Microeconomics Exam 2 - Michael Hammock

Marginal Product of Labor

^Change in quantity / ^Change in Labor

The Law of Diminishing Returns

When one variable input is increased while other inputs are fixed, the marginal product of the variable input will eventually decline.

Average Product

quantity / labor

Total Cost

Variable Cost + Fixed Cost

Variable Cost

Labor times Wage

Marginal Cost

(Change in Total Cost / Q) = (Change in Variable Cost / Q)

Average Variable Cost

VC / q

Average Fixed Cost

FC / q

Average Total Cost

TC / q

• ATC = AVC + AFC

Long-Run Average Total Cost

Long‑run average total cost is the minimum average cost of producing any level of output when all inputs are variable

• Typically, u-shaped

• Formed by the lowest points of many short-run ATC curves

Economies of Scale

when long‑run average total cost falls as output increases.

• (The more a company makes the cheaper it is to produce)

Diseconomies of Scale

Lon-run ATC rises as output increases

• (The more a company makes the harder it is to produce)

Accounting Profit

Revenue - Explicit Costs

Economic Profit

Revenue - Explicit and Implicit Costs

Total Revenue

Price times Quantity

• P x q

Perfect Competition Assumptions

• Identical products

• Many firms, no ability to change market price

• No barriers to entry

Perfect Competition Characteristics

• Price Takers (no pricing power)

• MR= Change in R / change in q

• Maximized when MR = MC

• Perfect Competition is efficient

The Shutdown Rule

Shutdown in the short run if price is less than average variable cost

Long Run Adjustment

• Increasing

  • Higher price

  • Higher costs

  • More output

  • Zero economic profit

• Decreasing

  • Lower price

  • Lower cost

  • Much higher output

  • Zero economic profit

• Constant Cost

  • supply curve horizontal,

  • expansion doesn’t affect costs

  • Zero economic profit

  • Output increases

Pure Monopoly

• One firm with high barrier to entry

• Causes: legal barriers, control of resources, network effects, natural monopoly

• MR does not equal D

• Deadweight loss, and inefficient in a static sense

First Degree Price Discrimination

Seller charges each consumer the max they are willing to pay

Second Degree Price Discrimination

A seller charges different prices based on the quantity or version of the product

Third Degree Price Discrimination

Charges different prices to different individuals based on their willingness to pay

Regulated Competitive Price (MC Pricing)

Government set price = to marginal cost

• mimics perfect competition

Regulated Normal Profit Price (ATC Pricing)

Government sets prices = to ATC

• So, firms earn zero economic profit

Antitrust Law

Promote competition and prevent firms from gaining or abusing monopoly power

Monopolistic Competition

• Price searchers with low entry barriers

• Differentiated products

• Many firms

  • (EX. Fast Food)

Oligopolist Competition

Two Temptations

• Collude to raise profit or compete to raise market share?