Econ 2010 Final Study Guide
Econ 2010 Final Study Guide ECON 2010
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This 4 page Study Guide was uploaded by Rosie Briggs on Thursday April 28, 2016. The Study Guide belongs to ECON 2010 at University of Colorado taught by Dr. De Bartolome in Spring 2016. Since its upload, it has received 140 views. For similar materials see Principles of Economics: Microeconomics in Economcs at University of Colorado.
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Date Created: 04/28/16
Microeconomics Final Exam Study Guide Key Ideas ● Firm Production Decisions ○ Short Run ■ Presence should the firm produce or shut down? ● If Rev > VC, or Price > Min AVC ■ Level at what output should they produce? ○ Long Run ■ Presence should the firm produce or exit the industry? ■ Level what output would make the most profit? ● If Rev > TC, or Price > Min ATC ○ Depending on whether the firms in the industry are making profits or losses, new firms will either enter or existing firms will exit. However, this will cause a shortage or a surplus, and the price will always return to what it was originally. ○ New Technology who gains? ■ Short Run: Shareholders gain from high profits, consumers gain with low prices. ■ Long Run: Consumers gain (profits go away, price stays low) ● Remember: No one makes profit in the LONG run! ● Profits ○ Revenue Variable Costs = Operating Profit ○ Operating Profit Fixed Legal Cost = Accounting Profit ○ Accounting Profit Cost of Shareholder Funds = Economic Profit ● Monopoly 1 firm and many buyers ○ As the market moves away from being perfectly competitive, net benefit falls ○ Monopoly raises price above competitive levels ■ Higher profits for the one industry/company ○ Barriers to entry ■ Legal barrier: Patent/copyright ● Provides incentive for original ideas/research ■ Technical barrier ● Other firms don’t have the technology/knowledge to make it ■ Resource barrier ● Key resource owned by a single firm ■ Cost barrier ● High fixed cost firms can’t afford to enter ○ Industries with large fixed cost: better to only have 1 firm because FC is only paid once ○ Monopoly demand curve = market D curve = downward sloping ○ Monopolies are priceMAKING ○ If price falls in a monopoly, price falls on all existing sales too ○ Monopoly decisionmaking: Can either: ■ Choose price and this sets output or ■ Choose output and this sets price ○ Net benefit loss w/ monopoly ■ Total wellbeing not as large as possible in monopolies ■ Produces all units until MR = MC ■ To find output and price: intersection of MR and MC, followed up to the price at that quantity on the D curve. ● NET BEN FROM BUYING= MBP (from buying first unit) + …. MBP (from buying last unit at whatever quantity is at the intersection 60). ● OPERATING PROFIT= PMC (of first unit) +.... PMC (of 60th unit) ● TOTAL NET BEN CREATED = NB FROM BUYING + OPERATING PROFIT (Shareholder profit) ■ Deadweight loss = NB lost because not enough units get made ● = MB MC (of 61st unit) + … MB MC (of unit of competitive market equilibrium Q what it would be if it wasn’t a monopoly) ● Causes: ○ Monopoly raises the price to get more profits, and thereby reduces the quantity. Wellbeing is lost on goods not made. ○ Monopoly shifts surplus from consumers to shareholders. In doing so, some surplus is lost. ○ Comparison: Monopoly vs Competitive Firm ■ Competitive firm: ● P = MC ● When individual compares MB = P, in fact compares MC = MB ● Individual decisionmaking maximizes wellbeing ■ Monopoly: ● Price > MR = MC ● So when indiv compares MB w/ price, actually comparing MB w/ something BIGGER than MC ● So they buy less units than in a competitive market ○ Monopolies shortlived ■ Profits lead to entry of new firms ■ Price falls, wellbeing increases ○ Firms take over competitors or merge ■ Fewer firms = higher price = higher profit ○ Government price regulations ■ Set at where the monopoly would break even ● Oligarchy ○ Few firms (cars, airlines) ○ Fewer firms raise price, increase wellbeing LOST ● Externalities ○ When 1 person’s actions directly affect another person the effect is outside of the decisionmaker ○ EMC= External Marginal Cost ■ Wellbeing lost by others if an individual undertakes extra unit of activity ○ EMB= External Marginal Benefit ■ Wellbeing gained by others if an indiv undertakes extra unit of activity ○ MB of society = MB of buyer + EMB EMC ○ MC of society = MC of firm + EMC EMB ○ Net benefit ■ Market maximizes NB of buyers and sellers. If they ignore externalities, wellbeing of society is not maximized. ■ Firm not paying full cost of actions. Thinks MC of firm < MC society, thinks production is cheaper than it is b/c ignores EMC, produces too much ■ Planner compares MC of society with MC of society, and produces MORE if MC society < MB society ● Firm compares MC firm with Price ● Market sets Price = MB buyer ● So in the market, firm compares MC firm w/ MB buyer. Planner and firm make different comparisons. ● Net benefit is lost on additional units because MC>MB. ■ NB lost = MC soc MB soc (of first unit) +... MC soc MB soc (of unit at original intersection). ● Pigou Taxes ○ Pigou tax = price of EMC ○ Makes firm internalize everything, makes MC = MC, maximizes wellbeing of society ○ ALWAYS WORKS ● Cap and Trade ○ Government figures out how many units of pollution maximize Net Benefit, sells that many to firms. ■ Within that limit, firms can sell if they have extra, buy if they need more. ○ If government GIVES permits to firms, they usually distribute it unevenly. ■ Firms will sell and buy to get it back to what the Q would be under a Pigou Tax, or the intersection of S and D. This way, the government doesn’t make revenue. ○ If government SELLS permits to firms, firms buy this same quantity ^ ■ Government makes revenue ● Crude Regulation ○ EPA sees that without government intervention, pollution is at 3800. We want it to be at 2800, which is the amount that will maximize well being. ○ So, they order industries to cut back a certain percentage ○ This makes it uneven could cut back one industry too much, and another not enough. ● Incentives ○ With Pigou Taxes and Cap and Trade, firms and industries are incentivized to pollute less so that they pay less tax. ○ With regulation, firms are incentivized to bargain with the EPA, which leads to government agencies being “captured by industry”.
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