Microeconomics EC101

producers will cut back production

It it produces the output at which P=MC

Market supply is horizontal at shutdown point

If the price= Marginal social benefit for customers and P=marginal social cost for producers

Firms that adopt the new technology will make an economic profit (entry is created by new technology firms) Firms that stick with the old technology either exit the market or switch to new technology.

if the minimum efficient scale of a single producer is small relative to the demand for the good or service. If each firm is perceived to sell a good or service that has no unique characteristics, and if sellers and buyers are well informed about prices.

Many airlines provide many services to many travelers, airlines and travelers are well informed about prices, and its relativity easy to enter the market.

If the ATC (average total cost) is above the profit maximizing point (MC=MR)

The firms supply curve is the same as the marginal cost curve at all points above minimum average variable cost.

In long run equilibrium each firm is making normal profit (the firm is making 0 economic profit).

Market demand and market supply determine the market price and output. Each firm takes the market price as given and produces its profit maximizing point. The market supply curve is upward sloping at prices above the shutdown price.

If the firm can vary the quantity it sells without affecting the price it receives.

The demand for the good will increase. As a result firms will make an economic profit. Some firms will re-enter the market and the market supply curve will shift rightward.

The market supply curve shifts leftward, the market price rises, and each remaining firms economic loss decreases.

At all points along the market supply curve.

At all points along the demand curve.

ATC=MC (average total cost= marginal cost)

Total Revenue- total cost
Marginal revenue= marginal cost (MR=MC)

Economic Profit
Economic Loss
Break Even

Break even
(only operating firms that survived and did not go bankrupt. Firms here are in equilibrium.)

When total revenue is above total cost

At the break even point
MR=MC=ATC
(marginal revenue= marginal cost= average total cost)

A profit maximizing monopoly produces an output in the inelastic range of its demand curve.

The change in total revenue for each additional good rented is always less than the rental price.

Under an average cost pricing rule the firm makes normal profit.

LRAC= D
(Long run average cost= demand)

Rent seeking shifts the firms ATC (average total cost) curve upward.

The social cost of a monopoly is greater with rent seeking than it otherwise would be.

A rule that specifies the highest price that the firm is permitted to set.
(A price ceiling)

When a firm practices perfect price discrimination, it sells each unit of output for the highest price someone is willing to pay for it. Consumer surplus is eliminated, and the demand curve becomes the marginal revenue curve.

Take the difference between MC and price and multiply it by the quantity.

Has a marginal revenue curve that is the same as the demand curve for the good that the monopoly produces. If a monopoly can perfectly price discriminate it produces no deadweight loss and is more efficient than a single price monopoly.

Only by setting a lower price.

Price Setters
barriers to entry and exit
no close substitutes

Sells goods to everyone for the same price.

Charges different prices to different people for the same good. (Ex: senior citizen discounts)

MR is doubled the slope of the demand curve.
Because there is only one producer and they are a price setter they are able to set price based on the demand line. (Market demand line is the firms demand line bc there is only one firm.)

Long run and short run outcomes are the same in a monopoly.

The second best regulation (best form of regulation for the firm because it allows them to be able to adjust and gives the firm more flexibility)
Price cap regulation
subsidy approach

Natural Monopolies (utility companies)

Monopoly must set the price where long run average cost= demand (LRAC= D) (The break even point)

The government makes the firm set the price of the good below LRAC (long run average cost) and then the government reimburses the firm their economic loss. (on the graph it appears the firm has incurred an economic loss, but the government pays them back this amount, so they end up making a normal profit)

Economic profit
Economic Loss
Break even

Break even (0 economic profit)

The efficient degree of product variety is the one for which marginal social benefit of product variety = its marginal social cost. Compared to product uniformity monopolistic competition may be considered efficient.

If a firm successfully advertises the quantity produced increases such that total cost increases and average total cost decreases. Advertising is a signal, it does not need any specific product info to be effective, and it is a fixed cost.

Firms in M.C advertise because products are slightly different but the companies want the consumers to think that the products are very different to they advertise aggressively (ex of markets that do this are phones and clothes) (after advertising total costs go up)

No one firms actions directly affect the actions of other firms.

Because of product differentiation, a firm in M.C faces downward sloping demand curve for the good it produces.

The amount by which price exceeds marginal cost at the equilibrium quantity. (From the profit max. point follow point up to demand line to set the price-- this is called the markup by whatever the amount is)

Advertising and brand name enables a better product choice to be made. The final verdict on the efficiency of M.C is ambiguous. The opportunity of the additional info provided through advertising and brand names must be weighed against the gain of the consumer.

Retaliative to successful advertising, with no advertising the profit max output is small, the markup is large, and the price is high.

Advertising expenditures increase the costs of a M.C firm above those of a P.C firm or monopoly.

The market must have more than 4 firms
HHI must be 1000 or less and the largest 4 firms can not control more than 50% of the market.

In a repeated game, punishments that result in heavy damages are an incentive for players to adopt the strategies that result in a cooperative equlibrium.

The output of a game in which the players make and share the monopoly profit.

The outcome of a game that occurs when player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A.

both players confess (in an R&D game of chicken an outcome with no firm or both firms doing R&D is not a Nash Equilibrium.)

There is no equilibrium (No equilibrium because if neither company does R&D then thy both have $0 profit so they want the other to spend $ on R&D so they can just copy it)

Weather or not one company in a duopoly can trust the other company to raise the price of a good and decrease advertising in order to raise econ profit.

All possible actions of each player

2 producers of a particular good compete in the same market.

no (inefficient outcomes because each player end up doing more than they could have of they had known the others situation before making their own.)

no (because the players hold on until the last minute)

If the present value of the future rental payments of an item of capital equipment is less than the cost of buying the capital. (firms that buy capital implicitly rent the capital to themselves.)

A market in which there is only one employer and the wage rate is the lowest at which the firm can attract the labor it plans to hire.

The outcome of bargaining is a wage rate that favors the stronger party.

The wage rate rises and the employment rate decreases.

Exceeds the wage rate.

Can increase the wage rate and employment.

The smaller the present supply of the good is.

VMP= Price of output * marginal product of factor

Physical and mental work effort that people supply to produce goods and services.

Price of the labor services is the wage rate. (Determined by supply and demand)

Resources that can be used only once. (Ex: oil, gas, coal)

Price is determined in global commodity markets.

The demand for a factor of production. It is derived from the demand for the goods that it is used to produce.

Value to the firm of hiring one more unit of a factor of production.

The lowest wage people are willing to supply labor.

How a person responds to labor and leisure. Person increases quantity of labor and decreases the quantity of leisure supplied. (SE>YE more labor as wage increases)

How a person responds to a higher wage rate. Person increases quantity of leisure and decreases the quantity of labor supplied. (YE>SE less labor as wage increases)

An organized group of workers that aims to increase wages and influence other job conditions. (Monopoly/ Monosony)

No (labor unions disrupt the natural equilibrium with multiple companies.)

The price to purchase or rent goods (capital+land= rental rate) (principle of supply and demand).

The firms opportunity cost of using its own capital.

The smallest quantity of output at which the long run average cost reaches its lowest level.