Microeconomics: Market Structures, Costs, and Game Theory

Marginal Cost

CHANGE in Total Cost / CHANGE In Quantity Produced

DWL formula

DWL = ½ x (Quantity under Perfect Competition - Quantity Under Monopoly) x (Price under Monopoly - Marginal Cost)

Marginal Revenue

CHANGE in Total Revenue / CHANGE in Quantity Demanded or Sold

Perfect Competition

No individual buyer or seller has any influence over price

Horizontal Demand Curve

Perfectly elastic

Monopoly

Single seller dominates the market with no close substitutes

Oligopoly

A few large sellers dominate the market

Monopolistic Competition

Many sellers sell similar, but NOT identical products and have some control over price

Economic Loss in the Short Term

Fixed Costs

Shutdown Price

Minimum average variable cost (AVC)

Breakeven Price

Minimum average total cost (ATC)

Maximizing Profit

Profit is maximized when MARGINAL REVENUE = MARGINAL COST

Profit Decision

Profit = Total Revenue - Total Cost

Short-Term Decision

Compare the Price to AVC

Long-Term Decision

Compare the Price to ATC

Deadweight Loss (DWL)

Lost net benefit to society caused by the monopolist producing less than the socially efficient quantity

Changes in Marginal Cost & Impact on Quantity and Price

Price will move in the SAME direction as MC; Quantity will move OPPOSITE of MC

Price Discrimination

Pricing strategy where a firm charges different prices to different consumers for the same good/service

Price Elasticity of Demand

Price is inversely related to elasticity

Natural Monopoly

Single firm can produce the entire market output at a lower cost than if multiple firms were producing

Game Theory

Study of strategic interactions among rational decision-makers

Cooperative Nash Equilibrium

Each player chooses the best possible action, given the choices of all other players

Non-Cooperative Nash Equilibrium

Players choose their strategy independently

Tat for Tat

Players start by cooperating and mimic the opponent's previous move

Cooperation Amongst Firms in an Oligopoly

Similar to a monopoly, low quantity, high price