Essential Flashcards
Before exam
Determinants of
Price Elasticity
- # of Substitutes
- % of income spent
-
Time period involved
Time↑ ⇒ ε↑ - Sustainability
Explain & Classify
when ε = |-0.3|
For every 1% change in Price
there will be a
0.3% difference in
Qty Demanded
in the Opposite Direction
& classified as InElastic (ε<1)
InElastic Demand ↑
% of Tax
Paid by Cx ↑ or ↓?
% of Tax Paid by Cx ↑
Gov set price for Monopolist to produce the
Best Allocation of prod from Society’s viewpoint
is called ___
where Price = ___
Socially Optimum Price
P = MC =AR
(MC ╳ DD)
⇒ Allocative Efficiency
$ paid for last unit = $ of producing the unit
& match social DD
SOMA
Gov set price for Monopolist to earn
Normal Profits only is called ___
where Price = ___
Fair-Return Price
P = AC =AR
(AC ╳DD)
⇒ Productive Efficiency
unit produced @ lowest possible cost
FRAP
Decision Making with curves of
1. AVC
2. MC
3. AC
- AVC for shut down/produce
- MC for best output
MC intersects MR - AC for Profit/Loss
4 Types of Economies
-
Co-operative
Foraging, egalitarian, no hierarchy/leader/army
(Kibbutz) -
Command
Totalitarian (elite group) -
Customary
Traditional/Religious
Landowners (royalty/aristocracy/church) -
Competitive
Market
Where is
the Point of
Diminishing Returns
Max. MP / Min. MC
Tho Output (TP)↑
Rate of ↑ ↓
Where is
the Point of
Max. Productivity
Max. AP / Min. AVC
if repeated, find where
MP=AP
Where is
the Point of
Max. Output
(Max Total Product)
MP = 0
(MC = ∞ doesn’t exist)
Where is
Economic Capacity
Min. ATC
經濟產能
the output at min. short-term
avg (total) cost curve
3 Situations
Avg Costs ↓
cutting costs
- $ of Fixed/Var. Inputs↓
(cost) - Tech↑(⇒ MP↑)
- Output ↑@ Excess Capacity
or Output ↓ Above Economic Capacity
Costs↓⇒ Curves↓
Formula Comparison
Marginal Product MP
vs
Marginal Cost MC
MP = ∆TP/∆L
. ΔTVC
MC = ———
. ΔTP
TP: total production
2 Reasons why larger firms produces lower AC than smaller firms
Economies of Scale
-
Technical Economies
a. adv from labour division
b. mngt specialization
c. machine specialization -
Pecuniary Economies
a. lower borrowing cost
e.g. interest rate
b. buy/sell in bulk
c. sell by product
d. lower mktg & advertise cost
In Monopoly industry,
how to find
Max TR Total Revenue
Find where
Marginal Rev MR = 0
In Monopoly industry,
how to find
Max Tπ Total Profit
Find OUTPUT where
MR = MC
or
slope of TR = TC
or
TR - TC is greatest
In Monopoly industry,
how to find
Break-Even Output
AR = AC
TR = TC
A Monopolist will
ONLY Produce More
when DD is
Elastic / Inelastic ?
Why?
Elastic
Monopolist can sell more only by lowering $
⇒ Elastic DD
2 Forms of
Price Discrimination
Dicriminations among
1. Units Purchased
- law of dinimishing marginal utility buyers don’t value units equally
- Cx buy additional units for lower $
- not relevant to cost of prod
- e.g. BOGO
2. Buyer Groups
- diff. Cx groups, diff. dd & value, diff. elasticities
- no possibility of resale
Lump-Sum Profits Tax
is a fixed cost which
increases Monopolist’s __ Cost
and __ Total Profit
While Output & Price __
& Cx pay __
Average (Total) Cost ↑
Total Profit ↓
Output & Price unaffected
Cx pay 0
Monopoly Sales Tax
is per unit sales tax
increases Monopolist’s __ Cost
and __ Total Profit
While Output & Price __
& Cx pay __
Marginal Cost MC ↑
Total Profit ↓
While Output ↓ & Price ↑
Cx pay partly
Gov set price for Monopolist to produce the
Best Allocation of prod from Society’s viewpoint
is called ___
where Price = ___
Socially Optimum Price
P = MC =AR
(MC ╳ DD)
⇒ Allocative Efficiency
$ paid for last unit = $ of producing the unit
& match social DD
SOMA
Gov set price for Monopolist to earn
Normal Profits only
is called ___
where Price = ___
Fair-Return Price
P = AC =AR
(AC ╳DD)
⇒ Productive Efficiency
unit produced @ lowest possible cost
FRAP
Why MR always < Price $
for Monopolist?
- Monopolist ctrl either $ or Qty
- DD curve is downward sloping
⇒ ↓ $ to sell more ⇒ ↓ Revenue - Selling additional unit earns
less revenue than the previous unit
⇒ MR < $
