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AICE - Budget Form - The Producers Masterguide

hey Heidi econ students this is Jacob Clifford welcome to ac/dc 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 superfast but keep in mind this is not designed to reteach 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 to help you learn economics these summary videos they cover everything in greater details in this video I'm doing right now now I was going to make this video available all the people who buy the packet but then I thought you know I can trust people man if you like my videos if these videos help you learn economics please go get the packet I make this video available to everyone but if you like my stuff please support my channel and help me continue to make great econ 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 the idea of scarcity scarcity ideas we have unlimited wants and limited resources also you learn the idea of opportunity cost that's the idea that everything has a cost or it doesn't matter what you're producing you give up something to produce or any decision you make has a cost now those concepts come together with the production possibilities 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 costs 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 get to get more and more of the other one that's called the law of increasing opportunity cost now there's 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 trained if another country trades with another country that can shift out the production pathways curve but it shows how much they can consume not actually produced so it doesn't actually change how much you can make but you can consume beyond your production possibilities curve and that brings us to the hardest part of this unit the idea of comparative advantage compared advantage of 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 than you I should produce this you should present a thing and we should trade now there's two different things you remember absolute advantage and comparative image absolute Vantage is a joke it's easy you just figure out who produces more that means they have an absolute advantage compared advantage requires you do some calculations or the quick and dirty if you sell my unit summary video and it tells you who should specialize in what now another thing you have to learn is the idea of terms of trade which means how many units of one product should they trade to the other product there wasn't benefit both countries that's the idea of terms of trade in this unit you also get a basic overview of different economic 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 factor payments so individuals sell their 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 ten it's a fast unit make sure you get it makes you get compared advantage now unit two sets the foundation for everything you're going to be doing later on you start with demand and supply remember the man is a downward sloping curve that shows you the law of demand when price goes up to buy less of stuff right or price goes down people buy more that's the idea price and quantity demanded understand the idea that this curve is downward-sloping for three reasons substitution effect income effect in the law diminishing marginal utility there's also a lot supply when the price goes up people produce more price goes down people produce less right price goes up quantity supply goes up goes down clarify goes down now together they form equilibrium please note if price goes up there is no shipped 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 high it you should also understand when there's actual individual shifts so there's only foreign things can happen the man can go up the man can go down supply can go up or supply can go down and you just watch the graph throughout the graph tells you exactly happens the price and quantity every single time now ever 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's going to be in determinants right you can't tell what's going to happen either price or quantity the trick here is draw the graphs draw the shift that occurs and that's going to tell you where you end up whichever one looks the same right means that indeterminate 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 to talk about is the idea of substitutes and complements remember substitutes are two products you buy in place of each other compounds are two things you buy together the price of what affects the demand for the other there's also normal and inferior normal goods when the income goes up people buy more of it inferior Goods when income goes up he'll buy less of it the hardest part probably 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 the price goes down people buy a whole lot more expensive to change the price inelastic 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 inelastic man 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 a 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 complements or substitutes a positive number means they're substitutes a negative number means or complements there's also the income elasticity coefficient which is 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's also something called the total revenue test this only applies to demand don't worry about what this client doesn't work with supply the idea that price goes up and whole revenue goes up that means the demand must be in elastic if price goes down toru goes down there must be inelastic now price goes up and the total revenue goes down that means it's elastic it has to do with the size of this box here so side by side you should tell over here this is inelastic demand over here elastic demand when the price falls any elastic demand pull revenue gets smaller that basket is smaller over here in price Falls total revenue gets bigger that must be elastic demand total revenue test that disappointed man 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 want to pay and what you did pay and producer surplus is the difference between the price and what someone's going to sell it for competitive efficient market maximizes consumer and producer surplus so there's no thing called deadweight loss now let's talk about ceilings and floors and the government comes in and sets prices when it's not at equilibrium that's the idea of price controls a ceiling looks like this remember a ceiling always goes below equilibrium if it's binding if the question says the ceilings above equilibrium just remember nothing's going to change price and quantity they don't change a for looks like this right there it is a floor always goes above the equilibrium so there's a price floor you should also be able spot consumer and producer surplus on each one of them consumer surplus and producer surplus then weight loss look like this for a ceiling a floor right that's the idea deadweight loss to the idea of lost consumer surplus or we're not being efficient in the market a competitive market efficient no dead weight loss ceiling floors monopolies other concepts you learn later on create this idea of deadweight 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 consumer is going to pay dip 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 governor says that we don't like that you know low price let's put a tariff on it that creates deadweight loss like this there's a tariff revenue box right there in the middle next up is the idea of taxes supply curve shifting to the left this is a per unit tax year they'll 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 how much consumers pay of the tax box in the bottom tells how abouts 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 sales 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 elasticity's who isn't paying for the tax remember when the demand is perfectly inelastic consumers pay all the tax right then more elastic it gets the more that producers pay of the tax cool that's a lot of stuff but there's still one more thing you have to learn it's a little different 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've got to figure out what you actually want to buy keeping in mind that the two different prices so you have to actually use an equation here it's the margin utility per dollar of one of them held equals the margin tilly per dollar of the other one in other words you've figured 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 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 dollars and there's a special combination or a combination that maximizes the total utility you use this rule unit two is super important that's got a lot of stuff but it's not like hard stuff so I give this five out of ten difficulty level for unit two but make sure you really get it because you're going to add on to this stuff later on now unit three 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 you hire more workers 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 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 returns this is cut into the specialization this is happening because of fixed resources and this happened because workers are stumbling over each other in each other's way you take that concept you catapult now into cost we talk about the three types of cost there's fixed costs 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 makes you in calculate them and make sure you understand what they look like on a graph graph looks like this at any given quantity all you do is go straight up and that tells you the cost per unit of that unit you can also convert those per unit cost to total cost just multiply your 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 to the variable cost and for the fixed cost at a shape of these curves isn't just random they look like this for a reason marginal cost goes down and that because as you hire more workers they specialized 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 well it goes down and then it goes right back up again also you should recognize the idea that APC hits marginal cost at ATC's minimum when marginal is below the ATC it pulls it down when Marvel's 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 marginal returns doesn't apply instead we have a different graph in 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 cost don't fall lower you can't use any more mass production techniques and so it levels off that's called constant returns to scale and eventually as you're producing so much you're in a long run cost go back up again your average costs go back up and that's called DISA console scale again that's the idea of the long run cost long run costs are these short run costs look like those now in this unit you're going to introduce 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 that was the firm's they all have the same exact product they have low barriers so other firms can enter really easy or exit the most important one they are price takers that means I 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 I am so your cost goes 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 four if your response makes 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 microeconomics you produce where mr equals MC get a tattoo in your arm produce mr equals MC that tells you exactly how much to produce whether your monopoly knocks competition urban competition you always produce wherever R 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 the marginal revenue again you're not maximizing profit you can still earn more profits 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 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 go and don't produce anything at all because you rather have your fixed cost be your loss as opposed to a bigger cost bigger than your fixed cost the rule is this is the falls below ABC you should shut down it's called a shutdown rule one more time the only rule that Trump's 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 the supply curve you've been drawing ever since back in unit 2 also you should know not all of it not all that's like your own the portion that's above the ADC because the price falls below ABC you shut down you'll produce anything at all so let's go back to a long run graphically quickly you remember this is the idea of the long-run equilibrium total revenue equals total cost that means our 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 covered they're not making money up and above their opportunity cuts their total revenue equals our total cost including their explicit costs and implicit cost their opportunity cost in other words this is not a bad thing this means they're breaking even they can't make more money doing something else they're not losing any money this is idea of a normal profit but they are making positive accounting profits now the question is how does it look like this well take a look in the short-run here's we can do short run the 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 a loss firms going to leave when they leave shift new supply curves the less price goes back up or goes back to a new long-run BAM long run now the last thing in this unit is the idea of efficiency member there's two different types productive and allocated 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 costs are the lowest they can be and they're also allocated Li efficient or socially optimal because of producing where the marginal cost hits the demand other words people are willing to pay or the price people are willing to pay exactly what the marginal cost equals that tells you the society actually wants those units produce right I'm going to pay ten dollars at a cost you ten dollars produce it you produce the right amount if I want to pay you ten dollars it cost you twenty dollars produce 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 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 you it's when you're introduced to all these cost curves you got to practice make sure you get I give this a nine out of ten difficulty level spend your time practice this use it now here we go in Unit four remember there's four market structures perfect competition and three others and this unit we're going to learn the three others we've got monopolies oligopolies not competition so let's jump into these things first thing monopolies obviously one firm they've got a unique product and 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 sloping demand and a marginal revenue that's less than that for all imperfect competition monopolies but obvious competition the reason why is if they want to sell another unit they got to lower the price they're not price takers their 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 the price is falling toll revenues going up and when the price is going down on this side total revenues 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 a monopoly you identify the profit maximizing quantity and my equals MC charge your price up the demand and now you can spot the profit the total revenue and the total cost you shell spill draw us using a lot now that's a monopoly there's also a natural monopoly the idea that they're smarter to have just one firm producing it because at the quantity so see 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 around Rocko's MC maximize profits right here is the idea of socially optimal whether it be no deadweight loss and right here it's going to cook something called fair return that's the idea that they're making no economic profit they're breaking even right there with a price hits the ATC you should also be able to recognize consumer surplus for the monopolies and also the deadweight loss now here's a trick really quick dead weight loss will always point to socially optimal number socially optimal as well marginal cost hits the demand or hits the price so right there's what we want produced and a monopoly under produce monopoly charge the higher price and produces less output so right there is the amount society actually wants the deadweight loss was 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 tons of pointing to socially optimal applies to ceilings and floors and lay we'll find out with positive and negative externalities you might also see another type of Monopoly that's the price discriminating monopoly this means they're charging multiple prices not just one price the marginal revenue actually becomes the demand curve so they can produce where mr equals MC but they can 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 when you start learning about oligopolies the idea that there's many small firms they've got really high barriers and they have strategic pricing they don't worry about the pricing of the other guy you can see we've got a game theory matrix right here you build a 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's the common ah Polly because they're a price maker that's like perfect competition because firms could 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 because berm can enter so in the long run firms will enter when they enter that means the demand is going to go down demand is going to fall this monopolist 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 grass needle do that's monopolist competition in a long-run equilibrium unit for is a bear there's the monopoly grass a lot different concept you have to learn but situated perfect competition that should help you out in fact you should actually learn more about perfect competition we do monopolies because it kind of puts concepts together in your brain I give it eight out of ten difficulty okay now we're talking about the resource market unit five it talks about supply 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 were supplying individual supplying and businesses are demanding the first concept you to know is the idea of derive demand the demand for labor depends on the product that that labor produces so the demand goes up for pizza then the demands going to go up for pizza delivery drivers that's the idea of derive 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 quantum and falls the client supplied increases and we have unemployment of resources also recognized the idea of MRP and mr see the first thing have to be able to do is do the chart right here you have the number of workers you have the total product they produce you learn this back in unit 3 but then you have to calculate the additional revenue these workers generate you do that like doing the marginal product then you calculate the marginal revenue product the additional revenue they generate which you do as 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 hiring of a worker now in a perfect pettite of resource market each worker costs the same and that tells you that you should hire certain number of workers now that concept also applies to a graph you take that chart put on the 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 dollar 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 higher it's important to see the 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 it's supply and a downward sloping curve as opposed an upward sloping curve from before so we can draw one just turn around and flip it and draw the other one that same concept applies to something called a monopsony but not something as a monopoly for labor so we instead of having a downward demand curve and a downward mrduss below it we have an upward sloping supply curve in 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 that are paying less that higher wage so the MRC is actually higher they're going to higher where MRP hits MRC always because we're going to pay a wage below the bounds of the supply curve what people actually want to work for but not Sydney graphs now the last concept in this unit is the idea of the least cost rule this is like margin utility except now we're talking about marginal products you have two different resources labor and machines 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 want to know what's the additional output I get from another unit of labour and what's the price of that labor what's additional output from another machine or the capital divided by the price of that machine if they're equal perfect I'm at the least possible cost if one higher I should keep doing that one right that number is going to fall because finishing marginal returns and that's going to fall if this one's higher dies due that one instead and it's called the least cost rule that is the equation now unit 5 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 we've never really seen a horizontal supply curve very often so I give this one a six out of ten difficulty only because it's the one that students have it often they often forgets right they often forget there's really very few graphs here and just one major skill figure out how many workers you can hide ok last unit six we talk about market failures market failures are 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 the three markets actually providing the first one is the idea of public goods public goods have two characteristics number one shared consumption or well 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 if they didn't pay their taxes so non exclusion shared consumption means that it's a true public good obviously the free market is 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 because I can't make profit so the government's going to separate instead the next thing you learn is idea of externalities externality is when there's additional cost or benefits on some of the persons 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 another person notice we have to cost curves ones the marginal private cost the other ones the marginal social cost and that tells you the social costs are above the private costs the firm's not recognizing these additional costs you've got a quantity of quantity free market and right here is the quantity socially optimal the free markets messing it up where's their 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 to cost curves but to benefit curves we've got a demand curve down here which is the marginal present benefit we also have a marginal social benefit that's right there and that tells you that society want more of this but the free markets not recognizing those additional benefits to other people so again we've got a quantity free market quantity socially optimal free markets 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 per unit subsidy to either consumers and producers to produce more by the way for a negative externality you want to approve you to taxed again to produce less the last thing you learn is the idea about the Lorenz curve and the idea of income inequality it's a graph that 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 curvey curve walking right there shows actual distribution of income the bigger the banana I taught my students the banana graph the bigger the banana more income inequality you can also learn about the Gini 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 proportional now to dollar tax on consumers to auto tax on all consumers is actually a regressive tax because $2 is a larger percent income for poor people so even as either you know everyone's paying the same dollar amount they're paying different percent of their income so a progressive tax means rich people pay a higher percent of their income like an income tax in the United States proportional means they pay the same percent of income like everyone pays ten percent of income and regressive tax through the idea that poor people pay a higher percent of income so a $2.00 tax although it seems progressive it's not it's regressive because the poor people pay a higher percent income when they pay just two dollars unit six is actually pretty easy because it's just the application of supply and demand which we learned earlier it's got a few definitions there's not that much to do calculation why do I give this a four out of ten 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 AP test or on a big final exam hey you're gonna do awesome okay thanks watchin tonic time