ECON Exam 2

CS = WTP - P

PS = P - Cost

TS = CS + PS

P increase, CS decrease
1) People drop out of market
2) CS smaller for those who remain

P increase, PS increase
1) People enter the market
2) PS smaller for those who remain

1) efficiency is the allocation of resources that maximizes the total surplus
2) equity is the distribution of economic prosperity uniformily across members of society

1) with taxes, CS and PS both decrease (higher Pb, lower Qt) and (lower Ps, lower Qt)
2) also, units are not sold because of the tax (DWL)

1) more elastic supply curve, larger DWL
2) more elastic demand curve, larger DWL
3) the grater the elasticity of supply + demand, the greater the DWL of tax

as tax increases, DWL increases even more rapidly than size of tax

as tax increases, tax revenue increases initially, then decreases after a certain threshold

1) Higher Elasticity = Less Tax Revenue, Greater DWL
2) Lower Elasticity = More Tax Revenue, Smaller DWL

Profit = TR - TC

1) implicit costs are costs that represent the opportunity cost
2) explicit costs are direct representation of monetary values

1) Accounting Profit = TR - Total Explicit Costs
2) Economic Profit = TR - Total Costs (Explicit and Implicit)

1) increase in output that arises from an additional unit of input
2) MPL = Change in Q/Change in L

as you increase your amount of labor(L), your MPL decreases (increasing quantity at a decreasing rate)

Fixed Costs: do not vary w/ Q of output produced
Total Costs: FC + VC
Variable Costs: vary w/ Q of output produced
Marginal Costs: MC = Change in TC/Change in Q
ATC: TC/Q or AFC + AVC
AVC: VC/Q
AFC: FC/Q

1) if marginal cost < ATC, pulls ATC down
2) if marginal cost > ATC, pulls ATC up

1) Short-Run: some inputs are fixed (factories, land)
2) Long-Run: all inputs are variable (firms can build more factories/sell existing)
3) in long-run, ATC at any Q is cost/ unit using the most efficient mix of inputs for that Q (factory size w/ lowest ATC)

1) long-run ATC falls as the Q of output increases
2) increases specialization among workers
3) more common when Q is low

long-run ATC stays the same as Q of output changes

1) long-run ATC rises as Q of output increases
2) increases coordination problems in large organizations
3) more common when Q is high

1) market with many buyers and sellers
2) trading identical products (each buyer and seller takes the market price as given)
3) firms can freely enter/exit the market
4) at market price, can buy/sell as many as desired (horizontal demand curve)
5) MR = P = Demand Curve

profit is maximized for Q where MR = MC (start producing from this point)

1) operate in short-run if P > AVC
2) shut down in short-run if P < AVC

1) operate in long-run if P > ATC
2) exit in long-run if P < ATC

See Slides

if all firms are making a profit in the market, more firms will enter the market: supply increases, which means price decreases

See Slides

1) a firm that is the sole seller of a product without close substitutes
2) has ability to influence the market price of the product it sells (price maker)
3) arises due to barriers to entry (other firms cannot enter/compete)

P: TR: MR: If you lower price, then the buyer of original price now pays the lower price at the same Q
50 50 50
45 40 40

1) Monopoly Resources
- a single firm owns a key resource
2) Government Regulation
- government gives a single firm the exclusive right to produce the good (patent/copyright laws)
3) Natural Monopolies
- a single firm can produce the entire market Q at lower cost than several firms
- arises when there are economies of scale (water, electricity, etc.)

1) produce Q where MR = MC
2) sets highest P for where consumers are willing to pay for Q on the demand curve

1) Monopoly Equilibrium at P > MR = MC
2) value to buyers of additional unit (P) > cost of resources to produce unit (MC)
3) monopoly Q is too low - could increase total surplus with larger Q
4) results in DWL

1) Price Discrimination:
- sell the same good at different prices to different buyers
- separate customers according to WTP
- can raise economic welfare (decrease DWL)
2) Perfect Price Discrimination:
- charge each customer a different price based on their WTP
- monopoly firm gets the entire surplus (profit)
- no DWL

the high barriers to entry in a monopoly market mean that:
1) firms cannot enter in long-run and therefore competition can be avoided
2) allows for positive economic profits in long-run

1) many firms
2) differentiated products
3) free entry and exit
4) no economic profit in LR

1) advertising
2) brand names

1) produce Q where MR = MC
2) sets highest P for where consumers are willing to pay for Q on the demand curve

SR economic profit leads to firms entering, which drives supply higher and prices lower

1) cooperation or collusion is an agreement among firms in a market about what Q to produce and/or P to charge
2) they can essentially act as a monopoly if they work together

1) market structure in which only a few sellers offer similar/identical products
2) mutual interdependence
3) difficult entry

1) each firm in a cartel can both be better off sticking to their collusion agreement,
however each firm also has incentives to cheat on their agreement
2) ex: one firm may produce more than agreed upon Q

See Slides

See Slides

1) if price effect > output effect, total revenue decreases
2) if output effect > price effect, total revenue increases

a market with only two sellers