micro exam 3

Rivalry

One person's use diminishes others' use of a good.

Excludability

A person can be prevented from using a good.

Private goods

Goods that are both rival and excludable, such as apples, shoes, and laptops.

Club goods

Goods that are non-rival but excludable, such as memberships and streaming services.

Common resources

Goods that are rival but non-excludable, such as fish in the ocean and coal.

Public goods

Goods that are non-rival and non-excludable, such as national defense and public knowledge.

Social Benefit

The worth of a good or service multiplied by the number of people using it.

Social Costs

The costs incurred to host or provide a good or service.

Free Rider Problem

A situation where people benefit from a good without paying for it.

Tragedy of the Commons

Overuse of a common resource leading to depletion.

Production Function

The relationship between the quantity of inputs and the quantity of output.

Marginal (Physical) Product

change in output/change in labor

Short run relationship between output and and single input when all other input are fixed

Perfect Competition

A market structure characterized by many firms selling identical products with no barriers to entry.

Monopoly

A market structure where one firm dominates the market with high barriers to entry.

Price Taker

A firm that must accept the prevailing market price for its product.

Golden Rule for Profit Maximization

Set output (Q*) at the level where marginal cost equals marginal revenue (MC=MR).

Price Discrimination

Selling the same good at different prices to different customers.

First Degree Price Discrimination

Charging different prices based on individual willingness to pay, such as at an auction.

Second Degree Price Discrimination

Charging different prices based on quantity sold, such as offering discounts for bulk purchases.

Third Degree Price Discrimination

Charging different prices to different segments of buyers, such as student discounts.

Long Run

A period of time in which all inputs can vary

Short Run

A period in which at least one input is fixed.

easier change to L than K

L is variable input, K is fixed

Monopolistic Competition

A market structure with many firms and differentiated products.

Oligopoly

A market structure dominated by a few firms, which may produce identical or differentiated products.

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs.

Exit

A long-run decision to leave a market entirely, eliminating fixed and variable costs.

Shut Down

A short-run decision to cease production while still incurring fixed costs.

Perfect competition assumptions

-perfect information (buyers and sellers know relevant info)

-market has many buyers and sellers (neither have market power)

-good/service is identical or nearly identical

-none or low barrier of entry

Stay open in the short run if

-P>=minimum AVC or 

-TR>= minimum VC

Shut down in the short run if

-P<= minimum AVC or 

-TR< minimum VC

stay open in the long run if

-P>= minimum ATC or 

-TR >= minimum TC’

exit market in the long run if

-P>= minimum ATC or 

-TR >= minimum TC’

Excludable means you

usually have to pay for it

The more you put into something

at some point you start to get less and less back

All firms will experience

short run phenomenon

in the long run, economic profit will eventually be

zero

there are no barriers of entry or exit in the

long run

in perfect competition it is…

costless to enter the market

positive economic profits incentivise new firms to

enter the market

entry of new firms eliminates

positive profits

supply increase, price decreases

output decreases

people leave the market

when their making negative profit

supply decreases, price increases until

it reaches minimum of ATC

exiting firms creates

less loss

How to make profit = to zero

minimum ATC point on the curve (lowest point)

barriers to entry

1. Control over input 

(resource monopoly, only this company can produce)

2. Economies of scale 

(produce more, cost decreases. One firm can supply market at a lower cost than 2 or more firms) (utility company)

3. Network economies 

(social media) (benefit to users rises when more of them are on the same platform)

4. Legal barriers

 (patents, copyright, trademark, secrets) (government licenses and franchises)

Market power:

ability to alter market price of a good or service

-measured by comparing price to marginal cost

Inelastic=big market power

elastic=smaller market power

monopolies due to patents are

government created monopolies (epipen example)

price discrimination Satisfies 2 conditions:

-firm must have market power

-firm must be able to prevent resale or arbitrage

public goods are usaully

positive externalities

common resources are usually

negative externalities

profit=

total revenue-total cost

marginal product of labor

change in quantity/change in labor

perfect competition on a graph looks like

horizontal demand

while making a positive profit, supply will ____ and price will _____

increase, drop

In positive economic profits, ATC is

below original P*, then new P** below ATC

In negative economic profits, ATC point is

Above P*

TR=

P* x Q*

TC=

ATC x Q*

VC=

AVC x Q*

FC=

TC-VC

marginal cost

change in total cost when one or more output is produced

ATC (Average total cost)

how much does each unit cost

economies of scale has a strong…

incentive to expand

In economies of scale, TC…. and LRATC ___

decreases producing more, falls

economies of scale is more likely to

monopolize market

In constant economies of scale cost…

stays the same

Constant economies of scale LRATC

stays flat

In economies of scale, if input doubles,

output more than doubles

In constant economies of scale, double input=

double output

diseconomies of scale, average cost will ___, and LRATC is ____

go up, rising

In diseconomies of scale, doubling inputs=

outputs less than double

Marginal revenue

change in total revenue/change in quantity, falls twice as fast as demand meaning a steeper slope

Duopolistic

two sellers in market, Example coke and pepsi

Oligopoly charges ____ than monopoly price, but _____ than competition price

lower, higher

Oligopoly produces ___ output than monopoly but ____ than competitive market

more, less

Game theory

understand other firms strategy and behavior

Collusion

all firms change monopoly price and share market and monopoly profit equally (bad for society)

competitive over price

charge lower price than its competitor trying to take over the market

Competitive over price condition

firms sell similar goods with huge production capacity

explicit cost

actual monetary payments

implicit cost

opportunity costs

diminishing returns to labor occurs in the

short run only

When a perfectly competitive firm is producing at a level of output where MC > MR, then the firm

should decrease output to increase profits

The perfectly competitive firm's short run supply curve is its _______, while its long run supply
curve is its _________

marginal cost curve above the AVC; marginal cost curve above the ATC