midterm 2 Flashcards
ATC
ATC(q) = TC(q)/Q
AVC
AVC(q) = VC(q)/Q
AFC
AFC(q) = FC(q)/Q
MC, marginal cost
MC(q) = TC(q) - TC(q-1)
FC
FC= TC-VC
always same.
VC
VC = TC-FC
TC
TC= FC+VC
Diseconomies of scale
as you Increasing output there are increases LR AC. slope upwards.
decreasing returns of sale.
Economies of Scale
as you increasing output you reduces LR AC
slope downwards
increasing returns of sale
Constant Returns of Scale
Straight line ________
TR, total revenue
TR(q) = P * q
amount paid to a firm for selling a particular quantity.
AR, average revenue
AR(q) = TR(q) / q =P
AR is always price.
average amount paid to a firm per unit sold.
MR, marginal Revenue
MR(q) = TR(q) - TR(q-1) = P
MR is always price
additional amount paid to a firm for selling one more unit.
Profit
Profit(q) = TR(q) - TC(q)
Profit = (P - ATC) * Q
Profit will increase by MR(q) - MC(q)
Produce as long as MR(q) ≥ MC(q)
Profit is maximized at q where MR(q) = MC(q)
PC
Long Run exit if
TR < TC
P < ATC
Total Profit < 0
AR < AC
PC
Short Run shut down if
P same as AR < AVC
Total Profit < -FC
still have to pay FC
PC
Short Run: P and MC determine..
P and MC –> determine firm q
If MR > MC, the firm should increase its output.
If MC > MR, the firm should decrease its output.
At the profit-maximizing level of output, MR = MC.
PC
Short Run: P and AC determine..
P and AC –> determine average profit –> times by q to get total profit.
PC
Long run: Profit (or loss)
–> firms enter (or leave) in the long run –> increases (or decreases) industry supply
PC
Long run: continues until profit=..
profit = 0
PC
Long Run: what occurs where MC = AC
MC = AC –> LR market price
PC
Costs in the SR
only some variable inputs can be adjusted. fixed inputs cannot change.
PC
Costs in the LR
you can change fixed inputs.
PRATC = minimum of all SRATC
PC
AC curve: SR and LR
SR: U shaped. MC crosses at lowest point.
LR: not always a U-shape.
PC
Profit maximization
Should I produce to the qth unit?
- producing it raises revenue by MRq
- Producing it raises costs by MCq
- So profit will increase by MRq - MCq
Produce it as long as MRq >= MCq
Profit is maximized at q where MRq = MCq
Profit maximization in PC
MRq = P
- so max profit occurs at q where MCq = P
- the firms MC curve is the firms supply curve (with a caveat on shutting down.)
- Leave the industry (in the long run) if profits are negative
homogenous product.
A homogeneous product is one that cannot be distinguished from competing products from different suppliers.
product has essentially the same physical characteristics and quality as similar products from other suppliers. One product can easily be substituted for the other.
Perfectly Competitive market
- Many sellers and many buyers
- free entry
- price Takers
- homogenous products
0 Profits
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
Monopolistically competitive market
- Many sellers and many buyers (brand loyalty)
- free entry
- price Makers
- differentiated products
0 Profits
a market structure in which many firms sell products that are similar but not identical
Oligopoly
- Few sellers and many buyers
- barriers to entry
- price Makers
- homogenous products
0 Profits - monopoly profits
a market structure in which only a few sellers offer similar or identical products
monopoly
- One sellers and many buyers
- barriers to entry
- price Makers
- N/A to homogenous products
monopoly profits
a firm that is the sole seller of a product without any close substitutes
natural monopoly
a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms
compared to a perfectly competitive firm, a monopolist produces..
more DWL, less CS
Monopoly
maximum profit
maximized at Q where MRq = MCq
-but MR is not longer constant
Externalities
Costs and Benefits
MPC, MEC, MSC, MPB, MEB, MSB
- marginal private cost (MPC): MC to the actor making the choice
- Marginal external cost (MEC): MC imposed on others.
- Marginal Social Cost (MSC): MPC + MEC
- Marginal Private Benefit (MPB): benefit to the actor (individual demand curve)
- Marginal external benefit (MEB): benefits that spill over to others.
- Marginal Social Benefit (MSB) = MPB + MEB
Public Goods:
- non-excludable:
- non-rival:
- public goods:
- common resource:
- non-excludable: firm cannot prevent individuals from using their good
- non-rival: one person’s use of the good doesn’t diminish another’s ability to use it.
- public goods: a good that is non-excludable and non-rival
- common resource: a good that is non-excludable and rival
Market Failure in Public Goods
Non-excludable : free riders
people benefit from it but do not pay for it
market demand will not reflect true marginal value (external benefits)
Non-Rival: Zero marginal cost of use.
Efficient price of use if 0.
Competitive market will not survive.
Tragedy of commons
depletes the natural resource faster than optimal.
Solution to market failure in common resources.
private owner will charge for use.
in comp market, price will equal the marginal cost.
Govt Failures
Bureaucracy
process is slow and the result may not reflect society’s preferences
Govt Failures
Rent Seeking
People will seek special advantages from gov’t
Govt Failures
Limitations on information
gov’t cant always discern true preferences, costs
Govt Failures
Restrictions on choice
Regulation only limits choice, and we value freedom
Adverse selection
when only the worst outcomes are left in market
Moral Hazard
when the agent’s actions are inefficient due to limited information.
Rational Ignorance
search for more information until the MC = expected marginal benefit
Risk Premium
higher return on risky investment or lower price on risky products.
Solutions to public goods
technical solutions
public financing
complementary goods
