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Final Exam Study Guide Intro to Microeconomics

by: Emma Notetaker

Final Exam Study Guide Intro to Microeconomics ECON 1010

Marketplace > Tulane University > Economics > ECON 1010 > Final Exam Study Guide Intro to Microeconomics
Emma Notetaker
GPA 3.975

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Comprehensive Study Guide of EVERYTHING!
Intro to Microeconomics
Toni Weiss
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This 19 page Bundle was uploaded by Emma Notetaker on Tuesday December 8, 2015. The Bundle belongs to ECON 1010 at Tulane University taught by Toni Weiss in Summer 2015. Since its upload, it has received 163 views. For similar materials see Intro to Microeconomics in Economics at Tulane University.


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Date Created: 12/08/15
Tuesday, December 8, 2015 Final Exam Study Guide • 3 questions each society must answer: • 1. WHAT will be produced • 2. HOW will it be produced • 3. WHO will get what is produced • these questions must be asked because of SCARCITY – limited resources • people have unlimited wants • microeconomics can relate to individual businesses (gas prices) • positive economics: no judgment about good vs. bad • normative economics: good/bad, how to make better • resources (factors of production) • land – natural resources • labor • capital – already-produced goods that are used to produce other goods o NOT MONEY (cannot produce anything directly with money) o capital has reached FINAL resting place (will NOT be transformed again) o human capital: knowledge and skills o ex: in sno-ball stand, capital good=machine used to shave the ice ♣ intermediate goods: will be used up in production (go out and come in) and transformed (ex: ice in a sno-ball) o ex: computer used by business to coordinate shipments of inputs and outputs • opportunity cost: value of the next-best option (what we CANNOT produce when we make a choice) • = what we give up • what we get • measured in units of what you give up • REAL costs – if we own capital, opportunity cost is what we COULD have done with it otherwise • ex: opportunity cost of owning your own house: rent you could’ve made if tenant lived there instead • we should consider the opportunity cost of resources when deciding how to produce something (due to limited resources) o NOT all resources equally well-suited for all production (ex: pick stronger people to move boxes) • absolute advantage: best at producing (will make more than anyone else) o of little worth – doesn’t help with efficiency • comparative advantage: person can produce with LOWEST opportunity cost o DOES deal with efficiency – this is what we look for 1 Tuesday, December 8, 2015 • CAN have both absolute and comparative advantage but not necessarily • CANNOT have comparative advantage in both things • law of increasing opportunity cost: the more you pursue an activity, the more costly it becomes to produce • ex: time – you give up more as you go along • Production possibilities frontier (PPF): • graphical representation of the amount of TWO goods that can be produced o WE ASSUME: ♣ 1. ALL resources are being used ♣ 2. all resources are being used EFFICIENTLY • PPF slopes down due to limited resources • PPF bowed due to LAW OF INCREASING OPPORTUNITY COST – because opportunity cost changes as you approach each point o if the opportunity costs of the 2 resources are NOT equal o if both opportunity costs equal, linear PPF (all resources are equally well-suited for production) o happens if all resources used in production not completely substitutable • any point ON ppf assumes efficient use of ALL resources • point to inside: not using all resources OR not using all resources efficiently • point on outside: attainable but NOT SUSTAINABLE o can only host crazy production amount for a small period of time (or overuse of resources) o also could be impossible if very far outside • Economic growth: previously unattainable or unsustainable levels of production are now possible • 2 ways to achieve growth: o 1. increase in resources ♣ allows you to produce more of BOTH goods – causes shift of ENTIRE ppf ♣ increase in resources causes BOTH ENDS of ppf to increase o 2. change in technology (using same amount of resources but producing more) ♣ change in technology causes only ONE POINT (whichever one technology helps) to increase ♣ even if you don’t want more of the resource being helped by technology, STILL advance! (can then produce more of the other resource) • MOVEMENT to interior of ppf: • resources still exist, but being used inefficiently (points on ppf assume efficient use) 2 Tuesday, December 8, 2015 • society is still capable of producing, just isn’t • air traffic control strike • inward SHIFT of ppf • loss of AVAILABLE resources due to drought, war, natural disaster, etc. • ppf illustrating tradeoff between producing CONSUMER (consumer goods ALWAYS the end of the road) vs. CAPITAL goods: consuming more TODAY versus in the FUTURE • investing more in capital goods will allow for more production later • increase in more consumer goods will still give you more capital goods, just not as much more • problems with poorer countries: not as many resources, can’t produce as much • can’t grow much because must devote everything to consumer goods (don’t have enough resources to devote many to capital goods) • efficiency: produce at least possible cost • specialization and exchange allow greater total production of every good without increase in resources (efficiency) • productive efficiency: each point of ppf – productively efficient given resources and technology • allocative efficiency: allocating resources efficiently to maximize surplus (between different goods) • economy that begins to produce more NOT necessarily experiencing economic growth • could be overproducing OR could’ve started inside ppf • circular flow of wealth: main arteries of flow • households and firms are the fundamental decision-making units • counter-clockwise o households send resources to resource/factor market o resource/factor market sends land, labor, capital to businesses o businesses send goods and services to product/goods +services market o product/goods+services market send products to households • clockwise: o households send money to product/goods+services market o product/goods+services market send payment to businesses o businesses send income to resource/factor market o resource/factor market send profit, wages, rent, interest to households • price: • absolute price: price on a price tag 3 Tuesday, December 8, 2015 • relative price: price in terms of something else (ex: one coffee costs 2 muffins) o we think in terms of relative price Demand demand: amount of good or service that a person is willing and able to consume at various prices (holding everything else constant) • availability is assumed – supply completely unrelated • determinants of demand: o price o tastes and preferences o income (ability to pay) o price of related goods (includes convenience) o expectations of future prices • price determines quantity demanded (not the other way around) • law of demand: the QUANTITY demanded of a good or service will increase as price decreases and decrease as price increases o INVERSE relationship – negative slope • quantity demanded: single point on curve o change in quantity demanded: movement along curve (due to change in price) • demand: entire curve o change in demand: WHOLE curve shifts (due to change in determinants OTHER than price) ♣ increase: greater quantity demanded at any given price (shift RIGHT) ♣ decrease: smaller quantity demanded at any given price (shift LEFT) • curves relating price and quantity: o left to right: demand curve o bottom to top: marginal benefit curve ♣ at given quantity, how much would you be willing to pay for 1 extra? (how much extra benefit from 5 vs. 4 ) th ♣ measured in dollars ♣ extra benefit resulting from a small increase in an activity o income: ♣ normal goods: • income increases, demand increases • income decreases, demand decreases ♣ inferior goods: • income goes up, demand goes down (and vice versa) • ex: fast food, used goods, etc. • takes preference into account 4 Tuesday, December 8, 2015 ♣ prices of related goods: • substitutes: “instead of” • demand for substitutes increases with price of original item o ex: price of tacos increases, demand for burritos increases • complements: “along with” • price of one goes up, demand for other goes down o ex: soda price increases, demand for burrito decreases o expectations of future prices: ♣ expect price to rise next week: demand increases this week ♣ expect price to go down next week: demand decreases this week o individual demand curves are summed horizontally to make market curves Supply supply: amount of good or service a business is willing and able to produce at various prices holding everything else constant • determinants of supply: o price o technology o prices of factors of production o prices of related goods o expectations of future prices • law of supply: as price increases, quantity supplied increases • change in supply: more or less supplied at ANY GIVEN PRICE • change in quantity supplied: movement along the curve – caused by a change in price • pries of related goods: o substitutes: what I could produce instead of (unrelated to products of other manufacturers) ♣ price of one goes up, supply of other goes down (want to supply more of one that makes more money) ♣ ex: baker could bake apple tart vs apple pie o complements: made along with (BYPRODUCTS) ♣ price of one goes up, supply of other goes up ♣ ex: cream and skim milk • curve is supply curve when read from left to right • marginal cost curve when read from bottom to top o price of producing one more unit 5 Tuesday, December 8, 2015 • market equilibrium: everyone that wants to consume the good or service at equilibrium price is able to do so • at rest: no force to drive it anywhere • suppliers make first move (determine price) • excess supply: surplus (signals market that price needs to go DOWN) o price LOWERS o quantity supplies decreases o quantity demanded increases o ex: study done to suggest that muffins are unhealthy ♣ demand goes down so surplus at original price ♣ price goes down ♣ quantity supplied of muffins decreases • excess demand: shortage (signals market that price needs to go UP) o price RISES o quantity demanded decreases o quantity supplied increases • movement up and to the left on point on SAME demand curve: caused by increase in price of factor of production • increase in population leads to rightward shift in market demand curve • when both supply and demand change: can determine direction of change for EITHER price or quantity but NOT both • when demand increases, supply must also increase to keep the price the same • if price does not change after shift in demand, supply will not change either • misc: • individuals given PRICE to make decisions • principle of voluntary exchange is based on the idea of rational self- interest • post hoc ergo proctor hoc: causation fallacy • composition fallacy: true for part=true for whole Consumer and Producer Surplus • consumer Surplus: difference between what you would have been willing to pay vs. what you get to pay o ex: finding out something you would have bought anyways was on sale o area above the price line and below the demand curve o you get ZERO consumer surplus for the last unit you buy – you’ve reached equilibrium price o we continue to consume until surplus is zero o bigger is demand curve is STEEPER (reservation price for the first few is VERY high o supply curve does not affect consumer surplus • producer surplus: difference between what a firm would be willing to sell a good for vs. what it actually got to sell it for o profit 6 Tuesday, December 8, 2015 o area under the price and above the supply curve o usually on earlier units due to law of increasing opportunity cost (costs more as you go) o bigger when supply curve is steeper • total economic surplus = producer surplus + consumer surplus • greatest economic surplus occurs when: o marginal cost = marginal benefit o quantity demanded = quantity supplied • when demand decreases, both consumer and producer surplus decrease • deadweight loss: a loss of economic surplus due to some type of economic restriction in the market o area of graph to the right of consumer or producer surplus (to the left of equilibrium point o ex: price restriction, production restriction, not enough competition o potential that was there is now gone Restrictions: due to unfairness of market • price floor: minimum (legally mandated) price at which something can be traded o ex: minimum wage • price ceiling: legally mandated maximum price at which something can be traded • in states of emergency, prices become frozen (ex: generators in storms) • amount traded in market will be smaller of Qs or Qd Elasticity: a measure of responsiveness to a stimulus • formula: response o stimuli Price elasticity of demand: how responsive is quantity demanded to a change in price? • stimuli: change in price • response: change in quantity demanded • ALWAYS negative, so we take the absolute value • e p % change in Q D • % change in price • to get rid of confusion caused by percentages, we use the midpoint formula: o ep = (Q1-Q2) o (Q1+Q2)/2 o (P2-P1) o (P1+P2)/2 • e p1 elastic (more responsive) 7 Tuesday, December 8, 2015 o flatter curve • e p 1 inelastic (less elastic) o steeper curve • e p 1 unit elastic • you can only calculate price elasticity of demand between TWO points on the SAME demand curve o because the change % change is represented only on that one curve o if there are multiple curves, there must be another factor OUTSIDE of price • along any straight line, there is a segment that is elastic, a segment that is inelastic, and a point that is unit elastic o elastic – near the top o inelastic – near the bottom o unit elastic is the point of change between elastic and inelastic • perfectly elastic demand: horizontal line o for perfect substitutes o if a price changes even a little, demand drops to 0 o ex: 2 vending machines next to each other selling exactly the same thing (if the price of one rises, people will only buy from the other) o slope = 0 • perfectly inelastic demand: vertical line o no matter what the price is, demand will stay the same o necessities (otherwise you will die) o slope = infinity o ex: insulin • determinants of elasticity: o 1. needs (inelastic) vs. luxury (elastic) o 2. # of substitutes (more substitutes = more elastic) o 3. time (longer time period is more elastic- more time to find substitutes) o 4. % of budget (more expensive = more elastic) • who cares about price elasticity of demand? suppliers o customer loyalty – how loyal are customers to products o suppliers want LOW elasticity – to create relatively inelastic demand o more elastic leads to a decrease in TOTAL revenue for suppliers ♣ people will not buy more at this price, less sold o total revenue: P*Q o e p 1 % change in price < % change in Q (decreDse in total revenue) ♣ price decrease pulls total revenue down and Q not d enough to pull it back up • income elasticity of demand: how responsive to change in income (y) 8 Tuesday, December 8, 2015 • e y % change in Q D % change in y • use midpoint formula: o = (Q1-Q2) (Q1+Q2)/2 (y2-y1) (y1+y2)/2 • normal goods: 0<ey<1 (positive income elasticity) • inferior goods ey < 0 (negative income elasticity) • luxury: ey>1 (largely positive elasticity) • cross price elasticity of demand: how responsive consumers are to a change in price of another good • has NOTHING to do with normality or inferiority • e = % change Q ab b o %change P a • e ab> 0 substitutes (positive cross price elasticity) • e ab< 0 complements (negative cross price elasticity) • unrelated goods have 0 cross price elasticity Utility • marginal utility: extra satisfaction from consuming one more o mu = change in total utility • total utility: total satisfaction from consumption • law of diminishing marginal utility: marginal utility decreases with consumption (additional satisfaction decreases) o negative marginal utility ex: too much alcohol • when graphing total and marginal utility, use two different graphs (because of differences in scale) o utils: vertical axis o Q/time: horizontal axis • marginal utility is the derivative of total utility: o mu>0 and increasing: TU increases at increasing rate (concave up) o mu >0 and decreasing: TU increases at decreasing rate (concave down) o mu<0 and increasing: TU decreases at increasing rate (concave up) o mu<0 and decreasing: TU decreases at decreasing rate (concave down) • total utility increases until marginal utility becomes negative • rate of total utility (concavity) depends on whether marginal utility is increasing or decreasing • budget lines: combination os 2 goods a consumer can buy given his income and the prices of the 2 goods 9 Tuesday, December 8, 2015 • every point on the line represents spending ALL money on combinations of the two goods • any point on the interior, not spending all the money • CAN’T afford points on exterior • to deal with weird fractions (ex: 3/5 of a muffin) change the TIME o ex: ½ muffin per week = 1 muffin every 2 weeks) • slope of budget line = income/Py o income/Px o OR Px/Py o slope is equal to the price of good on horizontal axis over price of good on vertical axis ♣ relative price of good on x-axis ♣ equal to opportunity cost of good on x-axis o tend to take absolute value because ALWAYS negative o everyone’s budget lines have EQUAL slopes o if income increases, line shifts right (left for decrease) ♣ slope stays the same o if Pxincreases steeper line o P yncreases flatter line • consumer goal is to maximize satisfaction and utility • there is some point on the graph where mu is equal for both x and y – after thie point they swap o mu ixcreases as you go up o mu iycreases as you go down • rational spending rule: maximizes satisfaction o mu =xmu y Px P y • law of demand hols with rational spending rule: if the price of one increases, that side will be larger. SO should buy more of one and less that the other • indifference curves: all combinations of 2 goods between which a person is completely indifferent • not indifferent to goods themselves, but to COMBINATIONS • each point has SAME level of satisfaction • different indifference curves represent different levels of satisfaction and utility • downward sloping • curved due to law of diminishing marginal utility • ALL points on a plane have an indifferent curve going through them o farther from origin = higher utility o closer to origin = lower utility • if COMPLETELY indifferent between goods (perfect substitutes) line would be linear • as you move down and right, mu of horizontal good decreases, mu of vertical good increases 10 Tuesday, December 8, 2015 • most satisfaction at point where indifferent curve is TANGENT to budget constraint (slopes are EQUAL) optimum satisfaction • marginal rate of substitution (MRS) = MUx/MUy • P x = MUx PxMUy = PyMUx rational spending rule! P y MUy • changes in price • increase in price causes inward shift in budget curve – we use a DIFFERENT indifferent curve o indifference curves CANNOT shift • income and substitution effects work together to give us the law of demand • income effect: change in purchasing power – due to rising prices • substitution effect: substitute AWAY from good that went up in price Production • short run period of time in which amount of at least one factor of production is fixed AND there is not enough time to enter or exit the industry o at any given point in time, you are in the short run • long run: period of time in which the amounts of all factors of production can be changed and there is enough time to enter or exit the industry o never quite there o long and short runs vary per company or firm ♣ Apple: longer time to disappear (YEARS) ♣ vs lemonade stand: very short (long run = afternoon) • fixed factors of production: difficult to change (large machines, warehouses, etc.) o CAN be changed in the long run • variable factors of production: easy to change • for our purposes, let only labor vary • total product (TP) the total amount that can be produced with various amounts of labor • marginal product (MP): extra amount that can be produced with one more unit of labor (unit of labor can be person, time, etc) o how much output does EACH new person make (not per worker – looking at LAST worker) o MP = ΔTP/ Δlabor • average product: amount on average that each worker can produce o AP = TP/L • law of diminishing marginal product/returns: o the more of a variable in put is added to fixed inputs, the more the productivity will DECREASE 11 Tuesday, December 8, 2015 o NOT due to skill set, but due to constraints o total output rises more slowly as additional workers are added o assumptions: ♣ ONLY labor is variable (all else fixed) ♣ all labor is identical (equal skill levels) ♣ the labor market is perfectly competitive • marginal product is DERIVATIVE of total product o MP > 0 and increasing: TP increases at increasing rate o MP > 0 and decreasing: TP increases at decreasing rate o MP < 0 and increasing: TP decreases at increasing rate o MP < 0 and decreasing: TP decreases at decreasing rate • marginal product and average product relationship: o MP > AP AP increases o MP < AP AP decreases o ex: need grades higher than average to raise GPA o average and marginal product ALWAYS start at the same place because you initially divide by one • graphs: o TP on separate graph than AP and MP because of separate scales o TP MUST start at 0 o AP and MP on same graph o Q/time on Y axis, labor on X axis o read the graphs from bottom-up! • changing angle from “how much output can be produced with various labor amounts” to “how much does it cost to produce various amounts of output” • to produce more you need more labor (because we assume that labor is the only variable – only thing that can vary is the amount of workers) o we also assume that all workers are as efficient as possible • multiple ways to divide total costs of production: • fixed vs. variable costs • Fixed costs: DO NOT VARY with output o as you product more, nothing changes o cost of fixed resources o cost of producing nothing o ex: rent (no matter if you’re there or not, will still have to pay) • variable costs: VARY with output o labor costs WAGES o ex: electricity (pay more if you use more) OR explicit vs. implicit costs • explicit costs: money that ACTUALLY changes hands o ex: salary wages • implicit costs: more like opportunity costs o no actual money changes hands o incurred in 3 ways: 12 Tuesday, December 8, 2015 ♣ 1. loss of wages (give up old job to open new business) ♣ 2. loss of interest earned on money ♣ 3. rent on capital – if you use your own capital, you’re missing out on rent opportunity • profits • accounting profit: total revenue – total explicit costs • economic profit: total revenue – total explicit – total implicit o less likely to have economic profit because this recognizes opportunity and implicit costs • ex: Myron worked at a factory earning $20,000/year. He quit his job to open a bumper sticker business. This earned $60,000 in sales revenue and incurred $30,000 in expenses. What is economic profit? o 60000-30000-20000 = 10000 • zero economic profit is called a normal profit o you could still be making a large accounting profit o as much has you would be making with next-best option total fixed costs: don’t vary with output • horizontal line on graph • cost of producing nothing • top right graph marginal costs: cost of producing one more unit of output • MC = ΔTC/ ΔTP = ΔTC / ΔQ notes on reading graphs/clicker questions: • start with bottom left graph (MP and AP) o MP over AP, AP is rising • top left graph: TP (integral of MP) o decreases when MP hits 0 o starts at 0 always • bottom right: MC, AVC, ATC, AFC o if AP increasing, AVC decreasing (and vice versa) o AVC intersects MC where AP at max ♣ AVC at minimum when AP maximum o costs CANNOT exceed maximum total product!!! o ATC approaches AVC with higher quantity • top right: TFC, TVC and TC o TFC horizontal line where total costs start o TC and TVC parallel (TVC starts at 0) • AVC = TVC/Q • ATC = TC/Q = AVC + AFC • AFC = TFC/Q • when TFC stays the same, AFC decreases with every increase in Q • at the beginning, mp increases, so each unit of additional labor is increasing productivity o when MP is increasing, marginal cost decreases (because it is cheaper to produce each additional unit) 13 Tuesday, December 8, 2015 o when MP is decreasing, MC increased until MP = 0 (then MP STOPS) why? when marginal product is decreasing, that means that each additional unit of labor is producing less output. That means that although you are producing more, it costs more fir each addition unit – it is less efficient • variables costs are 0 when firm’s short-run output is 0 o because variable costs = labor costs, and there is no labor with no production • marginal cost is equal to the change in the total variable cost divided by the change in output (because total fixed costs will stay the same) • total cost DOES NOT EQUAL the sum of the marginal costs o because we also need to factor in fixed costs • total variable costs = sum of all marginal costs • when TP increases at increasing rate, TVC increases at decreasing rate (as does total costs) • when AP increases at decreasing rate, TVC and TC increase at increasing rate • ATC reaches minimum AFTER AVC (due to fixed costs) o when AVC decreases, AP increases • when AVC increases, MP is LESS than AP • with marginal profit curves and marginal cost curves (online), NO DIAGONAL LINES (go down or up on the axis) profit maximization (economic profit) • profit = TR – TC • TR = profit + TC o the amount that a firm takes in from product sales • firms earning profits will produce to the right of the minimum point on the ATC curve • industries/markets: collection of businesses that sell a smiliar good/ service • scale: o (extreme) perfect competition o monopolistic competition o oligopoly o (extreme) monopoly perfect competition: • o 1. many buyers, many sellers o 2. homogenous product (exactly the same) o 3. no one buyer of seller has any market power ♣ no ONE person can influence the price ♣ Walmart has LOTS of power (can go directly to Proctor and Gamble and influence prices) o 4. all buyers and sellers have the same information o 5. no barriers to entry 14 Tuesday, December 8, 2015 ♣ ensures that each firm earns a normal profit in the long run o 6. all firms earn a normal profit in the long run o points 1-3 determine that the seller is a PRICE TAKER (must sell at the market price) o if perfectly elastic demand, CANNOT raise the prices – will have 0 business • profit maximization how many units of output should be produced and sold?? o firm needs to product when TR – TC is as LARGE as possible (want TC to be UNDER TR) o profit maximized when MR = MC ♣ past this point, each unit costs more to produce than you will get back o firm always produces on the decreasing and positive part of the MP curve o at point of profit maximization: ♣ profit = (MC-ATC)*q • total profit = Q (P – ATC) • marginal revenue: additional revenue from selling one more unit o MR = ΔTR / ΔQ • MR = PRICE • MR curve is right on top of perfectly elastic demand curve o BUT they are DIFFERENT curves – would be separate if not perfectly elastic demand • a perfectly competitive firm employing ONE variable (labor) will hire labor to the point where the wage equals the MR product of labor (without hiring any labor for which the wage is greater than the marginal revenue product of labor) • if the profit is negative, a firm should keep doing what it is doing o between 1 and q, they lose profit (they’d move past profit max point and MR would go down • if a firm is perfectly competitive, to maximize profit: o PRICE = MR = MC • if a firm is profit maximizing, wants output to make P>ATC (ensures earning profit) o GET PROFIT IF MR>ATC o if P < ATC, losing money • to know if a firm should continue: o lose money and SHOULD continue: ♣ price>AVC ♣ price < ATC firm’s supply curve: how much a firm is willing and able to produce at various prices (holding all else constant) • if price below AVC, firm should SHUT down 15 Tuesday, December 8, 2015 • amount that firm produces MC curve supply curve • supply curve is only the part of the MC curve above the AVC curve long run: • if the firm is losing money, it will exit industry • supply decreases • firms will enter industry as long as profits are made, will exit as long as losses are happening o reach equilibrium when p=ATC (ALL firms earning normal profit) o due to competitive nature of this market • when P>ATC for all perfectly competitive profit maximizing firms in the long run prices FALL long run average cost curve • scalloped, but eventually smoothes out (with more MC and ATC) • each point on LRAC means you’re producing that amount of output as cheaply as possible • in the long run, costs are just costs (not total or fixed because ALL costs are variable) • for every given amount of capital, you can draw a separate ATC and MC curve • want the amount of capital that allows you to produce as cheaply as possible • at every given output level, choose the amount of capital so you produce that amount as cheaply as possible • long run gives time to shop around • 3 parts to LRAC o 1. economies of scale (decreasing) ♣ increase inputs by certain % and output increases by greater % ♣ have greater incentive to expand (because lower ATC and increase profit) o 2. constant returns to scale: outputs increase at same % o 3. diseconomies of scale: increase inputs by %, outputs increase by SMALLER % ♣ average costs rising • firms continue to expand and lower until price is LOWER than ATC (then they are losing money) • in the long run, each perfectly competitive firm will product at the minimum point of its LRAC and earn a normal economic profit o through competition we guarantee that there are no wasted resources o NO way to produce more cheaply 16 Tuesday, December 8, 2015 Monopoly: • one seller • good with no close substitutes • very high barriers to entry o artificial: set by government (to restrict competition) ♣ tax ♣ trademarks/licensing o natural: inherent to the cost structure ♣ ex: high fixed costs for utility companies • demand curve is equivalent to market demand curve because they control the whole market • marginal revenue curve is below the demand curve: total revenue changes by LESS than the price o if you want to sell more, you have to lower the price for ALL units o downward pressure on revenue means that MR < P at every output ♣ at a certain point, MR becomes negative • elasticity vs TR: o if ep > 1 and price decreasing: TR increasing o if ep < 1 and price decreasing: TR decreasing o steeper demand curve, greater the distance between demand and MR cirves o MR < P at every output • PROFIT MAXIMIZING and making a profit: o MR = MC < ATC < Price monopolist chargest highest price that they can which is determined by DEMAND curve profit amount is between price and ATC intersections • in the long run, monopolist will earn profits if he earned them in the short run o one firm gets whole market to they are guaranteed • due to scarcity, we want resources to go to things that produce most benefit o monopolist produces where MB is NOT at its highest o create a lot of deadweight loss between surpluses monopolistic competition • many buyers, many sellers • no barriers to entry • products slightly differentiated (either real or imagined) o price is NOT a source of differentiation • each individual market gets a piece of the market demand curve – theirs is each more elastic than the market’s • same profit rules o dependent on where ATC intersects vertical 17 Tuesday, December 8, 2015 • if earning profits in the short run, achieve long run equilibrium when each firm earning normal economic profit • less deadweight loss than monopoly because different between demand and MR curve is less o demand curve in MC is flatter than monopoly price discrimination: about creating customer loyalty • why different people or groups are charged different amounts but the difference is NOT based on differences in costs of production o costs to provide goods IDENTICAL • 3 types: st o perfect (1 degree): each person pays maximum amount they are willing to pay ♣ greatest supplier benefit ♣ ex: auction ♣ MR curve RIGHT on top of demand curve ♣ NO deadweight loss ♣ NO consumer surplus (producers capture all surplus) ♣ output produces is the same as in perfect competition (very efficient) o 2 nddegree: coupons, BOGO free, punch cards, loyalty programs rd o 3 degree: different groups charged different prices ♣ senior, military, student discounts • in order to price discriminate a firm needs o market power (determined by distance between MR and demand curves) o way to differentiate consumers – categorize o prevent “buying low and selling high” ♣ ex: reselling things ⾇ 18


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Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.