Yesterday we finished up Demand in the Resource market with looking at the Substitution, Output and Net Effects.
Today we have some work related to all of Resource Demand.
First up you can do, "The Only Game in Town (Activity 4-3)". It is the last three sheets on this link:
Unit 4 Worksheets
So scroll down to find that.
Second you can do, "Factor Market Pricing." It is the last three sheets on this link:
More Unit 4 Worksheets
That link also starts with the unit review for Unit 4.
Thursday, April 30, 2020
Wednesday, April 29, 2020
Answers to the Practice Chart
Here are the answers to the chart I gave you last week.
Practice Labor Chart
It's always possible I made a mistake. If you think so, let me know.
Practice Labor Chart
It's always possible I made a mistake. If you think so, let me know.
April 29 - Substitute Resources
Last time we looked at the determinants of resource demand. For the most part they are pretty simple and intuitive. However, we did not get to the last of the determinants.
We handled complimentary resources. This was pretty simple, since it just makes sense that if you are going to get more or less of one resource, you would also get more or less of a complimentary resource.
Now we need to look at substitute resources.
This one gets a bit tricky, because it ends up looking at two effects caused by one change in price.
At first it seems pretty straightforward. After all if the price of substitute resource A goes down you will want to buy more of A. Once you buy more of A, you will want less of B, right?
The answer is yes, but also maybe no. This is because we have to look at two affects caused by the change in price.
These two changes are called the Substitution Effect and the Output Effect. Then we can put those two together and we call it the Net Effect.
The Substitution Effect is what we described above. It is the idea that when the price of Resource A goes down, we will substitute A for B and our demand for Resource B will go down. And of course is the price of resource A goes up our demand for Resource B will go up.
This is effectively the exact same thing we looked at when we talked about substitute goods in the product market. But there is a second effect, the Output Effect.
Let's say you had a business that needed both A and B to operate. Some jobs can be done only with Resource A. Some jobs can only be done with Resource B. And some jobs can be done with either resource A or B. Obviously for the 3 set of jobs, you will choose A or B depending on which one is cheaper overall. (That's the substitution effect.)
When the price of Resource A went down you got more A's and less B's. And when you switched from B to A that switch will save you money. If you are big operation, that switch might save you a lot of money. What can you do with that money you've saved?
You will likely use that excess of money to increase production. If you increase production you will now need more of every resource you use. Because some jobs can only be done with Resource B, you will need to get more B's to do that resource.
This is the Output effect. By saving money with the substitution effect, you can increase output.
The substitution effect means less of Resource B.
The output effect means more of Resource B.
When we add together the substitution and output effect we get the Net Effect.
If the substitution effect is having a bigger impact we will overall have less B's. But if the output effect is having a bigger impact we will overall actually increase our use of B's.
Here is a power point that goes into detail on these interplay of these two effects. Please feel free to ask questions about it. I'll admit it can make you scratch your head.
The Substitution, Output and Net Effects
Don't forget that there will be a Zoom meeting at 10:00 tomorrow if you have questions.
We handled complimentary resources. This was pretty simple, since it just makes sense that if you are going to get more or less of one resource, you would also get more or less of a complimentary resource.
Now we need to look at substitute resources.
This one gets a bit tricky, because it ends up looking at two effects caused by one change in price.
At first it seems pretty straightforward. After all if the price of substitute resource A goes down you will want to buy more of A. Once you buy more of A, you will want less of B, right?
The answer is yes, but also maybe no. This is because we have to look at two affects caused by the change in price.
These two changes are called the Substitution Effect and the Output Effect. Then we can put those two together and we call it the Net Effect.
The Substitution Effect is what we described above. It is the idea that when the price of Resource A goes down, we will substitute A for B and our demand for Resource B will go down. And of course is the price of resource A goes up our demand for Resource B will go up.
This is effectively the exact same thing we looked at when we talked about substitute goods in the product market. But there is a second effect, the Output Effect.
Let's say you had a business that needed both A and B to operate. Some jobs can be done only with Resource A. Some jobs can only be done with Resource B. And some jobs can be done with either resource A or B. Obviously for the 3 set of jobs, you will choose A or B depending on which one is cheaper overall. (That's the substitution effect.)
When the price of Resource A went down you got more A's and less B's. And when you switched from B to A that switch will save you money. If you are big operation, that switch might save you a lot of money. What can you do with that money you've saved?
You will likely use that excess of money to increase production. If you increase production you will now need more of every resource you use. Because some jobs can only be done with Resource B, you will need to get more B's to do that resource.
This is the Output effect. By saving money with the substitution effect, you can increase output.
The substitution effect means less of Resource B.
The output effect means more of Resource B.
When we add together the substitution and output effect we get the Net Effect.
If the substitution effect is having a bigger impact we will overall have less B's. But if the output effect is having a bigger impact we will overall actually increase our use of B's.
Here is a power point that goes into detail on these interplay of these two effects. Please feel free to ask questions about it. I'll admit it can make you scratch your head.
The Substitution, Output and Net Effects
Don't forget that there will be a Zoom meeting at 10:00 tomorrow if you have questions.
Tuesday, April 28, 2020
Review Sessions for the AP Micro Test
It isn't quite time to start reviewing for the AP Test, but I wanted to set up a new remind that was just for the AP Review.
So, if you are going to take the AP Micro Test in May and you wish to be involved in the review, you should sign up for this remind.
You can join the remind by:
1) Texting @faakf8 to the number 81010
or
2) There are alternate instructions on this page:
Joining the AP Micro Review Remind
If you know someone who took AP Econ in the Fall Semester, could you please let them know about signing up for the remind.
So, if you are going to take the AP Micro Test in May and you wish to be involved in the review, you should sign up for this remind.
You can join the remind by:
1) Texting @faakf8 to the number 81010
or
2) There are alternate instructions on this page:
Joining the AP Micro Review Remind
If you know someone who took AP Econ in the Fall Semester, could you please let them know about signing up for the remind.
April 28 - Classwork
For today's classwork you can work on Activity 4-1 How Many Workers Should A Firm Hire.
You can find it here:
Unit 4 Worksheets
Note that this link has a lot of worksheets on it. For now, just do the first one, which is the first 7 pages or so.
Tomorrow we will handle the substitution effect.
You can find it here:
Unit 4 Worksheets
Note that this link has a lot of worksheets on it. For now, just do the first one, which is the first 7 pages or so.
Tomorrow we will handle the substitution effect.
Monday, April 27, 2020
April 27 - Resource Demand Part 2
Today we are looking at the second set of notes about resource demand.
Resource Demand Part 2
The first part of the notes is about graphing.
We don't really need to talk about graphing the resource market, because we already know what every market graph looks like. It's a standard "X" graph.
We are now going to learn about graphing resource demand for an individual firm. (We will learn about graphing resource supply for a firm next week.)
The short version is that it is a standard downward sloping Demand line. There's some finer nuance about how sloped the demand line is, but we don't really need to worry about that.
So, it's that simple. When making a graph for an individual firm, the Demand line is just a standard downward sloping D line. (Don't worry, the Supply lines will be more difficult.)
Next up, DETERMINANTS !!!!!!!!!!!
Yep, you guessed it. Just like in the product market there are determinants of demand in the resource market. They fall into three broad categories. I don't have a spiffy acronym, so you just got to memorize these.
Determinants of Resource Demand
1. Changes to Quantity in the Product Market
2. Changes in Productivity in the Resource Market
3. Changes in the Price of Other Resources
1) The first set of determinants is Changes to the Quantity in the Product Market. We've touched on this before when we talked about derived demand. Anything that changes the quantity of our product means we will need more or less workers to make that product.
Example: We have a factory that makes cars. Thus we have supply and demand for cars in the product market. We also have supply and demand for labor used to make those cars in the resource market.
In the PRODUCT market, if either the Supply OR the Demand moves, we will end up needing a new quantity of cars. When the quantity of cars changes that will change how many workers we need. It will change our DEMAND for labor.
Note that it doesn't matter what line moved in the product market. Whether it was the demand for cars OR the supply for cars, it will end up moving the DEMAND for workers.
Saying that a different way. ALL of the Determinants of Demand and ALL of the Determinants of Supply in the PRODUCT market will change Demand in the RESOURCE Market.
2) The second set of determinants is Changes in Productivity in the Resource Market. This breaks down into three subcategories.
a) Changes in the Quantity of other resources. In your car making factory you have a lot of different types of resources you demand. You have a demand for labor, but you also have a demand for tires, steel, radios, paint, windshields and a lot more.
Let's keep our focus on the Demand for Labor. NOTHING has changed with our labor. However, there is suddenly a shortage of steel. You can only get half the amount of steel you want. How does that affect labor? Obviously you now need less laborers.
b) Technological Advances. What if another resource you used was a painting machine that painted your new cars. Let's call it the Paintsprayer 2000. It can paint 3 cars in an hour. Then the Paintsprayer 3000 comes out. It can paint 6 cars in an hour. You can now paint twice as many cars in an hour. You can now make more cars in an hour. But in order to make more cars, you need to up production everywhere else in the factory. You now need more laborers.
The increase in productivity of Resource A (Paint sprayer) has caused an increase in the Demand of Resource B (Labor).
c) Quality of the Variable Resource. This one is very similar to the last one. We again have a resource getting better, but in this case the increase in the goodness of the resource means we also want to have more of the resource. To use a different example, if we send our workers off to get trained in the latest car making techniques, they can make more cars per hour. Thus we want more workers. We have an increase in the demand for Labor. An increase in the productivity of Resource A (labor) causes an increase in the Demand for Resource A (labor)
3) The third set of determinants is changes in the Price of Other Resources. This should sound a lot like a determinant of demand in the Product Market (the Price of Other Goods). But in this case we have a change in the price of Resource A changing our demand for Resource B.
Just like with the Price of Other Goods, there are two subcategories: Compliments and Substitutes.
Compliments work exactly as you would suppose.
If something happens to make you want more of Complimentary Good A, you are also going to want more of Complimentary Good B.
If something happens to make you want less of Complimentary Good A, you are also going to want less of Complimentary Good B.
If you can easily get more steel, you need more workers to make cars out of that steel.
If you don't want as much steel, you need less workers to make cars because you have less steel.
The final bit is Substitute Resources. This is the tricky one. As such we are going to learn it later.
So that's it for today!
Resource Demand Part 2
The first part of the notes is about graphing.
We don't really need to talk about graphing the resource market, because we already know what every market graph looks like. It's a standard "X" graph.
We are now going to learn about graphing resource demand for an individual firm. (We will learn about graphing resource supply for a firm next week.)
The short version is that it is a standard downward sloping Demand line. There's some finer nuance about how sloped the demand line is, but we don't really need to worry about that.
So, it's that simple. When making a graph for an individual firm, the Demand line is just a standard downward sloping D line. (Don't worry, the Supply lines will be more difficult.)
Next up, DETERMINANTS !!!!!!!!!!!
Yep, you guessed it. Just like in the product market there are determinants of demand in the resource market. They fall into three broad categories. I don't have a spiffy acronym, so you just got to memorize these.
Determinants of Resource Demand
1. Changes to Quantity in the Product Market
2. Changes in Productivity in the Resource Market
3. Changes in the Price of Other Resources
1) The first set of determinants is Changes to the Quantity in the Product Market. We've touched on this before when we talked about derived demand. Anything that changes the quantity of our product means we will need more or less workers to make that product.
Example: We have a factory that makes cars. Thus we have supply and demand for cars in the product market. We also have supply and demand for labor used to make those cars in the resource market.
In the PRODUCT market, if either the Supply OR the Demand moves, we will end up needing a new quantity of cars. When the quantity of cars changes that will change how many workers we need. It will change our DEMAND for labor.
Note that it doesn't matter what line moved in the product market. Whether it was the demand for cars OR the supply for cars, it will end up moving the DEMAND for workers.
Saying that a different way. ALL of the Determinants of Demand and ALL of the Determinants of Supply in the PRODUCT market will change Demand in the RESOURCE Market.
2) The second set of determinants is Changes in Productivity in the Resource Market. This breaks down into three subcategories.
a) Changes in the Quantity of other resources. In your car making factory you have a lot of different types of resources you demand. You have a demand for labor, but you also have a demand for tires, steel, radios, paint, windshields and a lot more.
Let's keep our focus on the Demand for Labor. NOTHING has changed with our labor. However, there is suddenly a shortage of steel. You can only get half the amount of steel you want. How does that affect labor? Obviously you now need less laborers.
b) Technological Advances. What if another resource you used was a painting machine that painted your new cars. Let's call it the Paintsprayer 2000. It can paint 3 cars in an hour. Then the Paintsprayer 3000 comes out. It can paint 6 cars in an hour. You can now paint twice as many cars in an hour. You can now make more cars in an hour. But in order to make more cars, you need to up production everywhere else in the factory. You now need more laborers.
The increase in productivity of Resource A (Paint sprayer) has caused an increase in the Demand of Resource B (Labor).
c) Quality of the Variable Resource. This one is very similar to the last one. We again have a resource getting better, but in this case the increase in the goodness of the resource means we also want to have more of the resource. To use a different example, if we send our workers off to get trained in the latest car making techniques, they can make more cars per hour. Thus we want more workers. We have an increase in the demand for Labor. An increase in the productivity of Resource A (labor) causes an increase in the Demand for Resource A (labor)
3) The third set of determinants is changes in the Price of Other Resources. This should sound a lot like a determinant of demand in the Product Market (the Price of Other Goods). But in this case we have a change in the price of Resource A changing our demand for Resource B.
Just like with the Price of Other Goods, there are two subcategories: Compliments and Substitutes.
Compliments work exactly as you would suppose.
If something happens to make you want more of Complimentary Good A, you are also going to want more of Complimentary Good B.
If something happens to make you want less of Complimentary Good A, you are also going to want less of Complimentary Good B.
If you can easily get more steel, you need more workers to make cars out of that steel.
If you don't want as much steel, you need less workers to make cars because you have less steel.
The final bit is Substitute Resources. This is the tricky one. As such we are going to learn it later.
So that's it for today!
Thursday, April 23, 2020
April 23 - MRP & MRC Practice Chart
Here's a practice chart that deals with the two new variables we learned yesterday: MRP & MRC.
Profit and Labor Practice Chart
Later this unit we will have a quiz that involves one of these charts.
Next Week we will finish up the Demand side of Labor.
Profit and Labor Practice Chart
Later this unit we will have a quiz that involves one of these charts.
Next Week we will finish up the Demand side of Labor.
Wednesday, April 22, 2020
AP Exam Note
Here's a little message from the College Board about making sure you have access before the day of the exam.
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Students will need access to
their email or College Board account to take the 2020 AP Exams. You can help
ensure that your students have access in the following ways:
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April 22 - Resource Market Part 1 Continued
Today we will finish up the first power point on the resource market. Here's the ppt again:
Resource Market Part 1
The second half of the power point introduces us to two new variables. Except in a way they are not new at all, they are just new versions of old variables.
The first of these is Marginal Revenue Product or MRP. Let's break it down word by word.
Marginal means additional. Revenue is the money that you get when you sell a product. And in this case Product really means production or the amount of product being produce.
Put that all together and Marginal Revenue Product means what is the Additional Revenue we get for producing another unit of a good. In other words, how much more money do we earn buy producing one more.
This is very similar to Marginal Product (MP) or Marginal Physical Product (MPP).
MPP is a measure of how much more production do you get when you add a resource.
MRP is a measure of how much more money do you get when you add a resource.
The formula for MPP is:
MPP = ΔQ/ΔL
The formula for MRP is:
MRP = ΔTR/ΔL
This formula is for finding the MRP when the resource you are adding is labor. If we were looking at a resource other than labor, the bottom of our fraction would be the change in that resource.
(Notice how this formula fits with our basic "Marginal" formula. Marginal is always Change in Total divided by Change in Quantity.)
The second new variable we need to learn has three different names. They are:
Marginal Resource Cost (M RC)
Marginal Factor Cost (MFC)
Marginal Cost of Labor (MCL)
Two of these names are literally the exact same variable. MRC and MFC mean exactly the same thing. How much more will it cost me to add one more of a resource/factor of production.
MCL means the same thing, but it only applies to labor. How much more will it cost me to add one more unit of labor (which is a resource/factor of production.)
If you are talking about labor, you can use any one of these three variables. If you get one of the rare questions in which the resource in question is NOT labor, then you cannot use MCL.
The formula for MFC/MRC/MCL is yet another version of our root "Marginal" formula. Marginal is always Change in Total divided by Change in Quantity.
MFC = ΔTotal Factor Cost / ΔQuantity of that Factor; shortening that down we get
MFC/MRC = ΔTC/ΔQ
For MCL we can be more specific.
MCL = ΔTC/ΔL
So there you have it. Two new variables. Why are they important?
What's the golden rule of Econ?
You should keep doing something until the Marginal Benefit is equal to the Marginal Cost.
The corollary of that rule for the Resource Market is that you should continue adding units of a resource until the Marginal Revenue Produced by that new resource is equal to the Marginal Cost of adding that resource. In other words keep adding a resource until
MRP = MFC or MRP = MRC
If we are specifically talking about labor we can say
MRP = MCL
Note that it is really still the golden rule of econ, it's just been made more specific for the Resource Market.
The notes go into more depth about filling out a chart. Tomorrow I'll have a chart for you to practice with. Then next week we will look at the second part of Resource Demand, which will include graphs!
Resource Market Part 1
The second half of the power point introduces us to two new variables. Except in a way they are not new at all, they are just new versions of old variables.
The first of these is Marginal Revenue Product or MRP. Let's break it down word by word.
Marginal means additional. Revenue is the money that you get when you sell a product. And in this case Product really means production or the amount of product being produce.
Put that all together and Marginal Revenue Product means what is the Additional Revenue we get for producing another unit of a good. In other words, how much more money do we earn buy producing one more.
This is very similar to Marginal Product (MP) or Marginal Physical Product (MPP).
MPP is a measure of how much more production do you get when you add a resource.
MRP is a measure of how much more money do you get when you add a resource.
The formula for MPP is:
MPP = ΔQ/ΔL
The formula for MRP is:
MRP = ΔTR/ΔL
This formula is for finding the MRP when the resource you are adding is labor. If we were looking at a resource other than labor, the bottom of our fraction would be the change in that resource.
(Notice how this formula fits with our basic "Marginal" formula. Marginal is always Change in Total divided by Change in Quantity.)
The second new variable we need to learn has three different names. They are:
Marginal Resource Cost (M RC)
Marginal Factor Cost (MFC)
Marginal Cost of Labor (MCL)
Two of these names are literally the exact same variable. MRC and MFC mean exactly the same thing. How much more will it cost me to add one more of a resource/factor of production.
MCL means the same thing, but it only applies to labor. How much more will it cost me to add one more unit of labor (which is a resource/factor of production.)
If you are talking about labor, you can use any one of these three variables. If you get one of the rare questions in which the resource in question is NOT labor, then you cannot use MCL.
The formula for MFC/MRC/MCL is yet another version of our root "Marginal" formula. Marginal is always Change in Total divided by Change in Quantity.
MFC = ΔTotal Factor Cost / ΔQuantity of that Factor; shortening that down we get
MFC/MRC = ΔTC/ΔQ
For MCL we can be more specific.
MCL = ΔTC/ΔL
So there you have it. Two new variables. Why are they important?
What's the golden rule of Econ?
You should keep doing something until the Marginal Benefit is equal to the Marginal Cost.
The corollary of that rule for the Resource Market is that you should continue adding units of a resource until the Marginal Revenue Produced by that new resource is equal to the Marginal Cost of adding that resource. In other words keep adding a resource until
MRP = MFC or MRP = MRC
If we are specifically talking about labor we can say
MRP = MCL
Note that it is really still the golden rule of econ, it's just been made more specific for the Resource Market.
The notes go into more depth about filling out a chart. Tomorrow I'll have a chart for you to practice with. Then next week we will look at the second part of Resource Demand, which will include graphs!
Tuesday, April 21, 2020
April 21 - Resource Market Work
Yesterday we started looking at the resource market. Tomorrow we will finish the notes and look at a couple of new terms and look at one of our charts to see how these terms impact things.
For today there is just a simple worksheet to highlight the difference between the product market and the resource market. You can find the worksheet here:
As the Circular Flow Turns
For today there is just a simple worksheet to highlight the difference between the product market and the resource market. You can find the worksheet here:
As the Circular Flow Turns
Monday, April 20, 2020
April 20 - Unit 4 - The Resource Market
1) Check your Answers
Before we begin something new, I wanted to give you the answers to the Game Theory Worksheet I gave you last week. Here it is:
Game Theory Worksheet Answers
If you did not get the correct answers, I would first suggest watching the three videos I posted last week about Game Theory. If that doesn't fix your problems, then you can wait until Thursday and ask me in the weekly Zoom meeting. Or you can email me, but it is harder to explain this by email.
2) Unit 4
Today we are beginning unit 4. As I've said previously, there are only 3 power points to cover in this unit. However, we will probably be breaking them up into 5 or so sets up online lessons.
Our first notes are about Resource Demand:
Resource Demand Part 1
Here's a picture of a circular flow diagram:
Before we begin something new, I wanted to give you the answers to the Game Theory Worksheet I gave you last week. Here it is:
Game Theory Worksheet Answers
If you did not get the correct answers, I would first suggest watching the three videos I posted last week about Game Theory. If that doesn't fix your problems, then you can wait until Thursday and ask me in the weekly Zoom meeting. Or you can email me, but it is harder to explain this by email.
2) Unit 4
Today we are beginning unit 4. As I've said previously, there are only 3 power points to cover in this unit. However, we will probably be breaking them up into 5 or so sets up online lessons.
Our first notes are about Resource Demand:
Resource Demand Part 1
Here's a picture of a circular flow diagram:
For the most part, the majority of what we've done so far has taken place in the Product Market. We have looked at how a business decides how much of a product to sell and how many of that product customers will buy.
For Unit 4, we now will travel down to the Resource Market/Factor Market. Because we are now looking at the buying and selling or resources or the factors of production, we will now look at how a business decides how much of a resource it should BUY and how a household decides how much of that resource it should SELL.
Over all Unit 4 is pretty simple, as it is just looking at the things we already know through a new lens. Still doing this often confuses students. In particular they start trying to mix their Unit 4 knowledge into questions that have nothing to do with Unit 4.
One of the things that makes Unit 4 tricky was highlighted by the ALLCAPS two paragraphs ago. When we are in the Factor market, the roles or supply and demand switch.
In the PRODUCT market: Businesses SELL products and Households BUY products.
In the RESOURCE market: Businesses BUY resources and Households SELL resources.
In other words the role of Supply and Demand have flipped.
In the PRODUCT market: Business SUPPLY and Households DEMAND.
In the RESOURCE market: Business DEMAND and Households SUPPLY.
Essentially the rules we've previously used about how Supply and Demand work, have not changed. We are just now flipping who they are applied to.
One of the differences is the type of demand we have in the resource market. It is different because it isn't a pure demand. Instead we say it is a "Derived Demand".
What does that mean?
Let's say you have a pizzeria. In the product market you supply pizzas. But in the resource market, you demand things like: tomato sauce, cheese, pepperoni, and labor.
In fact, most of the time in AP Micro, the questions they ask about the resource market limit themselves to Labor. There are occasionally questions with other things, but 95% of the time it's just labor. Because of that, we will mostly limit ourselves to just focusing on labor too.
Now back to derived demand.
In the product market your customers want pizza. They have a demand for pizza.
In the resource market your business has a demand for workers to make those pizzas. But your demand is different because your demand wouldn't exist without the first demand of customers wanting pizza.
Said differently, there is no demand for workers at the pizzeria, if there is not first a demand for pizza. Your demand for workers comes from (or is derived from) your customer's demand for pizza.
How this impacts your business is that your demand for workers can change in two ways. First we could have something happen in the resource market. Imagine a standard Market graph with an X made of Supply and Demand. Here's an example:
Notice that there are a few other changes on our graph. In the product market our y-axis was price of the product. In the resource market the y-axis is still price, but now it is price of the resource. Of course we have a special name for the price of labor. We call it wages. So when we are drawing a graph for the labor market, we label the y-axis "W".
In the product market the x-axis is labeled Q for the quantity of the product. In the resource market it is still quantity, but now it is the quantity of the resource. In the labor market, we are talking about the Quantity of Labor. So we usually label it "L". (Naturally this only applies if we are actually talking about the labor market. If the question happens to be one of the rare times that we aren't talking about labor, it wouldn't by W and L.)
If either the S or the D line shifts, the equilibrium quantity or workers needed in the resource market will change and consequently you will need more or fewer workers. Here's an example:
- Two new pizzerias open in your neighborhood. According to the determinants of demand, Demand will now increase. This is an increase in the number of buyers. There are now two new businesses in the market demanding pizzeria workers. This increase in demand. On our graph the demand line would shift to the right and both the wages and quantity of people hired would go up.
But your demand for workers will also change if something happens to the equilibrium quantity of pizzas in the product market. Here's and example:
- The popularity of pizza in America rises. This is an increase in Taste and Preferences in the PRODUCT market. In the product market Demand increases. This means that the price of pizza will go up and that the quantity of pizza sold will also go up.
HOWEVER, in order for your business to make more pizzas, you are going to need MORE workers at your pizzeria. In other words, your derive demand for workers goes up too! Thus the Demand line in the RESOURCE market also goes up. This drives wages up and the number of people working at a pizzeria also goes up.
That's enough for today. That gets us about halfway through the power point. We'll cover the second half next time.
Thursday, April 16, 2020
April 16 - Game Theory Practice
Yesterday we started looking at game theory and a payoff matrix.
Game Theory Work Sheet
Today all we have is a sheet with four more practice questions. If you do them and want me to check your answers you can send me a copy of your sheet and I'll be glad to check it for you.
Game theory is the end of Unit 3. So next week we will start looking at Unit 4.
There are only 3 power points that go with unit four, but I may have to divide one of them up into more than one day. Either way, there is not much new material to handle.
After that we will begin reviewing for the AP test.
Game Theory Work Sheet
Today all we have is a sheet with four more practice questions. If you do them and want me to check your answers you can send me a copy of your sheet and I'll be glad to check it for you.
Game theory is the end of Unit 3. So next week we will start looking at Unit 4.
There are only 3 power points that go with unit four, but I may have to divide one of them up into more than one day. Either way, there is not much new material to handle.
After that we will begin reviewing for the AP test.
Wednesday, April 15, 2020
Test corrections
As I said before, I was able to go to my classroom and gather some materials. However, the more I look at it the more clear it is that doing test corrections is going to be very hard to manage. Having thought a long time about it, I have come to the decision that the best solution is for me to go back and give everyone points as if they have done their test corrections. In fact, I have already done this.
To give the people who have already done their corrections some credit for their work, I have given those people a bit more credit on top of what they have already received on their tests.
If it helps you make sense of this, pretend that I went back and curved the tests. Sort of.
You do not have to turn in any test corrections for any test you already have in your possession. You can turn it in if you want, but you will not receive any additional credit for doing so.
To give the people who have already done their corrections some credit for their work, I have given those people a bit more credit on top of what they have already received on their tests.
If it helps you make sense of this, pretend that I went back and curved the tests. Sort of.
You do not have to turn in any test corrections for any test you already have in your possession. You can turn it in if you want, but you will not receive any additional credit for doing so.
April 15 - Game Theory with Oligopolies
Imagine that you are 1 of thousands of firms who sell a product. You are able to produce all of the product that you'd like and sell it. You are maximizing your profit. You then hear that one of your main competitors is going out of business. How does this impact you?
The answer is that it doesn't. Sure the business that shut down did have customers who used to shop at that business and will now be looking for a new place to shop, but they have thousands of choices in the market to choose from. You might have a handful of that business' customers come to your shop but it isn't something you are even going to notice. You are still going to produce the same amount of your product. In fact, there isn't much that a competitor does that you are going to care about at all.
Now imagine that you are 1 of three firms that sell a product. Unlike the previous example you are constantly worried about and watching what your two competitors are doing. Why? Because there is a limited pool of people willing to buy this product and the three of you are already dividing that pool up. Thus, if they do something to gain new customers it means that they had to take those customers away from one of the other businesses. If you lose a customer, the customer is going to one of your two competitors. If you gain a customer, you had to have taken that customer from a competitor. You care a LOT about what the other businesses are doing.
That idea is what drives an oligopoly. The economics term is "mutual interdependence". It means that you are linked to and dependent on everything the other businesses in the oligopoly are doing. You do not and cannot act in a vacuum. If they are able to lower their prices, then you are forced to lower yours. If they come up with a new design or feature, then you are forced to match their moves.
One of the ways that works itself out is with game theory. Game theory is the idea that we can only decide what our best action is by looking at what the other firm's best actions are. A business won't act on its own. It will first study its opponents and then decide to act. (If you've ever played chess, it's a lot like chess. You can't just move your pieces. You have to think about how the other player is going to move his pieces.)
The main way that game theory shows up in AP Micro is with a payoff matrix. A payoff matrix can be much bigger, and can be between more than two firms, but for AP Micro it is always a two by two grid that shows how two firms will respond when making a choice between two options.
It's probably best to learn by showing you an example and talking about it. Here is a typical payoff matrix:
The answer is that it doesn't. Sure the business that shut down did have customers who used to shop at that business and will now be looking for a new place to shop, but they have thousands of choices in the market to choose from. You might have a handful of that business' customers come to your shop but it isn't something you are even going to notice. You are still going to produce the same amount of your product. In fact, there isn't much that a competitor does that you are going to care about at all.
Now imagine that you are 1 of three firms that sell a product. Unlike the previous example you are constantly worried about and watching what your two competitors are doing. Why? Because there is a limited pool of people willing to buy this product and the three of you are already dividing that pool up. Thus, if they do something to gain new customers it means that they had to take those customers away from one of the other businesses. If you lose a customer, the customer is going to one of your two competitors. If you gain a customer, you had to have taken that customer from a competitor. You care a LOT about what the other businesses are doing.
That idea is what drives an oligopoly. The economics term is "mutual interdependence". It means that you are linked to and dependent on everything the other businesses in the oligopoly are doing. You do not and cannot act in a vacuum. If they are able to lower their prices, then you are forced to lower yours. If they come up with a new design or feature, then you are forced to match their moves.
One of the ways that works itself out is with game theory. Game theory is the idea that we can only decide what our best action is by looking at what the other firm's best actions are. A business won't act on its own. It will first study its opponents and then decide to act. (If you've ever played chess, it's a lot like chess. You can't just move your pieces. You have to think about how the other player is going to move his pieces.)
The main way that game theory shows up in AP Micro is with a payoff matrix. A payoff matrix can be much bigger, and can be between more than two firms, but for AP Micro it is always a two by two grid that shows how two firms will respond when making a choice between two options.
It's probably best to learn by showing you an example and talking about it. Here is a typical payoff matrix:
A pay off matrix always represents two people, businesses, countries, etc. In this case we have Alex's business and Bob's business. Alex is on the left side and Bob is on the top.
There is always a choice between two options. It could be choosing between: to advertise or to not advertise, to sell product A or sell product B, to have a sale or not have a sale, to upgrade your machinery or to not upgrade it; or, as we have in this matrix, to charge high prices or to charge low prices. It can literally be anything, but for AP Micro there will always be two choices.
So, in our matrix above the top two boxes represent Alex charging high prices. The bottom two boxes represent Alex charging low prices. The left two boxes represent Bob charging high prices. The right two boxes represent Bob charging low prices.
Finally there will a set of two numbers in each box. Typically the first number in EACH box represents the person on the left. The second number in EACH box represents the person on the top. However, DON'T ASSUME. Always read the question fully, as it will tell you for sure which number goes with each person.
The numbers in the box can represent anything. They might be revenue or profit, but they could also represent a cost. Again, DON'T ASSUME. Always read the question fully. It will explicitly tell you what each number represents. This is important because if the numbers represent something good, then you want to pick higher numbers. If the numbers represent costs or something bad, then you want to pick lower numbers. DON'T ASSUME. READ THE QUESTION.
For our matrix, let's have the numbers in the box represent profit in thousands of dollars. And the first number in each box will be Alex's profit and the second number will be Bob's. Given all of that what is the box on the upper left corner telling us?
The box in the upper left says that Alex has decided to have high prices and Bob has also decided to have high prices. When that happens Alex will make $28,000 in profit. Bob will make $24,000.
The box on the lower left says that if Alex decides to have low prices, while Bob has high prices, then Alex will make $18,000 in profit. Bob will make $35,000.
Of these two boxes, clearly Alex would prefer the top box in which Alex makes $28,000. After all $28,000 is better than $18,000. Of those two Bob would prefer the bottom box in which he makes $35,000. After all $35,000 is better than $24,000.
But how did we get from the top box to the bottom? We got there because Alex switched from high prices to low prices. Bob had nothing to do with this switch. That is because Alex is the one that choose whether we are in the top row or the bottom row. Alex chooses which row they are on, by deciding between high and low prices.
Meanwhile Bob decides whether we will be in the left column or the right column. Alex has no control over which column they will be in. Bob choose by deciding whether he will have high or low prices. If he choose high prices, then they will be in the left column. If he choose low prices, then they will be in the right column.
How does that impact the market? In other words how do we "solve" a payoff matrix. In order to figure out what will happen in this market, we have to look at how each person will respond to the other's actions. That will help us to identify boxes that are called "Nash Equilibriums." (Named after John Nash. The movie "A Beautiful Mind" is about him. You should watch it. It's a great movie.)
A Nash Equilibrium is a box in which neither person has an incentive to change their strategy. If we look at a box and can see that one of the people can improve their situation by changing their strategy (in this case changing what level they set their prices) then it is NOT a Nash Equilibrium.
For instance let's look at the lower left box. The box that represents Alex having low prices and Bob having high prices. It says in that situation Alex will make $18,000 in profit. Bob will make $35,000. Do either of them have an incentive to change?
If Bob shifted from high prices to low prices, Bob's profits would drop from $35,000 to $12,000 (Because they would now be in the lower right box). That is a loss of profits. Bob does NOT have an incentive to change.
If Alex shifted from low prices to high prices to high prices profits would shift from $18,000 to $28,000. (Because they would now be in the upper left box.) That is $10,000 more in profits. Alex definitely DOES have an incentive to change strategies. Because of this fact, we know that the lower left box is NOT a Nash Equilibrium.
Here's the matrix again:
Okay, now back to solving the matrix. How you solve the matrix is first you pretend you are one of the two people. Let's start by pretending we are Alex.
If you are Alex and Bob sets his prices high, what do you do in response? If Bob sets his prices high, you will also set your prices high. In that case, Alex would rather set prices high and get $28,000 instead of $18,000.
If you are Alex and Bob sets his prices low, what do you do in response? If Bob sets his prices low, you will still set your prices high. In that case, Alex would rather set prices high and get $43,000 instead of $27,000.
Notice how for Alex it didn't matter what Bob did. Whether he sets his prices high or low, Alex will set prices high. In a situation like this we say that Alex has a "Dominant Strategy". That just means one person doesn't care what the other does. The other person's choices do not impact which option you will choose.
But we aren't done yet. Now we have to switch perspectives and pretend we are Bob.
If you are Bob and Alex sets prices high, what do you do? If Alex sets prices high Bob should set his prices low. After all Bob would rather have $25,000 than $24,000.
If you are Bob and Alex sets prices low, what do you do? If Alex sets prices low Bob should set his prices high. After all Bob would rather have $35,000 than $12,000.
Notice how for Bob it does matter what Alex does. Bob will change his strategy based on what Alex chooses. If Alex chooses high, Bob should choose low. If Alex chooses low, Bob should choose high. Bob does NOT have a dominant strategy. That means one person is going to react to what the other does.
Let's go back through the matrix one more time. This time when we are looking at how a person will respond, let's put a circle around the choice they will pick. As an example, if Bob choose high prices, Alex will pick high prices and make $28,000. So let's put a circle around the number 28. Let's do that for all of the possible outcomes.
When we do that, we get this:
(I color coordinated the two firms so it is clear which circle goes with which outcome.)
What are these circles telling us? The fact that there are two circles in the upper right box tell us that this is Nash Equilibrium. Let's check to be sure.
If we were in the upper right box, does either person have an incentive to change?
If Alex changes from high to low prices, profits drop from $43,000 to $27,000. Alex does not want to change.
If Bob changes from low to high prices, profits drop from $25,000 to $24,000. Bob does not want to change.
That box is a Nash Equilibrium.
The other three boxes are not Nash Equilibriums. In each of them one or both people will have a reason to change. Check on your own to see how that is true.
A matrix can have 0, 1, 2, 3 or even 4 Nash Equilibriums. However, for AP Micro you are likely to see one with 1 or 2 Nash Equilibriums. You might see one with 0. You almost assuredly will not see one with 3 or 4.
In a matrix a dominant strategy can be held by both, one or neither of the people. You could see any of these options.
Here is a power point that has some more practice examples.
Here are two Clifford Videos on this and a Crash Course Econ on it too.
Tomorrow I'll have some more examples for practice.
Also Zoom meeting tomorrow at 10:00. I can do some examples then too.
Tuesday, April 14, 2020
April 14 - Monopolistic Competition Work
Yesterday we learned about Monopolistic Competition and Oligopolies. Here are links to the notes, in case you missed them:
Monopolistic Competition
Oligopolies
Today we have a quiz on Monopoly Graphs and you should be working on the Monopolistic Competition work.
Here is the link for the quiz:
Monopoly Graph Quiz
You can turn it in at any time.
Here is the link to the Monopolistic Competition work:
Monopolistic Competition Worksheet
We don't really have any oligopoly work, because it is very similar to monopoly and because we don't learn the individual graphs because they are such a mess. Instead for oligopoly we learn about game theory. We will have notes about that tomorrow.
As I mentioned before I am going to figure something out for test corrections, but I need to get into my classroom first. I am scheduled to go by the school tomorrow and pick up the things I need. I have to go in the morning, so my post for tomorrow might come a bit later in the day.
Monopolistic Competition
Oligopolies
Today we have a quiz on Monopoly Graphs and you should be working on the Monopolistic Competition work.
Here is the link for the quiz:
Monopoly Graph Quiz
You can turn it in at any time.
Here is the link to the Monopolistic Competition work:
Monopolistic Competition Worksheet
We don't really have any oligopoly work, because it is very similar to monopoly and because we don't learn the individual graphs because they are such a mess. Instead for oligopoly we learn about game theory. We will have notes about that tomorrow.
As I mentioned before I am going to figure something out for test corrections, but I need to get into my classroom first. I am scheduled to go by the school tomorrow and pick up the things I need. I have to go in the morning, so my post for tomorrow might come a bit later in the day.
Monday, April 13, 2020
April 13 - Monopolistic Competition and Oligopolies
1) Here is a statement the county made last week.
Students and Parents,
This notification is to inform you of the latest
information released by the county regarding your child’s grade. As noted
from the district communication, students have a choice to accept their grades
as of March 13, 2020 as final grades for the 2019-2020 school year OR Continue
to earn grades for the remainder of the 2019-2020 school year to improve their
grade(s). We want to clarify that if a student chooses not to
participate, perform or actively engage with his/her teacher(s) and they do not
take advantage of assignment opportunities, this will result in their final
grade being the grade that they had on March 13th. The only
way for the March 13th grade to improve is for the student to submit
assignments and participate in the digital learning opportunities made
available to him/her by the teacher.
2) Schedule Going Forward: Because of the county's new schedule for classes, we have to adjust our schedule. From now on, there will be no new work on Fridays. Instead Friday is for students to catch up. Thus in general we will now use the following schedule:
Mon: New Material
Tue: Work related to that material
Wed: New Material
Thu: Work related to that material
Fri: Student catch-up day.
3) Schedule for This week:
Mon: Monopolistic Competition and Oligopoly
Tue: Work on MC and Oli. Plus a Monopoly Graph Quiz
Wed: Game Theory
Thu: Work on Game Theory
Fri: Student catch-up day.
3) Tomorrow's Work: For those that want to get ahead, here is the worksheet for Tuesday.
4) Tomorrow's Quiz: There will be a quiz on reading monopoly graphs. I will post it tomorrow. It is NOT due tomorrow. You can turn it in whenever you finish it. It will essentially be like the worksheets that I have given you in the past about monopoly graphs. It is an open note quiz.
5) Zoom meeting: We will have our weekly Zoom meeting on Thursday at 10:00.
6) Test Corrections: As I said in a previous blog, I have a plan for test corrections but it requires me to go to my office at school. I had previously thought I would be able to get to my office on Tuesday (4/14), but I now am scheduled to be able to go there this Wednesday (4/15). Thus, I should be able to tell you something on Thursday.
7) Today's notes:
Today we are going to handle all of Monopolistic Competition. (Shortened to MC for the rest of this post.) We will also handle half of oligopoly. It sounds like a lot, but it will really be very easy.
Here’s the MC notes:
What makes MC so easy is that it acts exactly like either a monopoly or a PC firm. The only thing you have to remember is when it does each. Most of the time it is more like a monopoly. Nevertheless it IS NOT a monopoly. Remember the basic characteristics of MC:
- Lots of firms
- Selling nearly identical products
- Low barriers to entry
- Very small control over price
- Unless you can use non-price competition to convince customers otherwise. Then you gain lots of control over price.
Graphing MC is super easy because it is the same as monopoly. You still have the MR line lower than the DARP line. The only difference is that the MR line and the DARP lines tend to be flatter than a monopoly. This is because there are more firms in the market, thus there are substitute goods available. More substitutes means more elastic. More elastic means these lines are flatter.
In the short run a MC firm acts like a monopoly. That means we are still looking for MR=MC to determine our quantity. We still use the DARP line to determine whether we should shut down or stay open.
In the long run a MC firm acts like a PC firm. That means it will break even in the long run. This is for the same reason as a PC market. If the firms in a MC market are making a profit, in the long run, more firms will enter the market and drive the price down. This will continue until there is no longer a profit. If the firms in a MC market are losing money, in the long run, firms will leave the market. This will continue until the price rises back to where everyone left in the market is breaking even.
However it will be different from a PC firm in that it WILL NOT be at the bottom of the ATC curve. Like a monopoly the MC firms DARP line is sloping downward. This means there is no reason for the firm to ever produce at the bottom of the ATC. If it is breaking even, the DARP line will touch the side of the ATC curve. Like this:
Here are the Oligopoly notes:
Remember that an oligopoly is only a few firms. Usually we think of it being somewhere in the 2-4 range, though it could possibly be a little more than that.
Oligopolies are like MC in that they can be more like a PC market or more like a monopoly. It depends on how the firms decide to act.
If the firms in the oligopoly decide to compete against each other they will act like a MC market.
However, since there are so few firms, they could decide to work together and collude. If they do this, the firms are all working together and will effectively be a monopoly.
Graphing oligopolies is a giant mess. Because of that, we don’t worry about graphing individual firms for oligopoly. We can still have a graph for an oligopoly market because it is still your standard X market graph.
On Wednesday we will learn about Game Theory.
8) Questions?
If you have questions you can email me and ask them OR you can just wait and ask them during the Zoom meeting on Thursday.
Sunday, April 5, 2020
Grade Improvement Opportunities for AP Econ
Here are a few things everyone can do to improve their grade in AP Econ.
All of this is optional and is not required.
1) Grade Improvement Opportunity
- Go to USATestprep.com and login. (If you do not know your login info OR you don't have an account, email Mr. Baumann and I will tell you the information you need.)
- On the website, at the top of the page there is a pull down menu labeled "Practice". On that pull down menu choose Econ EOC Updated. (As of when I am writing this post, it is on the far left column, second to the bottom.)
- Click the "Take a Test" link. It is on the left hand side just under a pink square.
- A pop-up window will appear. On it choose, "Large - 75% of actual test length."
- Choose My Name on the Teacher pull down box. It will force you to choose Honors Econ as the class, but that is okay. I will still get the results and know it's for AP Econ.
- Take the test. It has 57 questions. The test is open notes. The test is over all of Econ as it relates to general econ knowledge. This is NOT an AP econ test. It is essentially the topics the EOC would have been over.
This test will go in under the test category as "Grade Improvement Opportunity". I will only put it in the grade book if it helps improve your grade. This is 100% optional. You do NOT have to do it if you don't want to.
2) Test Corrections
The week after Spring Break, I will hopefully be able to get into my classroom and gather some papers I need. After that, I will have a specific post about how we will handle test corrections. Please bear with me until then.
3) Missing Work
If you have any missing classwork or summaries, please turn them in. If you are missing a quiz and wish to make it up, please email me and I will get you the quiz.
All of this is optional and is not required.
1) Grade Improvement Opportunity
- Go to USATestprep.com and login. (If you do not know your login info OR you don't have an account, email Mr. Baumann and I will tell you the information you need.)
- On the website, at the top of the page there is a pull down menu labeled "Practice". On that pull down menu choose Econ EOC Updated. (As of when I am writing this post, it is on the far left column, second to the bottom.)
- Click the "Take a Test" link. It is on the left hand side just under a pink square.
- A pop-up window will appear. On it choose, "Large - 75% of actual test length."
- Choose My Name on the Teacher pull down box. It will force you to choose Honors Econ as the class, but that is okay. I will still get the results and know it's for AP Econ.
- Take the test. It has 57 questions. The test is open notes. The test is over all of Econ as it relates to general econ knowledge. This is NOT an AP econ test. It is essentially the topics the EOC would have been over.
This test will go in under the test category as "Grade Improvement Opportunity". I will only put it in the grade book if it helps improve your grade. This is 100% optional. You do NOT have to do it if you don't want to.
2) Test Corrections
The week after Spring Break, I will hopefully be able to get into my classroom and gather some papers I need. After that, I will have a specific post about how we will handle test corrections. Please bear with me until then.
3) Missing Work
If you have any missing classwork or summaries, please turn them in. If you are missing a quiz and wish to make it up, please email me and I will get you the quiz.
Friday, April 3, 2020
April 3 - Today's Work and Some Information About Things Going Forward
Today's Work:
Remember that this is based on the notes from yesterday.
If you click the link below and scroll down you should complete the pages for Activity 3-14: Regulating a Monopoly.
Monopoly Work Sheets
Additional Information:
As I am sure you've all heard by now, online learning will continue and teachers are now allowed to put in new grades. However, nothing can make your grade go below what it was on March 13 when we were last at school.
We are close to being done with new material. I would guess there are around five more days of notes/new topics and then we will be done.
Sometime after Spring Break I will post a monopoly/monopolistic competition graph quiz. There will likely be one or two more quiz type assessments after that. Doing well on these can only make your grade go up.
I'm not sure what type of test we will have, but I'll figure something out.
For those of you who don't yet have your unit 2 tests, but still want to do test corrections for that, I'll come up with something.
For now what you can be doing to bring up your grade is turn in old work. If you have missing classwork, summaries, test corrections, etc. Turn them in. If you can, take a photo or scan them and then email that to me.
If you are missing a quiz or test, please reach out to me and we can figure out what to do about that.
Some of you have already emailed me things and I am in the process of working through them and putting in the grades. Bear with me, there's a bit of a backlog as we weren't allowed to put in grades before today.
Once we have finished with the new material, my intention is to then shift into reviewing for the AP test. If you look on the AP Central website they have some additional information about the test. Here is a brief list of how the test will be given (as I currently understand it).
- It will be taken at home. The time for the AP Micro test is 4:00 pm on May 20.
- It will be open note/open book.
- You will be allowed to use a simple 4 function calculator.
- It will still be a timed test. I believe it will be around 45-50 minutes.
- It will have three FRQ's. You'll have 25 minutes for two short FRQs that count 55% and then another 15 minutes for one long FRQ that counts 45%
- You will NOT have to draw and submit any graphs.
- It will NOT have a multiple choice section.
- It will NOT be about the material that AP calls Unit 6. (Their units are different than ours.) These are the things that will not be on the test. (Most of them were in our Unit 2.)
- Social efficiency. (Allocative efficiency).
- Externalities
- Public vs Private Goods (including the ideas of rivalry and excludability)
- Effects of Government Intervention in the Different Market Structures. This includes per-unit and lump sum taxes as well as Price Floors and Ceilings. As I read it those topics will not be included but only as it applies to the different Market Structures. They CAN still be included as they apply to the Market Graph. (In other words you CAN have questions about price ceilings on a standard Supply and Demand X graph. You CANNOT get a question about price ceilings on the MACG.)
- Inequality (in particular the Lorenz curve and the GINI Coefficient.)
If you have more questions, please email me.
Remember that this is based on the notes from yesterday.
If you click the link below and scroll down you should complete the pages for Activity 3-14: Regulating a Monopoly.
Monopoly Work Sheets
Additional Information:
As I am sure you've all heard by now, online learning will continue and teachers are now allowed to put in new grades. However, nothing can make your grade go below what it was on March 13 when we were last at school.
We are close to being done with new material. I would guess there are around five more days of notes/new topics and then we will be done.
Sometime after Spring Break I will post a monopoly/monopolistic competition graph quiz. There will likely be one or two more quiz type assessments after that. Doing well on these can only make your grade go up.
I'm not sure what type of test we will have, but I'll figure something out.
For those of you who don't yet have your unit 2 tests, but still want to do test corrections for that, I'll come up with something.
For now what you can be doing to bring up your grade is turn in old work. If you have missing classwork, summaries, test corrections, etc. Turn them in. If you can, take a photo or scan them and then email that to me.
If you are missing a quiz or test, please reach out to me and we can figure out what to do about that.
Some of you have already emailed me things and I am in the process of working through them and putting in the grades. Bear with me, there's a bit of a backlog as we weren't allowed to put in grades before today.
Once we have finished with the new material, my intention is to then shift into reviewing for the AP test. If you look on the AP Central website they have some additional information about the test. Here is a brief list of how the test will be given (as I currently understand it).
- It will be taken at home. The time for the AP Micro test is 4:00 pm on May 20.
- It will be open note/open book.
- You will be allowed to use a simple 4 function calculator.
- It will still be a timed test. I believe it will be around 45-50 minutes.
- It will have three FRQ's. You'll have 25 minutes for two short FRQs that count 55% and then another 15 minutes for one long FRQ that counts 45%
- You will NOT have to draw and submit any graphs.
- It will NOT have a multiple choice section.
- It will NOT be about the material that AP calls Unit 6. (Their units are different than ours.) These are the things that will not be on the test. (Most of them were in our Unit 2.)
- Social efficiency. (Allocative efficiency).
- Externalities
- Public vs Private Goods (including the ideas of rivalry and excludability)
- Effects of Government Intervention in the Different Market Structures. This includes per-unit and lump sum taxes as well as Price Floors and Ceilings. As I read it those topics will not be included but only as it applies to the different Market Structures. They CAN still be included as they apply to the Market Graph. (In other words you CAN have questions about price ceilings on a standard Supply and Demand X graph. You CANNOT get a question about price ceilings on the MACG.)
- Inequality (in particular the Lorenz curve and the GINI Coefficient.)
If you have more questions, please email me.
Thursday, April 2, 2020
April 2 - Regulating a Monopoly, Monopoly Work and More
Old Work:
I appreciate all of you that turned in your Monopoly Graph and the Monopoly Chart. I was going through and checking them all but it is very time consuming as you each seemed to find a different way to turn it in.
So, in the interest of you being able to quickly check your work, I am posting the answers here.
Monopoly Graph Answer
Monopoly Chart Answer
As a reminder, remember that going forward Monday's and Thursday's will be new Notes. Then Tuesday's and Friday's will be for doing the work related to those notes.
Zoom Meeting:
There will be a Zoom meeting on Fridays. Tomorrow we will be meeting at 1:00. This is NOT a mandatory meeting. It is just for you to ask questions and get help. If you can't make it to the meeting, don't worry about it.
I will post the link to the meeting on the blog tomorrow morning.
Regulating a Monopoly Notes:
Today we are finishing up the Monopoly Part 3 notes. Here they are again if you need them.
Monopoly Part 3
What is going to happen in the long run with a PC Firm?
It will break even.
What is going to happen in the long run with a monopoly?
There is no specific answer. A monopoly might break even, but it might also make an economic profit. A monopoly might also lose money in the long run.
Obviously the monopoly wants to earn a profit if it is able to. But what does society want?
Remember that the basic idea of economics is that we are trying to get the most we can out of our limited, scarce resources. Thus, society wants efficiency. In particular they want allocative efficiency. They want the monopoly to produce where MC = MR = P.
As we know from before, the monopoly if left to it's own devices is not efficient. MR does not equal price. We will find the Quantity to produce by looking at MR = MC but we find the price by going up from that point to the DARP line.
Society and the monopoly have different objectives.
Look at the following graph:
This is what the monopolist wants to do. If he produces at a Quantity of MR = MC but charges a Price based on the DARP line he will make a profit. (QM and PM for Quantity Monopolist wants and Price Monopolist Wants.)
But this is what society wants.
Society wants the monopolist to produce where MR = MC = Price. They want allocative efficiency.
Society wants PS and QS. In addition to being efficient, society is happy because they are getting more units at a lower price. But the monopolist is not happy with this. Why?
Because if they are forced to produce here they will lost money. PS is below the ATC.
What can we do to resolve this difference of opinions?
If what the monopolist is selling is not essential to living, then society should just let the monopolist make a profit. However, if the monopolist is selling something that society thinks is important, they can intervene and make the monopolist produce a greater quantity. There are two possible solutions for this.
The first is that society could subsidize the monopolist. How much should the subsidy be?
It will NOT be the difference between PM and PS. Instead society will subsidize the monopolist at a quantity of QS the difference between PS and ATC. This will cause the monopolist to break even.
There is a second choice. If society doesn't want, or can't afford to subsidize, they can compromise with the monopolist.
Look at PC and QC (Price Compromise and Quantity Compromise). As it is a compromise neither side is getting exactly what they want. Society is getting more units and the price is lower, but it isn't getting all the way to QS and PS. This is also closer to being allocatively efficient. The monopolist is not getting a profit, but they are also not losing money.
That's it for today and for monopolies. Next week we will handle Monopolistic Competition and Oligopolies.
Tomorrow is the day for you to work on the last of the monopoly work. However, I will give you the work today, so that you can do it sooner if you'd like.
If you click the link below and scroll down you should complete the pages for Activity 3-14: Regulating a Monopoly.
Monopoly Work Sheets
I appreciate all of you that turned in your Monopoly Graph and the Monopoly Chart. I was going through and checking them all but it is very time consuming as you each seemed to find a different way to turn it in.
So, in the interest of you being able to quickly check your work, I am posting the answers here.
Monopoly Graph Answer
Monopoly Chart Answer
As a reminder, remember that going forward Monday's and Thursday's will be new Notes. Then Tuesday's and Friday's will be for doing the work related to those notes.
Zoom Meeting:
There will be a Zoom meeting on Fridays. Tomorrow we will be meeting at 1:00. This is NOT a mandatory meeting. It is just for you to ask questions and get help. If you can't make it to the meeting, don't worry about it.
I will post the link to the meeting on the blog tomorrow morning.
Regulating a Monopoly Notes:
Today we are finishing up the Monopoly Part 3 notes. Here they are again if you need them.
Monopoly Part 3
What is going to happen in the long run with a PC Firm?
It will break even.
What is going to happen in the long run with a monopoly?
There is no specific answer. A monopoly might break even, but it might also make an economic profit. A monopoly might also lose money in the long run.
Obviously the monopoly wants to earn a profit if it is able to. But what does society want?
Remember that the basic idea of economics is that we are trying to get the most we can out of our limited, scarce resources. Thus, society wants efficiency. In particular they want allocative efficiency. They want the monopoly to produce where MC = MR = P.
As we know from before, the monopoly if left to it's own devices is not efficient. MR does not equal price. We will find the Quantity to produce by looking at MR = MC but we find the price by going up from that point to the DARP line.
Society and the monopoly have different objectives.
Look at the following graph:
But this is what society wants.
Society wants PS and QS. In addition to being efficient, society is happy because they are getting more units at a lower price. But the monopolist is not happy with this. Why?
Because if they are forced to produce here they will lost money. PS is below the ATC.
What can we do to resolve this difference of opinions?
If what the monopolist is selling is not essential to living, then society should just let the monopolist make a profit. However, if the monopolist is selling something that society thinks is important, they can intervene and make the monopolist produce a greater quantity. There are two possible solutions for this.
The first is that society could subsidize the monopolist. How much should the subsidy be?
It will NOT be the difference between PM and PS. Instead society will subsidize the monopolist at a quantity of QS the difference between PS and ATC. This will cause the monopolist to break even.
There is a second choice. If society doesn't want, or can't afford to subsidize, they can compromise with the monopolist.
Look at PC and QC (Price Compromise and Quantity Compromise). As it is a compromise neither side is getting exactly what they want. Society is getting more units and the price is lower, but it isn't getting all the way to QS and PS. This is also closer to being allocatively efficient. The monopolist is not getting a profit, but they are also not losing money.
That's it for today and for monopolies. Next week we will handle Monopolistic Competition and Oligopolies.
Tomorrow is the day for you to work on the last of the monopoly work. However, I will give you the work today, so that you can do it sooner if you'd like.
If you click the link below and scroll down you should complete the pages for Activity 3-14: Regulating a Monopoly.
Monopoly Work Sheets
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