Principles of Microeconomics (GT
Principles of Microeconomics (GT ECON 202
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This 7 page Class Notes was uploaded by Judson Hoeger on Tuesday September 22, 2015. The Class Notes belongs to ECON 202 at Colorado State University taught by Karen Gebhardt in Fall. Since its upload, it has received 18 views. For similar materials see /class/210321/econ-202-colorado-state-university in Economcs at Colorado State University.
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Date Created: 09/22/15
Costs of Production I Production function Microeconomics Study Guide Exam 2 0 Production function a relationship expression the maximum quantity of a good attainable from different combinations of factor inputs 0 O o Diminishing marginal productivity the idea that the marginal physical product of a variable input declines as Productivity output per unit of labor I Marginal productivity marginal physical product more of it is employed with a given quantity of other inputs Marginal productivity the change in total output associated with one additional unit of input 0 De ne be able to calculate from provided information be able to graph and identi y the curves on a graph I What is the difference between the short and long run 0 Short run a smaller period of time typically referring to variable items in the total cost 0 Long run an extended period of time typically referring to fixed items in the total cost I Costs of production particular quantity of a goodservice Attribute Abbreviation What it is Calculations What the Graph Does Cost to produce a FC PkK K capital Straight horizontal line with Fixed Cost FC quantity associated with FC QAFC no slope your fixed input Cost to produce a VC PLL Positively sloping curve Variable Cost VC quantity associated with PL price of labor See Figure 64 in book your variable input Total cost to produce a TC explicit cost implicit Positively sloping curve quantity of a cost See Figure 64 in book Total Cost TC goodservice TC FC VC TC PKK PLL TC ATCQ Average cost associated AFC Negatively sloping curve with fixed input to See Figure 67 in book Average Fixed C t AFC produce a particular S quantity of a goodservice Average cost associated AVC Upwardfacing Ushaped with a variable input to curve always under ATC Average AVC produce a particular curve Variable Cost l A 1 quantity of a particular See Figure 67 in book goodservice Average total cost to ATC E Upwardfacing Ushaped Average Total ATC produce a particular Q curve always above AVC Cost quantity of a curve goodservice See Figure 67 in book How much extra it costs MC Looks like the Nike symbol Marginal A42 MC to make one more unit of checkmark shaped curve Cost a goodserv1ce See Figure 67 in book How much a money a TR Q P P price Positivelysloping linear Total Revenue TR firm earns from selling a curve The difference between TE TR TC Profit Tr totalrevenue and total cost The change in total M R E Marginal W revenue that results from AQ Revenue a oneimit increase in the quantity sold I Economic vs Accounting Profits 0 Economic Profits Profit that account for both implicit and explicit costs I Economic Profit Total Revenue Total Economic Costs Accounting Profit Implicit Costs 0 Accounting Pro t Costs that only account for only explicit costs I Accounting Profit Total Revenue Total Costs 0 Implicit Costs Value of resources used even when no direct payment is made 0 Explicit Costs A payment used for the use of a resource The Competitive Firm I What is the profit motive The general point of going into business 0 Profit The difference between total revenue and total cost I Difference between a market and a firm 0 Market whenever and wherever an exchange of factors of production take place 0 Firm a producer 0 Perfect competition a market in which no buyer or seller has market power I Characteristics I Many buyers I Many sellersproducersfirms I Standardized or homogenous product I Low barriers to entry I No market power I Examples I Farmers I Burrito shops 0 Monopolistic competition a market in which many firms produce similar goods or services but each maintains some independent control of its own price I Characteristics I Many buyers I Many sellersproducersfirms I Heterogeneous product I Low barriers to entry I Limited market power provided by heterogeneous product I Examples I Tshirt shops 0 Oligopoly a market in which a few firms produce all or most of the market supply of a particular good or service I Characteristics I Many buyers I Several dominant producers I High barriers to entry I Product can be heterogeneous or homogeneous I Examples I Car companies I Cereal companies 0 Monopoly a firm that produces the entire market supply of a particular goOd or service I Characteristics I Many buyers I Single dominant seller I Unique product with no close substitutions I High barriers to entry I Examples I DeBeers diamonds I Nature of perfect competition 0 Price takers the idea that producerssellers entering the market must take the price the market sets I Zero market power I Examples I A farmer selling corn must sell it for the same price as all other farmers 0 Market demand the total quantities of a good or service people are willing and able to buy at alternative prices in a given time period I Still downward sloping curve as per the Law of Demand 0 Firm demand the demand is so small that changes in its output doesn t disturb market equilibrium I Horizontal demand curve 0 Profit maximization rule firms will produce at an output where marginal revenue equals marginal cost I Identifying the QTrmax 0 Profit difference between total revenue and total costs I Abbreviated as Tr I Tr TR TC 0 Shutdown decision I SR produce or not produce production should continue if total revenue TR is more than fixed costs FC production should cease if total revenue TR is less than fixed costs FC I Or a firm should shut down where the price equals the minimum AVC I LR stay in business or go out of business stay in business if total revenue TR is more than total costs TC go out of business if total revenue TR is less than total costs TC Competitive Markets I Perfectly competitive market D and S curve 0 Demand I A market demand curve is downwardsloping as per the Law of Demand I A firm demand curve is horizontal in a perfectly competitive market because its share of the market is so small 0 Supply I The marginal cost is equal to the shortterm supply curve I Describe and graph the impact of market changes I The cycle 1 New market emerges with low barriers to entry 2 New firms enter the market a marginal cost curvesupply curve shifts to the right Prices fall Firms exit the market 4 marginal cost curvesupply curve shifts to the left P th Prices rise 6 Rinse lather and repeat I Other shifts I Technological advances 4 downward shift of the ATC and MC curves I LR Tr outcome for the typical perfectly competitive firm 0 In longrun equilibrium entry and exit cease and zero economic profit prevails pg 184 Monopoly I Nature of monopolies o Barriers to entry obstacles that make it difficult or impossible for new producers to enter a particular market I Examples I Patents I High startup costs I Government regulations I One company already owns rights to essential resource 0 Price makers when one firm can set the price for a particular goodservice because they retain market power 0 Market demand is firm demand 0 Profit maximization rule I Where MR MC profit is maximized I Where the price at MR MC intersects the demand curve this is the price that people are willing to pay I The Shutdown Decision 0 The Shutdown Point the rate of output where price equals minimum AVC o Shortrun I Produce when revenue is greater than the AVC I Not Produce when revenue is less than the AVC o Longrun I Stay in business when revenue is greater than the ATC I Go out of business when revenue is less than the ATC I Differences between monopoly and perfect competition 0 Market Power I Monopolistic firms have retain all market power I Perfectly competitive firms have no market power 0 Demand Curve I Monopolistic firms face a downwardsloping demand curve I Perfectly competitive firms face a horizontal demand curve perfectly competitive markets face a downwardsloping demand curve 0 Profits I Monopolistic firms tend to make profits I Profits in perfectly competitive firms tend to be driven toward 0 or the breakeven point I Market power Pros Cons 0 Firms tend to earn profit 0 Market power monopolies o Producers enter the market with the dream 0 High market power might lead to high prices that they may become a monopoly for a goodservice 0 Firms don t have to cater to the consumer price signals of a goodservice 0 May hinder market developmentresearch 0 Why it is a market failure I Market failure because the firm has the ability to create a subpar mix of outputs o 4 government interventions to combat market power I Antitrust regulation I Regulate market behavior how the market behaves I Allow the natural monopoly to continue Monopolistic Competition I Nature of monopolist competition 0 Some price making capability I Monopolistic competitive markets retain some market power based on customer loyalty and brand recognition 0 Market demand is firm demand 0 Profit maximization rule I Where IWR MC profit is maximized I Where the price at MR MC intersects the demand curve this is the price that people are willing to pay Other Stuff I Advertising I Brand Loyalty 0 Brand loyalty is created with brand image I Brand Image distinctly associating product differentiation with a particular brand name 0 How it works I Perfect Competition retains no brand loyalty I Monopolistic Competition firms hold monopoly over their brand image though have far less market power over the actual product I Oligopoly firms hold monopoly over their brand image and have more market power due to limited competitors I Monopoly firm holds monopoly over both their brand image and product I Price Elasticity o Elasticity how much a change in price will change affect the quantity sold I Elastic Products the quantity of a product sold will decrease rapidly as price increases I Steeper demand curve I Inelastic Products the quantity of a product sold will less rapidly as price increases I Demand curve has less slope I Oligopoly 0 Characteristics I Many buyers I Several dominant sellers I High barriers to entry I Goodservice can be homogeneousheterogeneous I Look at Them Curves Demand and Cost Curves that is 0 Perfect Competition I Firm v Market Demand I Firm s demand curve is horizontal I Market s demand curve is a traditional negativelysloping curve I Equilibrium and Profits I As more competitors enter the market the supply curve MC shifts right above the equilibrium point I Competitors exit the market causing the supply curve to shift gradually left to the point of equilibrium 0 Monopolistic Competition I Firm V Market Demand I Both firm and market demand curve are negativelysloping I Longrun v Shortrun Equilibrium I Shortrun Equilibrium MC MR I Longrun Equilibrium more competitors enter the market causing the supply curve MC to shift to the right tangent to the ATC pushes profits to zero and achieves equilibrium 0 Monopoly I Firm V Market Demand I Both firm and market demand curve are negativelysloping In Overview I Perfect Competition 0 Characteristics I Many buyers I Many firmsproducers I Homogeneous product I Freelow barriers to entry 0 Examples I Agricultural products farms I Monopolistic Competition 0 Characteristics I Many buyers I Many firmsproducers I Heterogeneous product I Freelow barriers to entry 0 Examples I Fast food restaurants I Coffee shops I Shoes I Oligopoly 0 Characteristics I Many buyers I Few dominant firmsproducers I Heterogeneous or homogeneous product I High barriers to entry 0 Examples I Credit card companies I Breakfast cereal companies I Monopoly 0 Characteristics I Many buyers I One dominant firmproducer I Unique product with no close substitution I High barriers to entry 0 Examples I Local utility companies I Cable companies I DeBeers diamonds
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