Notes from class

Advantages of Sole Proprietorship (2)

Good incentives and easy to establish

Disadvantages of Sole Proprietorship (2)

Unlimited liability and hard to raise money

Advantage of Partnership

Good incentives

Disadvantages of Partnership (2)

Unlimited personal liability and can be hard to raise funds

Advantages of a corporation (2)

Indefinite lifespan/limited liability

Disadavtages of a corporation

Need legal/accounting requirements, double taxation, govt involvement, taxed at corporate+personal level, need govt approval

Principal agent problem in stocks

Stockholders (principal) want profts but agents (workers) want a good life/intersting career

3 characteristics of any game

Rules, Strategies, Payoffs

Rules

Clearly define what actions can be taken by agents

Strategies

What players employ to achieve their objectives

Payoffs

The results of the interactions among the players strategy

Consul

Bond issued by British Govt. that never expires

PV Formula

Price/(1+rate)^time

Zenos paradox

Increasing the efficiency of resource use will actually increase resource consumption, rather than decrease

Defined Benefit Pension

Company guarantees the amount they give you each month (rare now), burden is on company to pay benefit until they die

Defined Contribution Pension

Company makes you invest x amt of $ (more common now)

Why were boomers worse off for retirement (SAC)

Saved later, changing of pensions, assumed they could work later

Rules of saving (RDDB)

Return is a function of risk, diversify, don’t try to time the market, borrow to only buy an asset

Reasons to restrict Free Trade (INIUB)

Imports cost jobs, National Security Argument, Infant industry argument, unfair competition, bargaining chip

Log rolling

When competing entities pause competition to work together and benefit each other before going back to competition

Assumptions made about the consumer

1)Faced with 2 choices, they can make a choice

2)Choices are transitive: prefer a to b and b to c, we assume you prefer a to c

3) Consumers prefer more to less (for good things)

Substitution effect (MU)

Price of something goes down MU/$ goes up…buy more of that and less of everything else

MPL

Change in Quantity Produced/Change in Labor

Law of dim marg Utility is in ________________

Short run

Perf Competition produces to the point where

MC=MB

What causes Monopolies?

1) Govt creates them

2) Control of a key resource

3)Network externalities

4)Natural Monopolies

Long run avg cost

VC/Q

Causes of eco of scale

1) Technological Efficiency

2) Specialization

3)Larger firms can access discounts and purchase inputs for cheap (wholesale)

Compound interest

Interest earned or interest

Avg cost short run

FC+VC/Q

Max Profit

MC=MR

Consumer Surplus on a graph (CSBDAP)

below the demand curve and above the market price

Producer Surplus on a graph (ASBP)

above the supply curve and below the market price line

What price to produce at?

Follow up the quantity until it hits the DC

Cost of bond

Face Value+(Face value(1+rate))^t

Opportunity cost

explicit and implicit

If MU/$ of two products is not equal and you need to find best combination

Keep shifting spending until the Marginal Utilities are equal in order to maximize Marginal Utility

Law of diminishing Marginal Utility

Increased consumption of one good: there may/may not be an increase of MU but eventually MU will decrease to 0 and below

What effect is stronger?

Substition effect is stronger than income effect

Why do Demand Curves slope down?

Reducing the price of a product means the MU/$ has increased. So we will buy more this good than others because MU/$ is greater than others

Justifications for Tarrifs

Way of raising govt tax revenue and increase domestic production

Why use quotes when they benefit foreign countries instead of domestic revenue

Usually used to break agreements

Where does MC cut ATC and AVC

At their minimum points

Long run

Period of time where all inputs become variable

Short Run

Period of time where at least one input is fixed

Productive Efficiency

Produce at Min Avg TC

Allocative Efficiency

Achieved when MB=MC

Why do oligopolies exist

Economies of scale

Monopolistic Competition in LR

Neither Prod Eff, nor allocative (MB<MC)

Law of one price

Tendency for goods to change to one price after transaction costs lower

Creation of oligopolies

1) Must need a license

2)Patents

3)Tariffs or Quotas: Reduces consumption of cheaper foreign substitutes, turning customers to domestic market

Constant Returns to Scale

Long run average cost remains unchanged

Substitution Effect

As price falls (for good A) you can increase your total utility. Buy more of the good with degreased price and less of everything else. You substitute the cheaper good A for good B

Income Effect

As price of the good falls, the amount of income you spent on that good (at old quantity) decreases. You can buy more of the good with the same income.

Long-run average cost curve

Shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

Constant Returns to Scale

Long-run average cost remains unchanged as it increases output.

Perfect Competition Positive Shock

An increase in demand temporarily increases the price and allows firms to earn economic profits…this attracts new firms to enter the industry, increasing the supply, driving down the price, and eliminating economic profits

Break Even Level

Long Run

Perfect Competition Negative Shock

A decrease in demand temporarily decreases the price and causes firms to suffer economic losses…which leads some firms to exit the industry, decreasing the supply, driving up the price, and eliminating economic losses

What effieciency is perfectly competitive market

Allocative and Productive

Long-run average cost curve

Shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

Minimum Efficient Scale

The lowest level of output at which all economies of scale are exhausted

The monopolist maximizes profit by

producing the quantity where the additional revenue from the last unit (marginal revenue) just equals the additional cost incurred from its production (marginal cost). MC = MR determines quantity for a monopolist.

• The demand curve determines price, and

• The average total cost (ATC) curve determines average cost.

Is monopoly long or short run

No distinction

Monopolisits earn profit when

Long run

Transactions Costs

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.