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by: Eunice

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# Week 7 Notes PAM 2000

Eunice
Cornell

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IC and BC Monopoly Perfect Competition Decision to Enter/Exit
COURSE
Intermediate Microeconomics
PROF.
McDermott, E
TYPE
Class Notes
PAGES
4
WORDS
CONCEPTS
PAM, Microeconomics
KARMA
25 ?

## Popular in Political Science

This 4 page Class Notes was uploaded by Eunice on Saturday March 12, 2016. The Class Notes belongs to PAM 2000 at Cornell University taught by McDermott, E in Fall 2015. Since its upload, it has received 20 views. For similar materials see Intermediate Microeconomics in Political Science at Cornell University.

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Date Created: 03/12/16
PAM 2000 McDermott Spring 2016 March 8, 2016  solving kinked budget constraints o there will be tangency at each BC  use the two optimality conditions to solve o check the kinks to see if their optimal  COLA o Leontief: just as well of  they would be worse of even with COLA when:  the consumer’s preferred bundle doesn’t match the CPI’s implicit preference ratio of bundle o any other preferences: COLA makes the consumer better of o what conditions lead to worse of?  firms o determine optimal level of production  marginal cost: additional cost of producing one additional unit of a good (also the derivative of total cost)  MC = ∆TC/∆Q = ∆VC/∆Q = w∆L/∆Q = w/(∆Q/∆L) = w/MPL  Q: quantity  VC: variable cost  TC: total cost (fixed + variable)  L: labor  MPL: marginal product of labor o if diminishing, costs are increasing  fixed cost (usually capital) vs. variable cost (VC) o VC: costs that change with the production of every additional unit (usually labor, exception being cases like union contracts) o MC curve cross AC curve at its minimum o profit maximization  profit = total revenue – total cost  discussion of firms as price takers (they don’t decide the price)  profit (π)  π = P(Q) – C(Q) o price: P o cost: C o quantity: Q  π = TR – TC = P(Q) – F – VC o =Q(p-((TC)/Q)) o F: fixed costs  price = AVC, firm is breaking even o >, profit o <, loss  slide 16 for graphical representation  decisions o output decision: firm produces, what output level (Q) maximizes its profits/minimizes losses o shutdown decision: is it more profitable to produce or shut down  π < 0 when P < AVC + AFC  if p<AVC, shut down  p=AVC, π = F  p = ATC, π = 0 o SR  if firm is making a loss and price < AVC  if AVC < F and π is positive  then continue production in the short run so fixed costs can be paid of even if not with an optimal level of production  marginal revenue (MR) is price for profit taking firms (derivative of total revenue)  to determine whether increasing production is profitable, see if MR > MC o profit is maximized where MC = MR  P>MC, next unit is profitable, increase production  P=MC, keep production constant  P<MC, production not optimal, reduce o producer surplus  slide 14 for graphic representation March 10, 2016  perfect competition o short run v. long run  long run: entry/exit decision  no fixed costs  P>ATC, positive profits so firms enter  P<ATC, positive profits so firms exit  in LR equilibrium, P=ATC, profits=0  assuming there are no barriers to entry  long run: firms don’t lose money because if they did they will have exited  shutdown decision in the short run  based on fixed cost  revenue < VC, shutdown o p<AVC o o supply  first law of supply: as price increases, quantity supplied increases, ceteris paribus  same as the MC curve above the ATC curve  elasticity  market supply function (aggregate supply function) o total quantity of good that’ll be suppled at each price o sum of all individual firm supply functions  price elasticity of supply o amount producers will change the quantity suppled in response to a change in price o ε=%∆Q /%sP  positive value  if o ε= infinite, perfectly elastic  infinity> ε>1 : elastic supply o ε=0, perfectly inelastic  1> ε>0 : inelastic supply  second law of supply: the more time that producers have to react to a price change, the more elastically it’ll be supplied  monopoly o governments creates monopoly  patents o monopolies occur if a firm is more efficient or is superior in technology/production  the firm controls an essential facility: a scarce resource rivals need o natural monopoly  the firm can produce the total output of the market at a lower cost than other firms  governments allow monopolies to public utilities o barriers to entry  often it’s the government  patent: an exclusive right granted to the inventor to sell a new product, process, substance, design for a fixed period of time o profit maximization  no close substitutes in the market for a monopoly  monopoly is the price maker  MR=MC still applies  MR curve has twice the slope of monopoly demand curve o deadweight loss: the total surplus that isn’t captured due to an efficient equilibrium not being reached  efficient market: (perfectly competitive) allocation of goods will make it so that the marginal benefit of society is the same as marginal cost  returns to input o increasing: you get more the more you put in  monopolies are like this o decreasing: you get less back each time you put in more

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