Econ 2201 Final

Diminishing marginal utility

the common pattern that each marginal unit of a good consumed provides less of an addition to utility that the previous unit

Marginal utility

the additional utility provided by one additional unit of consumption (good and service)

Marginal utility per price

the additional satisfaction gained from purchasing a good given the price of the product

Total utility

Satisfaction derived from consumer choices

Accounting profit

the difference between dollars brought in and dollars paid out

Total revenue-Explicit costs=

Average profit

~profit margin

Price-average cost=

Average total cost (ATC)

total cost divided by the quantity of output produced

Total cost/quantity

Constant returns to scale

LRATC stays same as quantity increases

Diseconomics of scale

the long-run average cost of producing each individual unit increases as total output increases

Explicit costs

out-of-pocket costs: actual payments

Firm

an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs

Fixed costs

costs of the fixed inputs, like labor.

Implicit costs

the opportunity costs of using resources that the firm already owns

Long-run

period of time during which all factors are variable

Long-run average cost

shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology

Marginal cost (MC)

the additional cost of producing one more unit of output

TC2-TC1/Q2-Q1=

Private enterprise

the ownership of businesses by private individuals

Production

the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

Revenue

the income a firm generates from selling its products

Price x Quantity sold

Short-run

period of time during which at least some factors of production are fixed

Total cost

Explicit cost + implicit costs=

Variable cost

cost that change w/ output

raw materials, labor, energy

Entry

when new firms enter the industry in response to increased industry profits

Exit

the long-run process of reducing production in response to a sustained pattern of losses

Long-run equilibrium

where all firms earn zero economics profits producing the output level where

P=MR=MC and P=AC

Marginal revenue (MR)

is the additional revenue earned by selling another unit of output

Market structure

the conditions in an industry, such as numbers of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold

Perfect competition

each firms faces many competitors that sell identical products

4 Criteria:

• many firms produce identical products

• many buyers and many sellers are available

• sellers and buyers have all relevant information to make rational decisicions

• firms can enter and leave the market without any restricitons

Price taker

a firm in a perfectively competitive market that must take the prevailing market price as given

Shutdown point

the intersection of the average variable cost curve and the marginal cost curve. if:

• price < minimum AVC, then the firms shuts down

• price > minimum AVC, then the firms stays in business

Zero economic profit point

The point where total revenue equals total cost, resulting in no profit or loss. It occurs when accounting profit equals implicit costs.

Barriers to entry

are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market

Copyright

a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music

Intellectual property

the body of law including patents, trademarks, copyrights, and trade secrets law that protect the right of inventors to produce and sell their inventions

• implies ownership over an idea, concept, or image, not a physical piece of property

Legal monopoly

laws prohibit (or severely limit) competition

Monopoly

one firm produces all of the output in a market

Natural monopoly

where the barriers to entry are something other than legal prohibition

Patent

gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time

Predatory pricing

a firm uses the threat of sharp price cuts to discourage competition

• a violation of U.S. antitrust law, but it is difficult to prove

Trade secrets

methods of production kept secrets by the producing firm

Trademark

an identifying symbol or name for a particular good

Cartel

a group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price

Collusion

when firms act together to reduce output and keep prices high. They do this by:

• holding down industry output

• charging a higher price

• and dividing the profit among themselves

Differentiated product

a product that consumers perceive as distinctive in some way

Ways for a product to be differentiated:

• physical aspects

• location from which it sells

• intangible aspects

• perception

Duopoly

an oligopoly with only two firms

Game theory

1. Players

2. actions (choices available for them to make)

3. pay-offs (gets/does not get for choosing options)

Imperfect competition

firms and organizations that fall between the extremes of monopoly and perfect competition

Monopolistic competition

many firms competing to sell similar but differentiated products

• many firms

• producing similar but not identical products

• few barrier to entry

Nash equilibrium

is set of best actions where no player can do better by changing his/her action, given that the other players are playing their best actions

oligopoly

when a small number of large firms have all or most of the sales in an industry

• few firms

• similar products

• significant barriers to entry

Externalities

cost or benefit imposed on a third party outside of the market transaction

• somebody that is not a buyer/seller is affected by buyers/sellers

• smoking cigarettes (affecting other people/secondhand smoke)

Positive externalities

where benefits are imposed onto some third party outside the transaction

• education

• healthcare

Negative externalities

costs imposed on a third party outside of the market transaction

• pollution crime

Pigouvian tax

a tax that offsets the externality

Subsidy

tax but produce the efficient quantity

Coase-theorem

externalities exist where there is a lack of well defined property rights

Rivalrous

a g&s is rivalrous if consuming it diminishes what is available for others.

Excludable

a g&s is excludable if we can prevent others from using it

• my car (excludable) can prevent people from using it

• park (not excludable) can’t prevent people from using it

• ocean (not excludable)

• boat (excludable)

Private goods

Excludable/Rivalrous

• cars

• bananas

• phone

Club goods

Excludable/Non-Rivalrous

• gym equipment

• amusement parks

• internet

Common resources

Non-Excludable/Rivalrous

• fish in the sea

Public goods

Non-Excludable/Non-Rivalrous

• public roads

• street lights

• fireworks show

Congestion

a situation where the quantity of demand for a good or service exceeds the available supply, leading to inefficiencies and potential market failures.

Tragedy of the commons

when people will use this resource usually to depletion (overuse it)

Free rider problem

someone who enjoys the benefits but doesn’t pay the cost

(Public good)

Prisoner’s Dilemma

Two prisoners are captured committing a crime.The police can charge them both with the minor crime, but if they can get one of them to confess, they can charge them with a higher crime. They place both prisoners in separate cells so they cannot communicate with each other. The police tell prisoner 1 that they have enough information to charge them with the minor crime. But, if the prisoner cooperates they can get a reduced sentence. If they do not cooperate, and their accomplice does, then they will throw the book at them.

The police make the same offer to prisoner 2.

The payoffs are as follows.

If 1 confesses and 2 does not, the 1 gets 1 year and 2 gets 8 years.

If 2 confesses and 1 does not, then 2 gets 1 year and 1 gets 8 years.

If they both confess, then they both get 5 years.

If they both remain silent, then they both get 2 years.

Product differentiation

Creates the competitor

• physical qualities

  • size/shape/color/flavor

• Intangible qualities

  • warranty

  • image