea of a
command economy and a mixed economy
we're going to focus on capitalism in
this class and so you learn the circular
flow model the circular flow model shows
you that there's businesses and
individuals and the government and how
they interact with each other just
remember businesses both sell and buy
two different things they sell products
and they buy resources so there's a
product market and there's a resource
market and individuals you and me we buy
products and we sell our resources and
the government does some stuff as well
another thing you're going to learn here
is some vocab like transfer payments
this is when the government pays
individuals like welfare but it's not to
buy anything it's just to provide some
public service and you also learn the
idea of subsidies when the government
provides businesses money to produce
more and also you're going to talk about
the idea of factor payments so
individuals sell the resources and
businesses pay the factor payments to
those individuals overall unit one is
quick and easy to learn I give it about
a three on the difficulty level out of
10 it's a fast unit makes you get it
makes you get compared Advantage now
unit 2 sets a foundation for everything
you're going to be doing later on you
start with demand and Supply remember
demand is a downward sloping curve that
shows you the law of demand when price
goes up people buy less of stuff right
when price goes down people buy more
that's the idea of price and quantity
demanded understand the idea that this
curve is downward sloping for three
reasons substitution effect income
effect and the law diminishing margin
utility there's also a law of supply
when the price goes up people produce
more price goes down people produce less
right price goes up quantity Supply goes
up price goes down quantity Supply goes
down now together they form equilibrium
please note if price goes up there is no
shift price does not shift the curve it
just moves along the curve creates
either shortage when the price is low or
a surplus when the price is higher you
should also understand when there's
actual individual shifts so there's only
four things that can happen demand can
go up demand can go down Supply can go
up or Supply can go down and you just
watch the graph draw the graph tells you
exactly what happens to the price and
quantity every single time now there's a
double shift when two curves shift at
the same time there's a double shift
rule when two curves shift remember
something is going to be indeterminant
right you can't tell what's going to
happen either price or quantity the
trick here is draw the graph draw the
shift that occurs and that's going to
tell you where you end up whichever one
looks the same right means that's
indeterminate because you can't tell
price will go up or down another trick
really quick is you can actually
separate it out so if demand goes up and
Supply goes up you can actually separate
those two things out put those results
together and that tells you which thing
is indeterminate price or quantity the
next thing you're talk about is the idea
of substitutes and compliments remember
substitutes are two products you buy in
place of each other compens are two
things you buy together the price of one
affects the demand for the other there's
also normal and inferior normal goods
are when the income goes up people buy
more of it inferior Goods when income
goes up people buy less of it the
hardest part probably in this entire
unit is the idea of elasticity
elasticity shows how quantity changes
when there's a change in price elastic
means when price goes up a little bit
people buy a whole lot less so quantity
is very sensitive to a change in price
and when the price goes down people buy
a whole lot more
sensitive to change in price in elastic
looks like this this is the idea when
price goes up people don't buy that much
less when price goes down people buy
just a little bit more so in elastic
demand means quantity is insensitive to
a change in price in this unit you also
learn about the elasticity of demand
coefficient which sounds hard but it's
not hard it's just the percent change in
quantity divided by the percent change
in price this number tells you how
elastic the demand is if it gives you
the absolute value is a number greater
than one that means it's elastic demand
and if it's less than one that makes it
an inelastic demand also you should
understand the idea of cross price
elasticity which is the same kind of
equation but it's a percent change in
quantity of one product relative to the
percent change in price of a completely
different product and it tells you if
they're compliments or substitutes a
positive number means they're
substitutes a negative number means they
complement there's also the income
elasticity coefficient which is the same
idea except it's percent change in
quantity divided by the percent change
income a positive number means a normal
good a negative number means an inferior
good now when you talk about elasticity
there there's also something called the
total revenue test this only applies to
demand don't worry about with the supply
it doesn't work with Supply the idea is
if price goes up and total revenue goes
up that means the demand must be
inelastic if price goes down total
revenue goes down then it must be in
elastic now if price goes up and the
total revenue goes down that means it's
elastic and it has to do with the size
of this box here so side by side you can
tell over here this is in elastic demand
over here it's elastic demand when the
price Falls in elastic demand total
revenue gets smaller that box gets
smaller over here when price Falls total
revenue gets bigger that must be El
elastic demand total revenue test back
to supply and demand make sure you can
spot consumer and producer Surplus
consumer surplus is right here producer
Surplus is right there consumer surplus
is the difference between what you're
willing to pay and what you did pay and
producer Surplus is the difference
between the price and what somebody's
want to sell it for competitive
efficient market maximizes consumer and
producer Surplus so there's no thing
called Dead weight loss now let's talk
about ceilings and Floors when the
government comes in and sets prices when
it's not at equilibrium that's the idea
of price price controls a ceiling looks
like this remember a ceiling always goes
below equilibrium if it's binding if the
question says the ceiling's above
equilibrium just remember nothing's
going to change price in quantity they
don't change a floor looks like this
right there it is a floor always goes
above equilibrium so there's a price
floor you should also be able to spot
consumer and producer Surplus on each
one of them consumer surplus and produc
surplus deadweight loss look like this
for a ceiling on a floor right that's
the idea dead weight loss is the idea of
lost consumer improved Surplus or we're
not being efficient in the market a
competitive market efficient no dead
weight loss ceilings floors monopolies
other Concepts you learn later on create
this idea of dead weight loss another
concept you might see that looks like
this but it's different is the idea of
international trade if we can buy other
products at a cheaper world price that
means the price will fall and that means
producer Surplus will get smaller but
consumer surplus will get bigger
consumers willing to pay did pay can buy
more we're going to import the amount of
shortage that would normally exist that
doesn't exist anymore you might see a
question about a tariff if this world
price goes up because the government
says Ah we don't like that you know low
price let's put a tariff on it that
creates dead weight loss like this and
there's a tariff Revenue box right there
in the middle next up is the idea of
taxes got a supply curve shifting to the
left this is a per unit tax you got to
be a to spot the box of tax revenue note
the vertical distance between the two
Supply curves is the amount of tax per
unit the Box on the top tells you how
much consumers pay of the tax box on the
bottom tells how much producers pay the
tax you can also find the total
expenditures spent on whatever product
this is and how much of that that
producers get to keep this is the net
revenue that producers actually get to
keep also should be spot what happens
when the elasticity changes to this
graph and who ends up paying the taxes
so right here shows you when the demand
is different shapes and different
elasticities who ends up paying for the
tax remember when the demand is
perfectly inelastic consumers pay all
the tax right the more elastic it gets
the more that producers pay of the tax
that's a lot of stuff but there's still
one more thing you have to learn it's a
little different it's the idea of
consumer choice this is the idea that
you have two different products and you
have different additional satisfactions
for each one and you got to figure out
what you actually want to buy keeping in
mind that they're two different prices
so you have to actually use an equation
here it's the margin utility per dollar
of one of them till it equals the margin
utility per dollar of the other one and
another words you figure out how much
additional satisfaction you're getting
divided by the price of one of them and
the additional satisfaction you're
getting from the other one divided by
the price of the other one and that puts
them in like terms and you just keep
buying the one that gives you the most
additional satisfaction divided by the
price right the test might give you a
question like this where it asks you
okay what should they buy if they only
had $30 and there's a special
combination combination that maximizes
the total utility you use this rule unit
2 is super important it's got a lot of
stuff but it's not like hard stuff so I
give this five out of 10 difficulty
level for unit 2 but make sure you
really get it because you're going to
add on to the stuff later on now unit 3
is really the meat and potatoes of
microeconomics this is where you talk
about cost curves you start doing some
calculations you start putting together
the theory of the firm it gets hard but
it starts off easy you start off by
learning about the idea of inputs and
outputs and as you hire more workers uh
this is the total product you can
calculate the marginal product which
shows you the additional output that
these producers produce so this shows
you the relationship between inputs and
outputs and you find out the law of
diminishing marginal returns this means
as you hire more workers and there's
fixed resources you're going to get less
and less additional output there's three
stages of returns this is happened
because of specialization this is
happening of fixed resources and this
happening because workers are stumbling
over each other in each other's way you
take that concept and you catapult now
into cost we talk about the three types
of costs there's fixed cost variable
cost and total cost variable plus fix
equal total that also gives us the per
unit cost curves like average total cost
average variable cost average fixed cost
marginal cost make sure you calculate
them and make sure you understand what
they look like on a graph graph looks
like this at any given quantity all you
can do is go straight up and that tells
you the cost per unit of that unit you
can also Al convert those per unit cost
to total cost just multiply the know
average total cost of producing a
certain number of units times the
quantity that gives you a box that box
is the total cost you can do the same
thing for the variable cost and for the
fixed cost now the shape of these curves
isn't just random they look like this
for a reason marginal cost goes down and
up because as you hire more workers they
specialize so the additional cost those
units are going to fall but as you hire
more workers they produce less and less
additional stuff and so the cost of
those additional units are going to
start going up so marginal cost
goes down and then it goes right back up
again also you should recognize the idea
that ATC hits marginal cost at atc's
minimum when marginal is below the ATC
it pulls it down when marginal is above
the ATC it pulls it right back up again
now it's important to keep in mind that
the cost curves I'm talking about these
are short run cost curves which is
different than the long run the long run
is the idea that all resources are
variable the short run there's some
resource that's fixed in the long run
all resources are variable so the law of
diminishing margin returns does need
apply instead we have a different graph
and a different concept it's right here
as you're producing more you can use
mass production techniques mass
production means your average cost the
long run average total cost will fall
that's the idea of economies of scale at
some point your costs don't fall in
lower you can't use any more mass
production techniques and so it levels
off that's called constant returns of
scale and eventually as you're producing
so much stuff your long run costs go
back up again your average costs go back
up and that's called disarms the scale
again that's the idea of the long run
costs long run costs are these short run
costs look like those now in this unit
you're going to be introduced the idea
of the theory of the firm which shows
you these cost curves except now with
some Revenue curves on top you start off
with perfect competition the idea that
there are many small firms thousands of
firms they all have the same exact
products they have low barriers so other
firms can enter really easy or exit and
the most important one they are price
takers that means they got to take the
price that's set by the market so that
gives you the graph the graph we already
learned back in unit 2 supply and demand
there it is an individual firm looks
like this it starts off the horizontal
demand curve that's equal to the
marginal revenue because if they want to
sell another unit they don't have to
change the price the price is set so
horizontal demand curve and which is the
marginal revenue curve which is Mr darp
if you've seen that before then you take
your cost curves bam throw your cost
curves on there now you can spot if
there's profit or a long run or making a
loss these Concepts you have to be able
to draw as well probably for a free
response make sure you recognize this is
the idea of profit that is the idea of a
loss and that is the idea of the long
run this is also when you're introduced
the most important Concept in all of my
microeconomics you produce where Mr
equals MC you get a tattoo on your arm
produce Mr equals MC that tells you
exactly how much to produce whether
you're Monopoly monop competition
perfect competition you always produce
where Mr equals MC because if you
produce or the marginal cost is greater
than the marginal revenue then you're
not maximizing profit if you produce
where the marginal cost is less than
marginal revenue again you're not
maximizing profit you can still earn
more profit so produce the same spot
everywhere every time Mr equals MC don't
forget it another skill you need to be
able to do is actually do the
calculations of average total cost
average fixed cost do those things and
then figure out how many units you
should produce so calculate the marginal
cost and figure out they gave you the
price how many un they should produce
and how much profit you're actually
making so you should be able to use the
chart to maximize Profit just as much as
using a graph now let's go back to that
loss notice the ATC is above the price
which makes sense if the price is down
here and the average total cost is
higher that means you're making a loss
per unit now if your loss gets big
enough you should shut down means you
tell your workers to go home and don't
produce anything at all because you
rather have your fixed cost be your loss
as to a bigger cost bigger than your
fixed cost the rule is this if the price
Falls below AVC you should shut down
it's called the shut down rule one more
time the Only Rule that trumps The
Profit maximizing rule is the shutdown
rule so what that means is that marginal
cost is actually a supply curve the
marginal cost upward sloping curve is a
supply curve you've been drawing ever
since back in unit 2 also you should
know not all of it not all of that
supply curve own the portion that's
above the ABC cuz if the price Falls
below ABC you shut down you don't
produce anything at all now let's go
back to the long run graph really
quickly you remember this this is the
idea of long run equilibrium total
revenue equals total cost that means
they're making no profit remember
there's two types of profit economic
profit and accounting profit in this
case they're making no economic profit
they're not cover they're not making
money up and above their opportunity
cost their total revenue equals their
total cost including their explicit
costs and implicit cost their
opportunity costs in other words this is
not a bad thing this means they're
breaking even they can't make more money
doing something else and they're not
losing any money this is the idea of a
normal profit but they are making
positive accounting profit now the
question is how does it look like this
well take a look in the short run here's
we're going to do short run to Long Run
they're making profit what happens well
firms because there's low barriers jump
in Supply shifts to the right lowering
the price back down boom long run you
can go the same way with a loss so
here's the loss firms going to leave
when they leave shift in the supply
curve to the left price goes back up or
it goes back to uh new long run bam long
run now the last thing in this unit is
the idea of efficiency remember there's
two different types productive and
allocative perfect competition in the
long run has both they're producing at
the productively efficient quantity
which means they're producing the lowest
ATC their cost are the lowest they can
be and they're also allocatively
efficient or socially optimal because
they're producing where the marginal
cost hits the demand in other words
people are willing to pay or the price
people are willing to pay exactly what
the marginal cost equals uh that tells
you the society actually wants those
units produce right if I'm want to pay
$10 and it cost you $10 to produce it
you produce the right amount if I'm want
to pay $10 and it cost you $20 to prod
it then you obviously produce the wrong
quantity again that's the idea of
efficiency remember efficiency has more
to do with Society than the firm so a
monopoly is not efficient not because
they're not making profit and doing well
for themselves but they're not efficient
with society's resources unit three by
far is the hardest unit it's when you're
introduced to all these cost curves you
got to practice make sure you get it I
give this a nine out of 10 difficulty
level spend your time practice this unit
now here we go in unit four remember
there's four Market structures perfect
competition and three others in this
unit we're going to going to learn the
three others we've got monopolies
oligopolies monopol competition so let's
jump into these things first thing
Monopoly obviously one firm they've got
a unique product and uh there's High
barriers and the market is the firm
which makes the graph a whole lot easier
there's not two side-by-side graphs
there's one graph we've got a downward
opening demand and a marginal revenue
that's less than that for all imperfect
competition monopolies monopol
competition the reason why is if they
want to sell another unit they got to
lower the price they're not price takers
they're price makers you should also
recognize the elastic and the inelastic
ranges of this demand curve over on this
side that's the elastic range because
when the price is falling total revenue
is going up and when the price is going
down on this side total revenue is going
down that's the idea of the total
revenue test now we take the cost curves
that we've already learned put them on
the Monopoly you identify the profit
maximizing quantity Mr equal MC charge a
price up to demand and now you can spot
the profit the total revenue and the
total cost you should also be able to
draw this using a loss now that's a
monopoly there's also a natural monopoly
the idea that there's smarter to have
just one firm producing it because at
the quantity soci optimal we've got the
average total cost is still falling that
means they can produce at the lowest
possible cost now that's the idea of
Regulation the government can come in
and regulate this right here is
unregulated that's if the firm is left
to its own device it will choose to
produce where marles MC maximize profit
right here is the idea of socially
optimal where there be no deadweight
loss and right here's something called
Fair return that's the idea that they're
making no economic profit they're
breaking even right there where the
price hits the ATC you should also be
able to recognize consumer surplus for
the Monopoly and also the dead weight
loss now here's a trick really quick
dead weight loss will always point to
socially optimal remember socially
optimal is well marginal cost hits the
demand or hits the price so right there
is what we want produce and a Monopoly
underproduce Monopoly charges a higher
price and produces less output so right
there is the amount Society actually
wants the dead weight loss will always
point to it like that and it shows you
what we should do we should be producing
more output Society wants more now the
same concept of of pointing to social
optimal applies to ceilings and Floors
and laters will find out with positive
and negative externalities you might
also see another type of Monopoly this
is a price discriminating Monopoly this
means they're charging multiple prices
not just one price the marginal revenue
actually becomes the demand curve so
they're produce where Mr equal MC but
they're going to charge multiple
different prices that means the profit
gets a whole lot bigger consumer surplus
disappears and deadweight loss
disappears they're producing actually
the socially optimal quantity then you
start learning about oligopolies the
idea that there's many small firms
who've got a really high barriers and
they have strategic pricing they got to
worry about the pricing of the other guy
you can see we've got a game theory
Matrix right here you should be able to
spot dominant strategy for each one of
the two different firms and identify
something called Nash equilibrium I'm
not going to do the details now but I
got a ton of videos that show you
actually how to do that skill also
understand the idea of monopolistic
competition this is the idea that it's
like a monopoly because they're a price
maker but it's like perfect competition
because firms can enter right so what
you have is the same graph as before
Monopoly graph in this case making
profit but it doesn't stay there right
right because firms can enter so in the
long run firms will enter when they
enter that means the demand's going to
go down demand's going to fall this
monopolis competitive firm because now
they have to share more customers with
the new firms that jumped in so now
we're in the long run that's a graph to
do that's monopolis competition and long
run equilibrium unit four is a bear
there's the Monopoly graph a lot of
different concepts you have to learn but
since you already did perfect
competition it should help you out in
fact you should actually learn more
about perfect competition when you do
monopolies because it kind of puts
Concepts together in your brain I give
an eight out of 10 difficulty okay now
we're talking about the resource Market
unit five it talks about supply and
demand now for labor remember just like
we mentioned before in the circular flow
model businesses sell products in the
product Market but they also hire
resources in the resource market so now
the demand is the demand by firms for
workers and Supply is by you and me so
me and you are supplying individuals are
supplying and businesses are demanding
the first concept you have to know is
the idea of derive demand the demand for
labor depends on the product that that
labor produces so if the demand goes up
for pizza then the demand's going to go
up for pizza delivery drivers that's the
idea of derived demand you should also
be able to recognize shifts in this
curve and the idea of minimum wage
minimum wage is a binding floor and so
the price goes up in this case the wage
goes up the Quan demand Falls the
quanity supply increases and we have
unemployment of resources also recognize
the idea of MRP and MRC the first thing
you have to be able to do is do the
chart right here you have the number of
workers you have the total they produce
you learn this back in unit 3 but then
you have to calculate the additional
Revenue these workers generate you do
that by doing the marginal product then
you calculate the marginal revenue
product the additional Revenue they
generate what you do is you multiply the
product the additional output the
marginal product times the price and
then you compare that to the marginal
resource cost which is the cost of
highing number worker now in a perfect
competitive uh resource Market each
worker costs the same and that tells you
that you should hire a certain number of
workers now that concept also applies to
a graph you take that chart put on a
graph you get this side-by-side graphs
we've got that market graph from before
horizontal supply curve which equals the
marginal resource cost and a downward
sloping marginal revenue product because
each worker is worth less and less
Revenue to your company you hire where
MRP hits MRC just like before instead of
producing now though we're hiring it's
important to see that a perfect
competitive firm in the resource Market
is just the flip version of a perfect
competitive firm in the product Market
we have a horizontal curve except now at
Supply and a downward sloping curve as
opposed to an upward sloping curve from
before so if you can draw one just turn
around and flip it and draw the other
one now that same concept applies to
something called A monopsony a monopsony
is a monopoly for labor so instead of
having a downward demand curve and a
downward Mr that's below it we have an
upward soping supply curve and an MRC
that's above it the reason why is they
can't wage discriminate when they hire
another worker they're going to charge
that worker the wage and the workers
they were paying less the higher wage so
the MRC is actually higher they're going
to hire where MRP hits MRC always except
they're going to pay pay a wage below uh
the down to the supply curve what people
are actually willing to work for
monopsony graph now the last Concept in
this unit is the idea the least cost
rule this is like margin utility except
now we're talking about marginal product
you have two different resources labor
and machines and you're trying to figure
out what's the right combination of
hiring and the idea is you have to
calculate the additional output that
each one of these generates divided by
the price this puts them again in like
terms so I want to know what's the
additional output I get from another
unit of Labor and what's the price of
that labor what's the additional output
from another machine or another Capital
divided by the price of that machine if
they're equal perfect I'm got the least
possible cost if one's higher I should
keep doing that one right and that
number is going to fall because it's
diminishing marginal returns and right
that's going to fall if this one's
higher than I do that one instead and
this is called the least cost rule that
is the equation now unit five is
actually pretty short and it's actually
kind of easy but the problem is is
different than all the other units we
are looking at supply and demand but
we've never really seen a horizontal
supply curve very often so I give this
one a six out of 10 difficulty only
because it's the one that students
haven't often they often forget right
they often forget there's really very
few graphs here and just one major skill
figure out how many workers you can hire
okay the last unit unit six we talk
about market failures market failures
the idea the free market is awesome it's
great but sometimes it fails it ends up
producing the wrong stuff the Invisible
Hand of the free market ends up getting
the wrong quantity and the socially
optimal quantity is different than what
uh the free market it's actually
providing the first one is the idea of
public goods public goods have two
characteristics number one shared
consumption or what's called non-rivalry
when I use it you can use it we can all
use it your consumption of it doesn't
destroy it for me and most importantly
this idea of non-exclusion you cannot
exclude people from enjoying it uh if
they didn't pay their taxes so
non-exclusion shared consumption mean
that it's a true public good obviously
the free Market's not going to provide
it if they can't get people to buy and
pay for it if you know you can't exclude
people from enjoying the benefits free
market can't make it cuz they can't make
profit so the government's going to step
it in said the next thing you're going
to learn is the idea of externalities
externalities is when there's additional
cost or benefits on some of the person
so the free market assumes that the
people who buy and sell things to each
other are paying all the costs and
receiving all the benefits but what if
somebody else pays those costs or
receives those benefits well that gives
you the idea of negative externalities
and positive externalities a negative
externality is when there's additional
cost on another person notice we have
two cost curves one's the marginal
private cost the other one's the
marginal social cost and that tells you
the social costs are above the private
cost the firm's not recognizing these
additional costs you've got a qualtity
quantity free market and right here's
the quantity socially optimal the free
Market's messing it up so where is dead
weight loss well it's right there notice
it's pointing to socially optimal great
positive externality is the idea there's
additional benefits so not two cost
curves but two benefit curves we've got
a demand curve down here which is the
marginal private benefit we also have a
marginal social benefit that's right
there and that tells you that Society
wants more of this this but the free
market is not recognizing those
additional benefits to other people so
again we've got a quantity free market
quantity soci optimal free Market's
messing it up and the benefits are
spilling over to some other person the
deadweight loss is right here to solve
the problem you can do a perun subsidy
to either consumers or producers to
produce more by the way for a negative
externality you want to do a perun tax
to get them to produce less the last
thing you learn is the idea about the
Loren curve and the idea of income
inequality it's a graph looks like this
you've got the percent of families
percent of income and this diagonal line
right there tells you perfect equality
the actual curvy curve line right there
shows actual distribution of income the
bigger the ba banana I tell my students
the banana graph the bigger the banana
the more income inequality you can also
learn about the genie coefficient and
actually calculate the area of a
relative to the area of A and B combined
the last thing you learn here is the
idea of types of taxes there's three
different types Progressive regressive
RVE proportional now $2 tax on consumers
$2 tax on all consumers is actually a
regressive tax because $2 is a larger
percent income for poor people so even
even though everyone's paying the same
dollar amount they're paying different
percents of their income so a
progressive tax means uh rich people pay
a higher percent of their income like a
income tax in the United States uh
proportional means they pay the same
percent of income like everyone pays 10%
of their income and regressive tax is
the idea that poor people pay a higher
percent of income so a $2 tax although
it seems Progressive it's not it's
regressive because poor people pay a
higher percent of their income when they
pay just $2 unit six is actually pretty
easy because it's just the application
of supply and demand which you learned
earlier it's got a few definitions uh
there's not that much to do calculation
wise so I give this a four out of 10
difficulty level to finish off the class
hey thank you so much for watching this
video I wish you all the best of luck on
the AP test or on your big final exam
hey you're going to do awesome okay
thanks for watching till next time
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