1B03 – Microeconomics

- Many buyers & sellers, goods are homogenous (identical), and firms can freely enter & exit the market (no barriers, such as patents)
- Ex. convenience stores

*Total revenue = Price x Quantity
(TR = PQ)*

* Note: Price would be a given value b/c firms are price takers

*TC > TR = losses
TR > TC = profit max*

Profit = TR - TC

* Note: The larger the distance between TR and TC, the higher profit will be

Tells us how much revenue a firm receives for the typical unit sold

Change in total revenue from an additional unit sold

MR = ∆TR/Q
(For perfectly competitive firms: MR = P)

*Note: MR is the slope or TR

*MR > MC, firm should increase quantity
(Producing one more good will add more to TR than TC, at Q1)
MR < MC, firm should decrease quantity
(Producing that good adds more to TC than TR, at Q2)
MR = MC, profit max at that quantity*

P = MR = MC

*Note: P is the demand curve

P < min AVC
(Variable costs cannot be covered by revenue; as long as price is above min AVC, firm will produce)

*Note: Only fixed costs are still paid for.

Costs that have already been committed and cannot be recovered

The portion of the MC curve that lies above min AVC

Profit = (P - ATC) x Q

* Note: True for all firms

*P > ATC, firm makes positive economic profit
P < ATC, firm makes negative economic profit (loss)
P = ATC, firm makes 0 economic profit (considered normal economic profit)*

*Note: Demand and ATC are tangent curves to each other

- All costs are variable; therefore ATC (including any SR fixed costs) come into play
- Firm will want to exit completely if revenue earned is consistently less than its costs

P < min ATC or TR < TC

* Note: In the long run, everything is variable cost

Sum of the quantities supplied by individual firms in a market.

- Industry output increases, demand for input increases
- Input sellers may increase input prices => Raises production costs of final goods
- Increase in P is required to cover increase in costs and increase in market Q supplied

- If input price do does not increase as market output increases, firms' costs will not change
- min ATC & min LRAC will not change regardless of how much they produce
- Market supply will be a horizontal line @ P = min LRAC

One seller of product, no close substitutes, firm is a price setter
* ALWAYS BEST *

1) Single firm owns a key resource that no other firm can access or have a close substitute for.
2) Government gives on firm the exclusive right to produce or sell some good.
3) Industry is a natural monopoly.
4) Monopoly by good management (driving out competition).

*TR = PQ
AR = P = TR/Q
MR = ∆TR/∆Q*

Too little quantity traded (Can be measured by DWL; DWL in total surplus in market)

*Note: To calculate, find monopoly's profit (MR = MC) and graph. Then use (b x h)/2. Remember that profit is on the demand curve.

Legislation to prevent mergers that would make the market less competitive

Government agencies can regulate the prices a monopoly may charge (set P = ATC or P = MC); if they lose money, government should subsidize firm

Government can run the monopoly itself (may not be efficient)

If inefficiency is small, government may stay out of it

Selling the same good at different prices to different customers, even though the costs are the same (not possible in competitive markets)

Monopolist knows exactly the willingness-to-pay of each customer, it will charge each customer a different price (ex. accountants)

Firm can distinguish between different markets for its good (ex. Movie tickets, bus fares, discount coupons, quantity discount, ladies' nights at bars, ect)

Consumers are less flexible and less able to shop around and look for alternatives (ex. business vs. vacation flyers)

- Many sellers, free entry & exit (no barriers)
- Ex. restaurants, most retailers

- Many sellers, free entry & exit (no barriers)
- Ex. restaurants, most retailers

- Each firm's product is at least slightly different from another firm
- Ex. McDonald's and Harvey's sell burgers but they taste different

*Note: Price must be around the same

Firm will make losses (will not enter market)

* Note: If demand curve moves, so does that MR curve

- Increases the number of products offered
- Decreases the demand faced by firms already in the market (Existing firms: D shifts left & profits fall)

- Decrease the number of products offered
- Increases demand faced by remaining firms (Shifts demand of remaining to the right and increases remaining firm's profits)

Competitive firm

Monopolistically competitive firm

*Note: An extra unit sold at the going price means more profit for the monopolistically competitive firm (adds more to TR than it does to TC)

- As in a monopoly: P > MC, MR = MC, MR < P since D is downward sloping
- As a competitive market: P = ATC in LR equilibrium, free entry & exit drive economic profit to 0

A level of quantity where ATC is above min ATC (unlike perfectly competitive firms)

- Increases competition by offering a greater variety of products and prices
- People will think a firm has a quality product if they have a good advertisement because it costs a lot of money
- Ex. Superbowl commercials

- Useful way for consumers to ensure that the goods they are buying are of high quality

Consumers like new products, therefore entry of new firm = positive externality on consumers

Other firms lose customers and profits from entry of new firms, therefore entry imposes a negative externality on existing firms

*PV > BS = more firms are desirable (too little firms)
BS > PV = fewer firms are desirable (too many firms)*

In the short run

In the long run

- Fewer sellers, big firms, homogenous/nearly identical products
- Interdependence between firms
- Big oil companies, soft drink market, sugar

Oligopoly with only two members

- An agreement among firms in a market about quantities to produce or prices to change.
- Tacit collusion is most common (no formal agreements)

Note: Illegal by Canada's Competition Act

A group of firms acting in unison

Breaking the agreement, each would see the potential to increase their profits

A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen (always result in suboptimal outcome)
* ALWAYS SUBOPTIMAL *

* Note: If both firms stuck with the original agreement in the first place, they would be making more profit instead of cheating between each other

*Pm > Po > Pc
Qc > Qo > Qm*

The number of sellers increase

Price approaches marginal cost & quantity produced approaches socially efficient

Increase production = increase market quantity = reduces market price and reduces profit on all units sold

*OE > PE = increase production
PE > OE = decrease production*

Study of how people behave in strategic situations

A particular "game" between 2 captured prisons that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Payoffs can be negative (minimize) or positive (maximize); depends on the other person's decision on action (ex. jail time)

Best strategy for a player to follow regardless of strategies chosen by the other players. (Result is suboptimal Nash equilibrium)

Requiring a retailer to sell a good at a certain price determined by the wholesaler

Charging too low prices hoping to drive out competitors; can lead to price wars which benefit consumers

In order to purchase monopoly good, you must purchase another competitive good at the same time

- Market perfectly competitive
- Firm has no control over wages (determined by market S & D)
- A worker's contribution to TR is their MP

VMPL = W = P x MP_L

VMPL = MR of the last worker hired in addition to TR
W = Their wage; the MC of the last worker hired in addition to TC
P x MP_L = A firm hires labour where MR_L = MC_L to max. profit

Contribution > Cost

W = VMPL (because they want to max. profit)

Additional cost of hiring the labour = additional revenue the labour generates

*- D_L = D_VMPL = P x MP_L
- If P increases, D_L increases, shifts right
- If P decreases, D_L decreases, shifts left*

* Note: Only shifts labour demand

- If MP changes, curve will shift
- Ex. decrease supply of plastic = decrease in water bottles = decrease MP & D_L shift left

* Note: Only shifts labour demand

- Advances = Increase in MP_L = Increase D_L

* Note: Only shifts labour demand

- Reflects worker's opportunity costs
- Less leisure time = more hours of wages (vise versa)
- Higher wage, more expensive leisure becomes, and more work hours/less leisure an individual is willing to supply

- When an individual personally feels like they need to contribute or not contribute
- Ex. women wanting to work outside the home = increase labour supply

* Note: Only shifts labour supply

- When another job has better wages but similar job characters
- Ex. wages of apple pickers increase, some cherry pickers would switch

* Note: Only shifts labour supply

- Workers moving from region to region

- Surplus of labour
- Downwards pressure on wages
- Firms can hire more workers
- Diminishing MP
- Lower value of MP
- Gives new equilibrium

- Goal of government to ensure at least a certain wage for workers
- Must be able equilibrium wage (a wage floor)

- Unemployment increase
- Encourages teens to drop out of school
- Prevents unskilled workers form getting on-the-job training
- Isn't high enough to relieve poverty of working poor

What a person pays to own an input indefinitely

What a person pays to use an input for a limited period of time (e.g., leasing equipment)

r = P x MP_k

P = selling P of good
MP_k = Amount of captial

The amount of money needed today to produce a given amount of money at a specified future date, accounting for prevailing interest rates

*Note: Firm will choose investment that has the highest present value.

PV = X/(1 + i)^t

X = amount you want to receive in period t
t = amount of time
i = prevailing interest rate

- Prevent someone from enjoying or using the good
- Ex. You can't have a candy bar unless someone gives you one or sells you one

- One person's use of the good diminishes the ability of another person to use it
- Ex. If I'm eating a candy bar, you can't eat the same one

- Both excludable and rival
- Ex. Donut

- Neither excludable nor rival
- Ex. Lighthouse

- Rival but not excludable
- Ex. Fish in the oceans

* Note: Our enjoyment of and possible overuse/misue of these resources can diminish others' ability to enjoy them (Ex. Every time we drive we take up part of the road from others)

- Excludable but not rival
- Ex. Cable TV

- A person who receives the benefit of a good but avoids paying for it
- Ex. A fireworks show (someone can watch from their balcony)

Taxing each resident an amount not exceeding the value they place on the event/good

*Note: However, people of the city get taxed but someone from another city can come and enjoy the event/good for free

1) National Defence
2) Research
3) General Knowledge

- Total benefits of all those who use the good must be compared to the costs of providing and maintaing the public good
- Benefits outweigh costs = good should be provided

- Every additional cow a farmer brings clears more grass that could have been enjoyed by another farmer's cow
- Each cow confers a negative externality

- Set limits on the number of cows each farmer could have
- Assign a certain amount of land to each farmer (private property)

- Market fails to allocate resources efficiently when property rights are not well established
- Ex. Laws control the duration of hunting seasons and hunters and fishers require licenses

- When a consumer gains satisfaction from a good or services
- Overconsumption of a good (ex. pizza) can lower utility

*Note: We assume consumers try to maximize utility by consuming bundles of goods and services (consumption bundle)

MU = ∆TU/Q

*Note: MU is the slope of TU function

- Their income and prices of the goods (can only buy what you can afford)
- BC shows various combinations of goods the consumer can afford, given his/her income and prices of two goods

*Note: If they want more of one good, they must give up some of the other good

BC = -Px/Py

*Note: Px/Py is the relative price of the two goods and the opportunity cost of good X in terms of good Y

BC becomes flatter (rotates out) & can buy more of relatively cheaper X

BC becomes steeper (rotates in) and can't buy as much of relatively more expensive X as before

BC will have a parallel shift

BC will rotate depending on relative magnitude of price change

Can buy more goods

Can't buy as much of either good as before

Consume combos of two goods on budget constraint line or inside it (they are all affordable)

The one that maximizes a consumer's TU so that they are spending all their income -- they are consuming a point ON the BC

When a price change makes us consume more of a relatively cheaper good and less of the now relatively more expensive good

When a price change changes our purchasing power so that it feels like our total income has changed

- An industry in which it is most efficient (involving the lowest long-run average cost) for production to be permanently concentrated in a single firm rather than contested competitively
- Economies of scale over the relevant range of output

Cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Exceeds the monopoly level of output, but falls short of the competitive level of output.

Marginal utility per dollar spent is the same for all products