micro exam 3
Rivalry: one person's use diminishes other peoples use
Excludability: a person can be prevented from using a good
4 types of goods
Private goods (apples, shoes, laptop) Rival and Excludable
Club goods (memberships, streaming services, country clubs) Non Rival and Excludable
Common resources (fish in the ocean, coal) Rival and Non Excludable
Public goods (national defense, knowledge in public domain) Non Rival and Non Excludable
Excludable: usually have to pay
Social Benefit: how much worth x number of people
Social costs: how much is costs to host
When benefit outweighs cost, do it (vice versa, find gain or loss)
Free Rider problem: people enjoy the benefits without having to provide them or pay for them
Soulution: property rights or subsidize seller
Common resource problem: Tragedy of commons, get used more than what is desirable for society as a whole
solutions are regulating numbers (quota), or imposing corrective taxes, or turning common resources into private goods
Chapter 14: Production and Costs
Profit = total revenue - total cost
TR = Price * Q
Production function: relationship between quantity of inputs and quantity of outputs
Q = f(L, K, H, N)
Q: quantity of output, changes when L changes in short run
L: amount of labor, changes at my discretion in short run
K: amount of physical capital, fixed variable in short run, not enough time to change
H: education and training of workers
N: raw materials
Short run: amount of time that at least one input is held fixed
-easier change to L than K
-L is variable input, K is fixed
Long Run: time that all inputs are free to vary
Marginal (Physical) Product
-short run relationship between output and single input with all other input fixed
-output and labor
-change in output/change in labor
Big Economics Idea
The more you put into something, at some point you start to get less and less back
All firms will experience short run phenomenon
Perfectly Competitive Markets
-perfect competition and monopoly are two extreme cases, opposites
Perfect competition
Number of firms (many)
Product (identical or similar)
Barriers of entry (none)
Monopolistic competition
Many firms
Differentiated products
none/ low barriers
Oligopoly
Few markets
identical/differentiated
Some barriers to entry
Monopoly (dominant firms)
One market
-
High barriers (hard to copy)
Perfect competition assumptions (must satisfy)
-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
Shut down: short run decision to produce nothing, q=0
Still pay fixed costs
Exit: long run decision to to leave market, exit business entirely
No variable or fixed costs
Short run
stay open if:
-P>=minimum AVC or
-TR>= minimum VC
Shut down if:
-P<= minimum AVC or
-TR< minimum VC
Long run
Stay open if:
-P>= minimum ATC or
-TR >= minimum TC’
Exit if: \
P<= minimum ATC,
TR < minimum TC
Long run competition-no barriers to entry or exit (4th assumption of perfect competition)
-knowledge requires effort, harder for some people to learn = high barrier of entry
-economic profit will eventually be zero in the long run
-in perfect competition, it is costless to exit the market
Making positive profit
-positive economic profits incentivise new firms to enter the market
-entry of new firms eliminates positive profits
-supply increase, price decreases, causing output to decrease
-new equilibrium where P=MC=ATC so that TR=TC and profit = 0
Making negative profit
-people leave the market
-supply decreases, price increases until it reaches minimum of ATC
-existing firms exiting creates less loss
-new equilibrium where P=MC=ATC so that TR=TC and profit = 0
In the long run, P=MC= minimum ATC
This is the only price where pie=0
How to make profit = to zero: minimum ATC point on the curve (lowest point)
Chapter 16: Monopoly
-extreme of market structure
-one dominant company in market (desirable for companies)
-can charge whatever they want
Assumptions:
Perfect information (buyers sellers know all info)
Market consists on many buyers and one seller
Only 1 good available, with no close substitutes
High barriers of entry (hard to enter this market)
Barriers to Entry
Why is there only one firm?
Control over input
(resource monopoly, only this company can produce)
Economies of scale
(produce more, cost decreases. One firm can supply market at a lower cost than 2 or more firms) (utility company)
Network economies
(social media) (benefit to users rises when more of them are on the same platform)
Legal barriers
(patents, copyright, trademark, secrets) (government licenses and franchises)
Price taker:
Golden rule for profit maximization: set output at level where MC=MR (this applies to all firms under all market structures)
To find P* and Q*:
Find Q* first, use golden rule where Q*, where MC=MR
Then find P*, use corresponding P* from the demand curve after finding Q*
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 (government created monopoly)
-epipen example, had to price control and intervene on epipen to lower prices because government made them a monopoly but they got greedy and started charging massive prices
Price discrimination:Selling same good at different prices to different customers
Satisfy 2 conditions:
-firm must have market power
-firm must be able to prevent resale or arbitrage
Three types:
-mostly illegal
First degree: perfect discrimination, charging different prices to different buyers based on their willingness to pay. Example of this is an auction, placing bids on products
Second degree: quantity discount, charge different prices on different amounts of goods sold. (buy more, each unit cost less) can't identify willingness to pay
With law of demand, buyers will buy more when price is lower
Third degree; market segment, charge different prices to different groups of buyers
High value and low value groups segmenting by age, income, gender, location
Ex. student discount and happy hour at bar