Econ 102 Dave Brown Final Exam

consumer surplus

Difference between willingness to pay and the price actually paid for the good.

Math CS: willingness to pay - price actually paid

ex: willing to spend 50 on shoes costs 30 tho 50-30=20

Graphing: area under the demand curve but above price

consumer surplus

willingness to pay - price actually paid

producer surplus

difference between the price the good is sold at and the lowest price the producer would have been willing to sell it at

Math: market price - minimum willingness to accept

ex: A producer is willing to sell a product for $20 (cost).

• The market price is $40. 40-20=20

Graphing: area above the supply curve but below price

producer surplus

selling price of the good - lowest price supplier was willing to accept

economic welfare

the sum of producer and consumer surplus

w: cs + ps

maximized in efficient markets shows total gain from trade

deadweight loss how to calculate it and what causes it too

will occur when the market price is different than the equilibrium price, consumer surplus or producer surplus that disappears and is transferred to nobody

Deadweight Loss=Lost Consumer Surplus+ Lost Producer Surplus

causes:

taxes

price celings-rent control etc

price floors-minimum wage

price ceiling

A price ceiling is a government-imposed limit on how high a price can go.

usually Set Below Equilibrium price

Price Ceiling=Maximum legal price sellers can charge

will cause an increase in CS and a decrease in PS

Suppose the equilibrium price for rent is $1,200/month.
The government sets a price ceiling of $900 to make housing more affordable.

• At $900, more people want apartments (high demand).

• But landlords are less willing to rent (low supply).

• This creates a shortage of apartments.

price floor

government-imposed minimum price that must be paid for a good or service.

Usually set above equilibrium

Suppose the equilibrium price for wheat is $4 per bushel.
The government sets a price floor of $6 to help farmers earn more.

• At $6, producers want to sell more (increase in supply).

• But consumers buy less (decrease in demand).

• This creates a surplus of wheat — extra goods producers can’t sell.

will cause in decrease in CS and an increase in PS

competitive markets/perfect competition what causes it

individual buyers and seller have little or no market power

characteristics of perfect Comp:

1. large number of buyers and sellers

2. perf subsitiutes

3. no entry barriers to enter or exit

4. evryone has perfect info about prices and products

Price takers

competitve firm that must take price of product given because they have no influence of price since its determined by the market

Total revenues

Profit

Formulas

TR= P x Q

Profit=total revenue minus total cost

price=determined by market in perfect competitin

q=firm chooses

Marginal Revenue

Marginal cost

equations

additional revenue a firm earns from selling one more unit of a good or service.

mr= change in total Revenue divided by change in quanity

extra cost of producing one more unit of a good or service.

MC= change in tc divided by change in quantity

Short run

period in time when atleast one factor of production is fixed (usually factory machines and buildings etc) while other inputs like raw materials etc can be chnaged

ex: bakery has one oven In the short run, the bakery cannot get another oven immediately because it takes time to buy, deliver, and install one.
So the oven is a fixed input.

But the bakery can change:

• how many workers it hires

• how much flour, sugar, or butter it buys

Monopoly

market structure where one firm is the sole producer and seller of a good or service with no close substitutes.

had downward sloping demand curve

Profit Maximization

producing the quantity of output that gives the highest possible profit. where mr=mc

in a perfectly competitve firm this means that profit max occurs at the level of output where p=mr=mc

Shut down

A firm should shut down in the short run if:

Price < AVC

or

Total Revenue < Total Variable Cost

Why?
Because if the price can't even cover variable costs, the firm loses less money by producing nothing

Break Even

Total Revenue = Total Cost (explicit + implicit)

or

Price = Average Total Cost (ATC)

This means the firm earns zero economic profit
(but accounting profit may still be positive).

Long run equilbrium in perfect competition

In the long run, perfectly competitive firms earn zero economic profit because entry and exit drive profit to zero.

In long-run equilibrium:

• P = MC = minimum ATC

• Firms produce at the lowest point of their Average Total Cost curve

• No firm wants to enter or exit the market

• Economic profit = 0

This is the most efficient outcome.

Efficiency in Long Run in perfect competition

1. Productive Efficiency

Firms produce at the lowest possible cost.

• In long-run equilibrium:
  P = minimum ATC

• Firms operate at the minimum point of their ATC curve, meaning resources are being used at the lowest cost per unit.

✅ No waste of resources
✅ Production done at the lowest cost possible

2. Allocative Efficiency

The market produces the socially optimal amount of the good.

• In perfect competition:
  P = MC

• This means the price consumers are willing to pay equals the marginal cost of producing one more unit.

✅ Consumers get exactly what they value most
✅ No underproduction or overproduction

Importance of Entry Barriers, Examples

Entry barriers are important because they determine:

• Whether firms can enter the market

• Whether existing firms keep long-run profits

• The level of competition

• The prices consumers pay

• How efficient the market is

Monopoly profit max, compare to Perfect Competition

monopolies and perfectly competitive firms maximize profit where: mr=mc

Perfect Competition Characteristics

• Many firms

• Firms are price takers

• Demand curve is perfectly elastic (horizontal)

• profit maximizing cond: p=mr=mc

• Firm produces where P = MC, meaning allocative efficiency.

• In the long run: P=mc=min atc

• → Productive efficiency and zero economic profit.

monop;

Characteristics

• One seller

• Market demand downward sloping

• Monopoly is a price maker

Profit-maximizing condition: p>mr=mc they choose q

hen charge the highest price consumers are willing to pay at that Q, so: p>mr=mc

Outcome

• Higher price

• Lower quantity

• Positive economic profit (in long run if barriers to entry persist)

mr can be less than zero in monopolies while in comp mr> 0

Monopoly inefficency

produce less output and charge a higher price than what is socially optimal.

Allocative inefficency:

monopoly: sets p>mc while in perfect C: p=mc

monopoly restricts output to raise the price, so the value consumers place on the good (P) is greater than the cost of producing it (MC).

created DWL

not enough output

Productive inefficency:

Monopolies do not produce at the minimum ATC.

• They face no competitive pressure to minimize costs.

• In perfect competition, firms must operate at min ATC in the long run.

• Monopoly may operate at a higher cost level.

Are monopolies ever desirable?

Natural monopolies:

one firm can produce at lower cost than multiple firms.

• Electricity transmission

• Water supply

• Natural gas pipelines

• Railways

• powerplants

Natural monopolies exist in industries where it is very expensive to start operating, usually because of infrastructure.

MC curve at and above the intersection with the AVC curve

short run supply curve for a perfectly competitive firm

Regulation methods and firm response

Ristricting:

profits firms can earn

prices firms can charge

cons:

firms in response to charging lower prices may try to lower costs by:

laying off workers, reducing quality of goods and customer service

regulator could be poltically self inerested

shut down (P < AVC)

what should the firm do if AVC=6, ATC=12, MC=9, P=5

economic profits

signal that firms should enter the market which will cause output to increase, prices to fall, and profit to eventually disappear

economic losses

signal that firms should exit the market which will cause output to decrease, prices to increase and losses to eventually disappear

breakeven

signal that no firms will enter or exit because the market is giving a normal rate of return

zero economic profit

in the long run in a perfectly competitive industry, firms will earn...

marginal cost pricing

when the price charged is equal to the opportunity cost to society of producing one unit, the opportunity cost of production is the marginal cost to society

allocative efficiency

when the marginal value to consumers equals the marginal cost of production; level of output where P = MC

equals the cost of production

in the long run in a perfectly competitive industry, the price price are charging...

long run equilibrium for perfectly competitive industry

each firm is maximizing profits by producing at q*, economic profit is equal to zero, all firms are content to stay in the industry

yes, but not guaranteed

can monopolists earn economic profit in the long run

monopoly

single seller, no substitutes, high barriers to entry

barriers to entry

what allows monopolists to maintain profits in the long run

ownership of resources that do not have close substitutes

barrier of entry that is hard to accomplish, but one of the most effective ways to establish a monopoly

economies of scale

cost of production goes down dramatically as more is produced so it is harder for small companies to compete with large companies

predatory pricing

setting your price so low that it drives your competition out of business, then raising your price back to the monopoly level once the competition exits the market

natural monopoly

a firm has decreasing average total costs over a large range of output

average revenue curve

monopolist's demand curve can be thought as this because price is determined by the position of the demand curve

perfect competition

one firm's output has not effect on the market

no

does a monopolist have a supply curve?

monopolist's price depends on the shape of the demand curve which affects the MR curve

why is a monopolist's profit maximizing Q* not always higher when it raises its price

because monopolists have to lower their price to sell additional units

Why is marginal revenue less than price for a monopolist?

MR = 0

At what point would a single price monopolist maximize its revenue?

when its price exceeds its average total cost

When will a monopolist earn a positive economic profit

decrease production and increase price

A monopolist is currently producing at the point where P = MC. The firm is currently earning positive profits. What should the monopolist do to maximize profits?

price discrimination

what allows a firm to produce output on the inelastic portion of the demand curve and still have positive marginal revenue

price discriminating monopolist using market segmentation

price discrimination is designed to transfer some of the consumer surplus to the firm

two-part tariff

consumer pays flat access entry fee (fixed costs/number of consumers) and a specified amount per unit consumed

rate of return regulation

allows the monopolist to earn a "fair" return on its investment for providing adequate service to consumers

price caps

a simple price ceiling on the final output

profit sharing

a firm can earn a set percentage return, but all profits after that must be shared with the regulator

monopolistic competition

differentiated products, firms choose their prices, many sellers, firms advertise, low barriers to entry in the long run

monopolistic competition

relatively small market share, lack of collusion, relative independence

it will produce at a point where price exceed the minimum average costs

which of the following is true about a monopolistically competitive firm in the long run?

monopolistic comp produces a vider variety of goods but at a higher price

monopolistic comp vs. perfect comp

demand for each firm will shift to the left

if firms enter a mono comp industry because its current firms are earning a positive profit...

set price above marginal cost

why are mono comp firms often electively inefficient

oligopoly

small number of large firms, barriers to entry, product differentiation, interdependence, strategic dependence

economies of scale, barriers to entry, mergers

why do oligopolies occur?

vertical merger

joining your company with a company that you either buy an input from or sell an input to

horizontal merger

joining your company with a company that sells a similar product

brand proliferation

if a larger number of differentiated products already exist in a market, there is little or no market share for new firms to take

collude

when firms work together and act as a monopoly; there joint profit will be maximized

cartel

when producer explicitly agree to act as a single seller in order to maximize going profit; have incentive to cheat

network effect

your demand for a product depends on how many other people use that product

economies of scale

what most likely explains the existence of oligopolies

low concentration ration

what kind of concentration ratio represents a competitive industry

firms will breakeven, have zero economic profits, profits will equal the cost of production

what is true about economic profit in the long run in perfectly competitive industry?

firm produces at the minimum point on the ATC curve

what best describes production efficiency?

rate of return regulation

which of the following methods of regulation would make it so that producers are least concerned with minimizing costs?

economies of scale

Which of the following is not a way government regulation can create a monopoly?

-patents

-tariffs

-economies of scale

-regulations

economically efficient, desirable for producers

what best describes perfect price discrimination

same price volatility in both market structures

what happens when there is a permanent change in demand

only a monopoly can earn positive economic profits in the long run

profits of monopoly vs perf comp

price system

essential coordinating mechanism of a free-market economy is...

decrease the number roof firms in an industry

what will horizontal mergers do

moves down its demand curve to a lower price that will increase quantity supplied

to sell more units, a monopolist...

relatively easy

entry into a monopolistically competitive industry is...

fail to take into account network effects

an industry battle between incompatible product formats can occur if competing firms selling compatible products...

decreasing marginal utility

The demand curve is downward sloping because for each additional good consumed the consumer is willing to pay less. aka. ____________

the highest mound consumers re willing to pay for the specific quantity demanded

What does the height of the demand curve represent?

increased marginal costs

Why is the supply curve upward sloping?

lowest price producers are willing to accept when producing and selling that specific quantity supplied

What does the height of the supply curve represent?

marginal cost

what is the lowest price a firm would accept?

CS+PS

Welfare=

when economic welfare is maximized, see that this occurs in competitive markets at equilibrium

When is a market efficient?

CS goes down, and PS goes up

When price goes up, how are CS and PS affected?

the market is not functioning efficiently

What is DWL an indicator of?

don't allow prices to reach equilibrium, causes "forgone surplus," due to reduced # of transactions

Why do price ceiling and price floors cause DWL to occur?

increase cs and decrease PS

In terms of CS and PS, a price ceiling will typically

increase PS and decrease CS

In terms of ps and CS, a price floor will

Government policy is motivated by politics, not economics. Political desire to help a specific group i.e. farmers, renters, low income family's

Government intervention often caused DWL, so why do it?

market structure

all features of a market that effect the behavior and performance of the firms with a market

predict firm behavior, output, efficiency price cost margins

Why is market structure important?

market power

a firm is said to have this when the firm can influence the price of the product or the terms in which the product is sold

little to no

How much market power is there in a competitive market??