econ dirk review #2

accounting profit vs. economic profit

·       Accounting profit – revenue – explicit costs

·       Economic profit – revenue – (explicit + implicit costs)

Coase Theorem

if there are no boundaries to negotiations, and if property rights are fully specified, interested parties will bargain to correct externalities

closing time (shut down rule)

shut down if the profit falls below average variable costs (AVC)

cost graphs

congestion charges

dynamic pricing is the most efficient and promotes sustainability; prices varies with supply and demand (encourages ride sharing, using smart parking meters, and toll lanes)

defects of monopoly

·       few choices

·       high price

·       lower output

·       rent seeking

Differences between pure competition and monopoly

·       Pure competition – many sellers and buyers, selling similar or nearly identical products, no price control, more efficient, easy to enter and exit

·       Monopoly – one seller and many buyers, no good substitutes, some price control, barriers to entry

diminishing marginal product

occurs when successive increases in input are associated with a slower rise in output

Economic efficiency

operating at the lowest point on the ATC curve for competitive markets

efficient scale

entry and exit result in zero economic profit in the long run; the output level that minimizes average total cost in the long run

explicit and implicit costs

·       Explicit – tangible, out-of-pocket expenses

·       Implicit – the costs of resources already owned, for which no out-of-pocket payment is made; hard to calculate and easy to miss (opportunity cost of capital)

externalities

– the cost or benefits of a market activity that affect a 3^rd party, a form of market failure; positive and negative externalities

·       Positive externality – market Q less than socially desirable (ex. Vaccines)

·       Negative externality – market Q more than socially desirable (ex. People farting on planes)

·       Correcting negative externalities – regulations, taxes, private negotiations

·       Enhancing positive externalities – subsidies, other incentives, private institutions

four types of goods (private, common, club, and public)

·       Private – excludable and rival, only one person can enjoy it at a time (ex. A pizza, a sandwich, a drake t-shirt)

·       Common – rival and nonexcludable (ex. River fishing)

·       Club – nonrival and excludable (ex. Sorority membership, cable tv)

·       Public – nonrival and nonexcludable (ex. A rainbow, national defense)

free-rider problem

occurs when someone receives a benefit without having to pay for it

marginal cost

the increase in cost that occurs from producing one additional unit of output; (cost of producing n units) – (cost of producing n-1 units)

minimum wage

the lowest hourly wage rate that firms may legally pay their workers

optimal amount of pollution

occurs when the marginal cost is equal to the marginal benefit

Perfectly competitive firm and long-run profits

positive accounting profit, zero economic profit

price ceiling

a legally established max price for a good or service, only binding if lower than the equilibrium (ex. Rent control, leads to a shortage)

price gouging

place a temporary price ceiling on the prices that sellers can charge during times of emergency

price and output effects

price effect - lower prices affect revenue

output effect - lower prices affect the number of customers

price floor

legally established minimum price for a good or service, only binding if it’s higher than the current one (ex. minimum wage, leads to a surplus)

response to political pressure from suppliers to keep prices high

profit maximizing graph

profit maximizing rule

profit maximization occurs when a firm chooses the quantity of output that equates marginal revenue and marginal cost, MR = MC; in the short run, need MR>MC                                                                             

profit maximizing rule (table)

never stop at the first unit that’s leaving money on the table

profit maximizing price (solve with equations)

set MR = MC

rent seeking

occurs when resources are used to secure monopoly rights through the political process

scale

the size of the production process

·       Efficient scale – the output level that minimizes average total cost in the long run

·       Economies of scale – occur when long-run average total costs decrease as output expands, lower prices

·       Diseconomies of scale - occur when long-run average total costs increase as output expands, higher prices

·       Constant returns to scale – occur when long-run average total costs remain constant as output expands

sunk costs

unrecoverable costs that have been incurred as a result of past decisions (no bearing on future decisions)

Short-run versus long-run

continue to produce if losing money in the short-run, shut down if losing money in the long-run

tragedy of the commons (in general)

occurs when a common-resource becomes depleted

tragedy of the commons table of llamas

in auction they choose 1 llama, 22% return

do monopolies lead to deadweight loss?

yes

should a firm stay in business if it is pessimistic about future profitability?

no, shut down

will discrimination increase if a new binding price ceiling is passed?

yes

what is output a function of?

labor and capital

when there is diseconomies of sale, what should happen with production?

production should be lowered

which curves rise with output?

MC, ATC, and ACV

NOT AFC

steve’s sandwich shop (a competitive firm) is producing where MR>MC. what should he do to increase profits?

produce more output

when is there a fixed level of capital?

in the short run

a monopolist will have negative profits and exit the industry in the long run if in the long run…

price<ATC

if you could only choose one curve…

MC