ECON 3012 Midterm 1

gross demand (x_i)

the total final amount of a good a consumer wants to consume

net excess demand (x_i - ω₁)

desired consumption minus initial endowment

• if e_i > 0, the consumer is a net buyer

• if e_i < 0, the consumer is a net seller

Edgeworth Box

a graphical tool used to analyze general equilibrium outcomes in a 2-consumer, 2-good economy

Pareto efficiency

an allocation where there is no feasible reallocation of goods that would make all consumers at least as well-off and at least one consumer strictly better off

Walras’ law

states that the total value of aggregate excess demand across all markets is identically zero for all possible price vectors

First Theorem of Welfare

guarantees that any competitive equilibrium allocation is Pareto efficient

Second Theorem of Welfare

asserts that as long as preferences are convex, every Pareto efficient allocation can be supported as a competitive equilibrium through an appropriate redistribution of initial endowments

monopolist

A single seller with no close substitutes facing the entire downward-sloping market demand curve p(q)

• price-maker

natural monopoly

Driven by huge fixed costs (F) and small marginal costs (MC), where Average Total Cost (ATC) falls across all output levels. One firm can serve the entire market at a lower average cost than multiple competing firms

legal monopoly

created by patents or government law to reward research and development (e.g., pharmaceutical drug patents)

innovation-driven monopoly

sustained by unique technological advances, high R&D intensity, and trade secrets (e.g., ASML lithography machines)

platform monopoly

controls a digital gatekeeper platform supported by network effects (e.g., Google Search handling over 90% of search traffic)

state monopoly

exclusive government-granted rights (e.g., Minnesota state lottery)

marginal revenue (MR)

the extra revenue from one more unit

• = p(q) + q ⋅ p′(q)

elasticity rule

A profit-maximizing monopolist never operates on the inelastic portion of demand because MR would be negative

Lerner index

Measures market power as the price-cost gap relative to price

= p - MC / p = 1 / |ε|

deadweight loss

the net social loss in consumer and producer surplus caused by monopoly output restriction

minimum efficient scale

the output level where average total cost is minimized

• large relative to market demand → monopoly

• small relative to market demand → competition