Microeconmics

Market Power

A firm's ability to influence the price it charges instead of simply accepting the market price.

Elasticity

A measure of how much the quantity demanded of a good responds to a change in price.

Consumer Surplus (CS)

The difference between what a buyer is willing to pay and what the buyer actually pays.

Producer Surplus (PS)

The difference between the price received by producers and the marginal cost of producing that good.

Total Surplus (TS)

Total surplus is the sum of consumer surplus and producer surplus.

Markup

The difference between the price of a product and its marginal cost, expressed as P - MC.

Deadweight Loss (DWL)

The total surplus lost when trades that would benefit buyers and sellers do not happen.

Monopoly

A market structure with only one seller and no close substitutes available for consumers.

Natural Monopoly

A market situation in which a single provider can supply the entire market at a lower cost than multiple competing providers.

Mergers

The combination of two firms, potentially reducing competition and affecting prices and output.

Marginal Cost (MC)

The additional cost incurred by producing one more unit of a good.

Formula for Markup Relationship

The formula (P − MC) / P = 1 / |ε| relates price, marginal cost, and price elasticity of demand.

Example of Producer Surplus Calculation

If the price is $27,500, marginal cost is $15,000, and quantity sold is 30, then PS = ($27,500 - $15,000) × 30.

Impact of Market Power on Innovation

Market power can encourage innovation as firms may invest more in R&D if they expect returns.

Effects of Reduced Competition from Mergers

Reduced competition can lead to higher prices and less output, negatively impacting consumers.

Demand Elasticity Relation to Markup

More elastic demand leads to a smaller markup; less elastic demand leads to a larger markup.

Government Regulation of Natural Monopolies

Governments may regulate prices or services of natural monopolies to avoid wasteful duplication of infrastructure.

Cartels

An agreement between competing firms to coordinate activities such as limiting output or raising prices.

Key Takeaway on Total Surplus and Deadweight Loss

Deadweight loss represents mutually beneficial trades that do not occur due to market inefficiencies.