Study AP Microeconomics with flashcards covering supply and demand, production costs, market structures (perfect competition, monopoly, oligopoly), and the graphs required for the FRQ section.
Must-Know AP Micro Terms and Graphs
- Profit Maximization Rule: A firm maximizes profit (or minimizes loss) by producing where MR = MC. This applies to all market structures. If P > ATC at that quantity: profit. If AVC < P < ATC: loss but should operate. If P < AVC: shut down.
- Deadweight Loss: Loss of total surplus (consumer + producer surplus) from a market inefficiency. Caused by monopoly power, taxes, price floors/ceilings, or negative externalities.
- Price Discrimination: Charging different prices to different consumers for the same good. Requires: market power, ability to separate markets, ability to prevent resale. 1st degree: perfect. 2nd: quantity discounts. 3rd: different groups.
- Externalities: Costs (negative) or benefits (positive) imposed on third parties not in the transaction. Negative: production exceeds social optimum. Positive: production falls below social optimum. Solutions: taxes/subsidies, regulations, property rights (Coase theorem).
- Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay. Area above price line and below demand curve. Monopoly reduces consumer surplus vs. competitive market.
- Marginal Revenue for Monopoly: MR curve lies below demand curve (MR < P). Monopolist faces downward-sloping demand, so must lower price to sell more units. Sets MR = MC for profit max, charges price from demand curve above that quantity.
- Oligopoly: Market with few large firms. Features: interdependence, barriers to entry, strategic behavior. Game theory (prisoners' dilemma) explains why oligopolists may collude but often defect.
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