Economics Review Notes

Opportunity Cost

  • Lauren can produce 600 pounds of tacos or 200 pounds of pizza.

  • Opportunity cost of one pound of tacos = 200/600 = 13\frac{1}{3} pounds of pizza.

Monopolist Profit

  • Monopolists produce less output at higher prices than perfectly competitive firms.

  • If a monopolist's marginal cost curve shifts up, price increases while output decreases.

Long Term Profits

  • Monopolist: Can earn long-term profits due to barriers to entry.

  • Oligopoly: Potential for long-term profits but depends on market cooperation.

  • Monopolistic Competition: Long-run equilibrium occurs where P=ATCP = ATC; zero economic profit.

  • Perfect Competition: Firms earn zero economic profit in the long run; P=MRP = MR.

Elasticity Review

  • If price increases by 15% and quantity demanded falls by 20%, price elasticity of demand = −20%15%=−43\frac{-20\%}{15\%} = -\frac{4}{3}.

  • Cross-price elasticity:

    • Negative: Complements

    • Positive: Substitutes

    • Zero: Independent goods.

  • Inferior goods: Demand increases as income decreases.

Costs

  • Fixed Cost: Remains positive even if output is 0.

  • Variable Cost: Only positive if output is produced.

Demand Problem

  • For a normal good like ice cream, if income increases, equilibrium price and quantity typically increase.

Cost Problem

  • At 300 units: Average Total Cost = $40, Marginal Cost = $28, Price = $40.

  • To maximize profit/minimize loss, the firm should increase output as P > MC.

Practice Problems

  • Louise's market scenario: Rentals increase from 15 to 16 bicycles, price drops from $35 to $34.

  • Marginal Revenue of 16th bicycle = ΔTR/ΔQ=(16×34−15×35)/(16−15)=(544−525)/1=19\Delta TR / \Delta Q = (16\times34 - 15\times35)/(16-15) = (544 - 525)/1 = 19.