chapters 9-10

Monoply

• one firm or one dominant firm

• firm is a price setter

• barriers to entry

• market and firm demand are equivalent 

barriers to entry

• sole ownership of resources 

• gov creates monopolies 

• natural monopoly

• technology advancements 

patent 

• exclusive legal right to sell a product for a period of time 

• encourages innovation because one can earn a + economic profit before others copy and drive the price down

Natural monopoly 

• one firm can satisfy the entire market demand more cheaply than multiple firms can

• exists when there are very high fixed costs but low variable costs

• MC is a horizontal line, ATC approaches but never touches it

network externalities

when the value of a good increases the more people that use it
ex social media platform

Demand curve for monopoly

• MR is below demand curve because as price dec the old and new consumer pay a lower price 

• MR= amount received from additional quantity sold - amount old customers are no longer paying 

profit max

• when MR=MC

• charge the price from the demand curve at that quantity

socially Efficient solution vs inefficient soluction

• Efficient: p=MC

• firm’s profit max solultion is not efficient

Dead weight loss

• The gap between profit max and the socially efficient solution

• Dead weight loss: 1/2( new p-old p)( old q-newq)

Pros of longer patents

• more financial incentive to create new products(such as drugs)

• can lead to safer drugs because firms are more willing to invest more money in discovering side effects 

cons of longer patents

• consumers will have to pay a higher price

• insurance my not cover the more expensive drug, meaning some people will not have access to the drug

Anti-trust laws

promote comp in the market by preventing mergers or forcing firms to break up

Price regulation 

placing a legal limit on what a firm can charge 

• for natural monoploies it is better to force them to charge where ATC intersects demand( 0 ecnomic profit ) than where demand=mc, negative economic profit 

public ownership

• gov can change price to effective solution because profit is not the primary goal

• loss can be offset through other rev generated by the gov 

price discrimination 

when diff customers pay a different price for an identical good or service 

allows firms to maximize profit by having everyone charge what they are willing to pay as long as it is above mc

perfect price discrimination

when each customer pays exactly what they are willing to pay

Imperfect price discrimination

when different groups of customers pay diff prices for the same good

consumer surplus

the difference between price willing to pay and price actually paid

producer surplus

difference between price received and minimum price willing to accept( economic cost of production)

GDP( aggregate output)

the total val of what a country produces in a year

Inflation rate

rate at which prices of goods/services inc

long run economic growth

sustained inc in a country’s productive capacity, leading to higher standards of living 

Business cycles

fluctuations of output around its overall trend

Recessions

periods where output dec below the trend

recoveries

when output starts to rise back towards the trend

booms

when output is above the trend

expansions

recoveries + booms ( output is rising)

Peak

the point at which the economy switches from expansion to recession

trough

point at which economy reaches its low point and enters recovery

Nominal GDP

the market value of all final goods/services produces domestically this period, evaluated at current prices

This period

value of used goods bought is not inculded

domestically

if something is imported, the price it was imported for is subtracted from the price it was sold for

Intermediate goods/services

goods and services that are used up in the production of other goods and services
ex wages of workers, materials

final goods/services 

sold to its ultimate user

cost of intermediate good is included in this price

What constitiutes a final good/service

• consumption

• investment

• gov purchases

• exports

consumption

goods/services purchased by households expect new housing construction 

Investment

business purchases of new factories and equipment

inventories: goods that have not been sold, inputs that have not been used 

Gov purchases

any good or service bought by the gov
things like social security and unemployment not included

aggregate output

C+I+G+X-M(imports)

value added

the sum of value added at each stage of production till it reaches final sale 

Real GDP

the market val of final goods produced domestically this period, evaluated at base year prices 

Growth rate of real GDP

growth rate of nominal gdp-inflation rate

shortcomings of GDP

• excludes home production(stay at home parent, home garden)

• excludes value of leisure time

• informal economy

• environmental quality