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externalities
cost to people outside of transaction (eg second hand smoke)
repugnant transactions
people morally object even if not involved in transaction (eg human trafficking, organ sales, prostitution(
fixed costs
initially spent, don’t increase with each unit produced
variable costs
dependent on amount produced
marginal product
how much more output is produced when input is increased. delta output / delta input
marginal productivity decreases over time
because fixed inputs aren’t increased, and so the additional output from the variable inputs decreases. (eg if digging holes with two shovels, increasing number of people might help up until 4 or so, but after that not worth it)
accounting profit
arithmetic calculation. revenue - costs
economic profits
include implicit (opportunity costs). revenue - costs - opportunity cost
protection from competition includes
patent, trademark, copyright, trade secrets
3 aspects of perfect competition
many buyers and many sellers. goods offered are largely the same. firms can freely enter and exit the market.
price taker
in perfect competition, buyers choose by price because products are the same, so all sellers have to have roughly the same price
to increase revenue in perfect competition,
sellers must produce more
perfect competition profit maximization point
where marginal cost intersects marginal revenue (MR=D=AR=P line)
productive efficiency
firms/ producers minimizing their costs and maximizing outputs
allocative efficiency
when firms produce the right quantities of consumer goods to satisfy consumer wants and needs, without waste. defined by P=MC which is true of perfect competition
monopolies have market
power and share
market power
ability to influence the market price of product
horizontal integration
buying up all of one resource. eg owning all diamond mines
vertical integration
owning every step along the way to production so not responsive to any other firm
legal monopoly
allowed by government, often so can be unified and provide service to everyone across the country. (eg post office, defense)
natural monopolies form
in economies of scale, because initial costs are so high and firms already in only have to deal with small marginal costs
natural monopolies produce
at a lower cost than several firms in the market could
monopolies have demand curve below
marginal revenue, because have to lower price when increase the quantity produced
government intervention in monopolies through
price controls, public ownership of utilities, output requirements
predatory pricing
a firm dramatically lowering prices to kick competitors out of market. Taking losses that others can’t because well established firms have much lower average costs. illegal but hard to determine
monopoly profit maximization point
quantity is where marginal revenue intersects marginal costs, price is up vertically from that point to line of demand
supernormal/monopoly profits
profit above the total costs. rectangle between price of charged at profit maximization point and total costs (on ATC curve)
price discrimination
charging people max that think they will be willing to pay by having different prices for different demographics. (eg airline tickets at different times before flight, movies by age)
price discrimination takes away
consumer surplus
socially optimal point
where consumer and producer surplus are the greatest. where marginal cost intersects demand. no deadweight loss but firm might be losing money
fair returns/welfare maximization point
where firm breaks even. where ATC intersects demand, so not profit, but costs covered and more consumers will buy
monopolistic competition
firms try to differentiate so although they are close substitutes, they aren’t identical and people will choose their brand over others despite price. try to make each firm like its own little market through brand loyalty. eg Nike
local monopolies
a monopoly based on geographic location. eg there might only be one gas station in a rural area - people who live there will probably go there even if higher price because of convenience
monopolist vs monopoly
an industry with only one firm is a monopoly; a monopolist is what that one firm is called
price effect
amount revenue decreases by when a monopoly increases its quantity produced because it has to lower prices to do so
quantity effect
the increase in revenue when a monopolist increases its total production, because more units are sold
monopolies usually under-produce because
it is more efficient for them because of the price effect, and making their product seem scarce increases people’s willingness to pay higher prices
