Economics

What can be used to convert Nominal GDP to Real GDP?

*GPD Deflator* - is a price index that can be used to convert N GDP to R GDP, taking out the effects of changes in the overall price level. GDP Deflator = (Nominal GDP/Real GDP) x 100 might ask for compounded real annual growth rate = (new/old)^(1/t) - 1

Relationships among Marginal and Average Cost Curves.

1) AFC slopes downward 2) The vertical distance b/w the ATC and AVC curves is equal to AFC. 3) MC declines initially, then increases - due to diminishing return, at some point, each added worker contributes less to total output than the previously added worker 4) MC intersects AVC and ATC at their minimum points (from below) 5) ATC and AVC are U-shaped. AVC decreases initially, but as output increases, the effect of diminishing return sets in and AVC eventually slopes upward. 6) Minimum points on the ATC curve represents the lowest cost per unit, but is not necessarily the profit-maximizing point. 7) The MC curve above the AVC is the firm's short-run supply curve in a perfectly competitive market.

What are the different types of markets?

1) Factor Markets (crude oil and labor) 2) Goods or Product markets (cars, clothing, liquor) 3) Capital markets (markets for raising money)

Ways that they compete with other firms for sales

1) Perfect competition - compete for sales only on the basis of price 2) monopolistic competition - through product differentiation (products are not identical). 3) oligopoly - products are good substitutes, compete through marketing, product features, quality, which is signaled strongly through brand name 4) pure monopoly -

Elasticity of demand curves they face

1) Perfect competition - face perfectly elastic (most price sensitive) b/c no firm is large enough to influence the price 2) monopolistic competition - Demand curve is downward sloping but still elastic 3) oligopoly - can be more or less than monopolistic competition. products are usually very good substitutes for each other 4) pure monopoly - have a downward sloping demand curve and is able to set the price they choose

Number of firms and their relative sizes for each market

1) Perfect competition - many, all about the same size 2) monopolistic competition - many but not identical products. differentiate through product quality, features and marketing 3) oligopoly - only a few firms; however they are interdependent on one another. 4) pure monopoly - single seller of a product with no close substitutes.

Ease or difficulty with which firms can enter or exit the market

1) Perfect competition - very low 2) monopolistic competition - low 3) oligopoly - high, because economies of scale in production or marketing lead to very large firms 4) pure monopoly - high, usually has protection of a patent or copy right or control over a resource specifically needed to produce the product. Often supported by government

Four Types of Markets

1) Perfect competition - wheat market in the Midwest 2) monopolistic competition 3) oligopoly 4) pure monopoly

Obstacles to the efficient allocation of productive resources.

1) Price Controls (ceiling and floors). Rent control and minimum wage are examples 2) Taxes and trade restrictions, such as subsidies and quotas. - Taxes - increase price buyers pay and decrease what sellers receive - Subsidies - government payment to producers that increase amount sellers Rx and buyer Py. - Quotas - government imposed production limits, resulting in production of less than the efficient quantity of the good. 3) External Costs. costs imposed on others by the production of goods which are not taken into account in the production decision. ex. cost imposed on fisherman by a firm that pollutes the water. 4) External Benefits - are benefits of consumption enjoyed by people other than the buyers of the good that are not taken into account in buyers' consumption decisions. 5) Public Goods and common resources. - public goods - are goods and services that are consumed by people regardless of whether or not they paid for them (i.e. national defense). - Common resource is one which all may use. (i.e. unrestricted ocean fishery)

Differentiation in Monopolistic competition can be achieved through:

1) Product Innovation - firms that bring new innovative products to the market are confronted with less-elastic demand curves, enabling them to increase price and earn economic profits. (until close substitutes enter the market) 2) Advertising Expenses - are high for firms win monopolistic competition. is to inform consumers about the unique features of their product and to create a perception of differences between products that are basically the same. 3) Brand Names - Provide information to consumers by providing them with signals about the quality of the branded product

Factors that affect demand elasticity

1) quality and availability of substitutes. 2) Portion of income spent on a good 3) Time - elasticity tends to be greater the longer the time period since the price change. (buying a more fuel efficient car with sustained higher gas prices).

Impact of Taxes

A tax will increase the equilibrium price and decrease its equilibrium quantity. Tax on producers (statutory incidence): shifts the supply curve back (to the left) as producers supply less to make up for the higher price. increases price to the buyer, decreases amount to the seller Tax of Buyers (statutory incidence): shifts the demand curve back (to the left). less is sold at the higher price. reduces amount received by the seller and increases amount paid by the buyer

Descending Price Auction

AKA Dutch Auction. begins with a price greater than what any bidder will pay, and is reduced until the bidder agrees to pay it. Modified Dutch Auction: winning bidders all pay the same price, which is the reservation price of the bidder whose bid win the last units offered.

Accounting Profit vs Economic Profit

Accounting: also referred to as net income, net profit, net earnings, or the bottom line. Equal to total revenue less all accounting costs. Economic: also referred to abnormal profit. is equal to the accounting profit less implicit costs. Implicit costs are the opportunity costs of resources supplied to the firm by its owners. may include the opportunity cost of owner-supplied capital and the opportunity cost of the time and entrepreneurial ability of the owners.

Common Value Auction vs Private Value Auction

Common Value: the vale of the item will be the same to any bidder, but the bidders do not know the value at the time of the auction. Example would be Oil lease auctions as bidder must estimate what the value of the oil is, and the bidder that over estimates the value the most wins (*winners curse*). Private Value Auction: the value that each bidder places is the value it has to him, and we assume that no bidder will bid more than that. example would be an art auction.

Oligopoly and the four models of pricing and profits

Compared to monopolistic competition, an oligopoly market has higher barriers to entry and fewer firms. Firms are also interdependent, so a price change by one can be expected to be met by a price change by its competitors. given this fact, models of oligopoly pricing and profits must make a number of important assumptions. four models of pricing and profits 1) Kinked demand curve model 2) Cournot duopoly model 3) Nash Equilibrium model (prisoners dilemma) 4) Stackelberg dominant firm model

Concentration Measures

Determining a monopoly from the elasticity of demand directly is very difficult, instead regulators often use percentage of market share to measure the degree of monopoly or market power of a firm. One concentration measure is the *N-firm concentration ratio*, which is calculated as the sum or the percentage of market shares of the largest N firms in a market.

Principles of demand

Downward sloping, where less is demanded at higher prices and increases as the price decreases (called the law of demand).

Sealed Bid Auction

Each bidder provides on bid, which is unknown to other bidders. The highest bid wins.

Stable vs Unstable equlibria

Equilibrium is termed stable when there are forces that move price and quantity back towards equilibrium. Unstable equilibrium occurs if the supply curve is less steeply sloped than the demand curve, in which case price above (below) equil will tend to get further from equilibrium

Expenditure vs Income approach for calculating GDP

Expenditure: calculated by summing the amounts spent on goods and services produced during the period Income: is calculated by summing the amounts earned by households and companies during the period, including wage income, interest income, and business profits. total economy, expenditures and total income must be equal, so the two approaches should produce the same result.

Firms are buyers in ____ markets and sellers in ____ markets

Factor markets, Product Markets

Profit-maximizing utilization level of an input.

For a firm with N productive inputs, cost minimization requires that: (MP1/P1) = (MP2/P2) = ...= (MPn/Pn)

Giffen vs Veblen Good

Giffen good is an inferior good for which the negative income effect outweighs the positive substitution effect when price falls. Veblen Good - one for which a higher price makes the good more desirable. the idea is that the consumer gets utility from being seen to consume a good that has high status, and that a higher price conveys more status and increases utility. 2 important distinctions: 1) Giffen good are inferior, while Veblen are definitely not 2) The existence of Giffen goods is theoretically supported by our rules of consumer choice, while the existence of Veblen goods is not.

Elasticities of Supply and Demand Influence the Incidence of a Tax

If demand is less elastic (less price sensitive) than supply, consumers will bear a higher burden. If supply is less elastic than demand, suppliers will bear a higher burden.

Perfect Competition

In a perfectly competitive market, a firm will continue to expand production until MR equals MC. For a price taker, MR is the P b/c all additional units are assumed to be sold at the same price. (MR curve is identical to the demand curve). Equilibrium: P = MR = MC = ATC Firms will not earn economic profit for any significant amount of time. economic profits will lead to market entry, loss will lead to exit.

Dominant Firm Model

In this model, there is a single firm that has a significantly large market share because of its greater scale and lower cost structure (the dominant firm). Here the price is essentially determined by the dominant firm, and the other competitive firms (CF) take this market price as given.

Marginal Product, Diminishing marginal productivity, and diminishing marginal returns.

Marginal Product - the output with only one worker is considered the marginal product of the first unit of labor. the additional of a second worker will increase total product by the marginal product of the second worker. As we add more workers the additional output from that additional worker will be less than the previous addition, which is called diminishing marginal productivity.

To determine the quantity of each input that should be used to *maximize* profit:

Marginal Revenue Product (MRP) is the increase in the firm's TR from selling the additional output from employing one more unit of the factor. The profit-maximizing quantity of an input I is that quantity for which MRPi = Pi - A firm can increase profits by employing another unit of the input as long as MRPi > Pi, because employing another unit of the input increases revenue more than it increase costs - on the opposing side a firm can increase profits by employing one less unit of the input when MRPi < Pi because it decreases costs by more than the revenue decrease.

Price Bubbles

Market participants take recent price increases as a indication of higher future asset prices. the expectation increases the demand for the asset, which increases the equilibrium price of the asset. eventually bubble will burst and demand and price will fall to a sustainable equilibrium.

Difference b/w long-run equilibrium with monopolistic competition vs perfect competition

Monopolistic competition: price is greater than MC ATC is not at a minimum for the quantity produced, and the price is slightly higher than under perfect competition.

Causes of shifts in, and movements along the supply and demand curves.

Movement: a change in the market price that increases or decreases the quantity supplied or demanded. Shift: A change in one of the independent variable other than price (i.e. an increase in income).

Herfindahl-Hirschman Index (HHI)

N -Firm Concentration ratio may be insensitive to mergers of two firms with large market shares. The HHI is calculated as the sum of the squares of the market shares of the largest firms in the market.

Nominal GDP vs Real GDP

Nominal: is simply GDP under the expenditures approach; the total value of all goods and services produced by an economy value at current market prices. Because nominal GDP is based on current prices, inflation will increase N GDP, even if output remains constant. Real GDP: Measures the output of the economy using prices from a base year, removing the effect of changes in prices so that inflation doesn't skew GDP. Real GDP growth reflects only increases in total output, not increases in the money value of total output.

Normal goods vs Inferior goods

Normal good - one for which the income effect is positive. Inferior good - one for which the income effect is negative

Collusion vs. Perfect Competition

Oligopoly resulting will be somewhere between the price based on perfect collusion that would maximize total profits to all firms in the market (the monopoly price) and the price that would result from perfect competition and generate zero economic profits in the long run.

Partial equilibrium vs general equilibrium analysis

Partial equilibrium - what is studied in the basic form. we are taking the factors that may influence demand as fixed except for the price. General equilibrium analysis, relationships between the quantity demanded of the good and factors that may influence demand are taken into account (takes into account changes in complimentary goods).

Perfect Competition vs Monopoly

Perfect Competition - equilibrium will be at the intersection of the industry supply curve and the market demand curve, because each firm is small relative to the industry and has nothing to gain by attempting to decrease output in an effort to increase price. Consumer and producer surplus is maximized under PC. Monopoly - will maximize profits where MR = MC and charging the price along the demand curve. Monopoly creates deadweight loss relative to perfect competition because monopolies produce a quantity that does not maximize the sum of consumer surplus and producer surplus.

Indifference Curves

Plot the combinations of two goods that provide equal utility to a consumer. Must follow certain criteria: 1) Indifferences curves for two goods slope downward - a bundle with less of good x must have more of good y to have equal utility and lie on the same indifference curve. 2) Indifference curves are convex towards the origin: Convexity results when the magnitude of the slope decreases as we move toward more of good x and less of good y. The slope of an indifference curve at any one point is referred to as the *marginal rate of substitution*, the rate at which the consumer will willingly exchange units of good X for good Y. 3) Indifference curves cannot cross.

Price Discrimination

Practice of charging different consumers different prices for the same product or service. For price discrimination to work, the seller must: 1) face a downward-sloping demand curve 2) have at least two identifiable groups of customers, with different elasticities of demand for the product 3) be able to prevent the customers from paying the lower price from reselling the product to the customers paying the higher price.

Shutdown and Breakeven Under Perfect Competition

Remember under perfect competition, price = MR = AR. Breakeven: The price at which MC = ATC Shutdown: The price at which MC falls below average variable cost. The area where MC is greater than AVC but less that ATC, the firm is losing money, but losing less than it would if it were to shut down. (the revenue is covering part of the fixed costs).

Profit Maximization Under Imperfect Competition

Remember: Firms under imperfect comp face a downward sloping demand curve, and marginal revenue is less than price, as price must be reduced to sell additional units. Profit is maximized when MR = MC, the same quantity for which TR - TC is at its maximum.

Short Run vs Long Run for the firm

Short Run - defined as the time period over which some factors of production are fixed. The firm cannon change its scale of operations over the short run. Long Run - where all factors of production are variable. Firm can let its leases expire, sell equipment, etc.

Short-run vs long-run profit maximization

Short run - producers will maximize profits when MR = MC as long as its above AVC Long Run - All firms will choose to operate at the minimum average cost, considering all possible plant sizes. The long-run industry supply curve is perfectly elastic at the ATC for the minimum efficient scale. because economic profits will lead to excess supply and put downward pressure on the price. where economic losses will cause firms to exit from the industry, reducing supply and driving price to equilibrium.

Actual vs Statutory Incidence of a tax

Statutory - who is legally responsible for paying the tax. Actual - who actually bears the cost of the tax through and increase in the price paid (buyers) or decrease in the price received (sellers) the actual tax incidence is independent of whether the government imposes the tax (statutory incidence) on the consumer or the suppliers.

Substitution vs Income effects

Substitution effect: when the price of good X decreases, consumption shifts towards more of good X. Because the total expenditure on the consumer's original bundle of goods falls with the price of good x falls, there is also an *income effect*. Income effect can be toward more or less consumption of good X. the substitution effect always acts to increase the consumptions of a good that has fallen in price *while* the income effect can either increase or decease consumption of a good that has fallen in price. 3 possible outcomes of decrease in price of good X: 1) substitution effect is positive, income effect is also positive = consumption increases. 2) substitution effect is positive, income effect is negative but smaller than sub effect = consumption increases 3) Sub effect is positive, income effect is negative and larger than sub effect = consumption decreases

Shutdown and Breakeven Under Imperfect Competition

TR = TC: Breakeven TC>TR>TVC: firm should continue to operate in the short run but shutdown in the long run. TR<TVC: firm should shut down in the short and long run. Because price does not equal marginal revenue for a firm in imperfect competition, analysis based on total costs and revenues is better suited for examining breakeven and shutdown points.

Calculating Price Elasticity of Demand

The Q0 and P0 should be the average. I. E. P0+P1/2

Consumer's Equilibrium Bundle of Goods

The optimal (most preferred) consumption bundle for a consumer is at the point where the indifference curve is tangent to the budget line.

Cross Price Elasticity of Demand

The ratio of the percentage change in the quantity demanded of a good to the percentage change in the price of a related good. Substitutes - when the increase in the price of one good leads to increased demand of another good. Complements - when an increase in the price of a related good decreases demand for a good.

Decreasing, Constant, and Increasing Cost industries.

The result on prices of resources as the industry expands: 1) Increasing Cost - prices of resources increase with an expanding industry 2) Decreasing Cost - prices decrease with industry expansion 3) Constant - stay the same

Gross Domestic Product

The total market vale of the goods and services produced in a country within a certain period of time. Is the most widely used measure of the size of a nation's economy.. Includes: -market values of final goods and services (not goods that will be resold or used in the production of other goods and services) -Goods and services provided by government (are valued at the cost to the government since they do not have a market value) -includes the value of owner-occupied housing, and rental housing services

Problem with Concentration Measures

They do no take into consideration potential competition. With low barriers to entry, it may be the case that other firms stand ready to enter the market if firms currently in the market attempt to increase prices significantly (which in turn makes the elasticity of demand high).

Cournot Model

This model considers an oligopoly with only two firms competing (a duopoly), and both have identical and constant marginal costs of production. Each firm knows the quantity supplied by the other firm in the previous period and assumes that is what it will supply in the next period. by subtracting this quantity from the (linear) market demand curve, the firms can construct a demand curve and marginal revenue curve for its own production and determine the profit maximizing quantity. Firms determine their quantities simultaneously each period and, under the Cournot model, these quantities will change each period until they are equal ( at which point there are no additional profits to be gained from changing quantity, i.e. equilibrium)

Total Fixed Cost, Total Variable Cost, Total Cost

Total Fixed Costs (TFC): is the cost of inputs that do not vary with the quantity of outputs and cannot be avoided over the period of analysis. Average Fixed Cost (AFC) = TFC/Total Product Total Variable Cost (TVC): is the cost of all inputs with outputs over the period of analysis. usually in the form of wages and/or raw materials. Average Variable Costs (AVC) = AVC/Total Product Total Cost (TC): the sum of all costs Average Total Costs = TC/Total Product

Total, Marginal, and Average Product of Labor

Total Product of Labor - the output for a specific amount of labor. Average Product of Labor - per worker is the total product of labor divided by the number of workers Marginal Product of Labor - is the addition to the total product of labor from employing one more unit of labor.

Total, Average, and Marginal Revenue

Total Revenue (TR) = P x Q Average Revenue (AR) = TR/Q Marginal Revenue (MR) = is the increase in total revenue from selling one more unit of a good or service. In a perfectly competitive market, all units are sold at the same price regardless of quantity, so that AR and MR are both equal to the market price. Firms under imperfect competition (price searcher firms), the demand curve is downward sloping, and therefore marginal revenue is less than price for quantities greater than one. also, AR and MR will decline as the quantity sold increases

Unregulated vs Average cost vs Marginal Cost Pricing

Unregulated: The firm will produce where MR = MR cost (profit maximization) and charge a price along the demand curve. This leads to significantly higher prices and less output. Average Cost: Forces monopolists to reduce price to where the firms ATC intersects the market demand curve. This increases output and decreases price, increases social welfare, and ensures the monopolist a normal profit b/c price = ATC Marginal Cost Pricing: also called efficient regulation, forces the monopolist to reduce price to the point where the firm's MC curve intersect the market demand curve. Results in even lower prices and higher output but requires a subsidy since price is below ATC

Principles of Supply

Upward sloping. more is supplied at higher prices with less being supplied at lower prices (law of supply)

Value-of-final-output vs sum-of-value-added methods

Value-of-final-output method is the same as the expenditure approach: summing the values of all final goods and services produced. sum-of-value added method: GDP is calculated by summing the additions to value created at each stage of production and distribution.

Natural Monopoly

When the average cost of production for a single firm is falling throughout the relevant range of consumer demand, we say that the industry is a natural monopoly The entry of another firm into the industry would divide the production between tow firms and result in a higher average cost of production than for a single producer. Large economies of scale in an industry present significant barriers to entry.

Condition of non satiation

a condition that, other things equal, more is always preferred to less. if less is preferred to more, we don't have a good; instead we have a bad.

Profit Maximization Under Perfect Competition

a firm, whether under perfect or imperfect competition, will maximize economic profit by producing the quantity for which marginal revenue equals marginal cost. Profits can be maximized by: 1) Producing up to the point where MR = MC and not producing additional units for which MR < MC. 2) Producing the quantity for which TR - TC is at a maximum

Price Floor

a minimum price that a buyer can offer for a good, service, or resource. If the price floor is below the equilibrium price, it will have no effect. if it is set above the equilibrium price, it will result in a surplus (excess supply)

Nash Equilibrium Model (prisoner's dilemma)

a more general version of the Cournot Model, and is reached when the choices of all firms are such that there is no other choice that makes any firm better off. Prisoner's Dilemma - states that equilibrium outcome is for both firms to cheat on a *collusion* agreement. The reason is, the firm *could* be better off my cheating so that is the course of action that is assumed to be taken. The picture shows two firms that have agreed to charge $150, but since both firms will cheat (b/c there is a chance they could make $200), the equilibrium price will fall to $100

What is a Natural Monopoly

a situation where the average cost of production is falling over the relevant range of consumer demand. having two or more producers would result in significantly higher cost of production and be detrimental to consumers. power companies, distribution businesses, public utilities. These companies' prices are often regulated by the government.

Calculating excess supply and excess demand

calculate the quantity supplied and the quantity demanded. Qd - Qs = excess demand if positive, excess supply if negative.

Budget Constraint

can be constructed based on the consumer's income and the prices of the available goods. Prices of goods are referred in relative terms (Px/Py), which are referred to as relative prices.

Second Price Sealed Bid Auction

also known as a Vickrey Auction. the bidder submitting the highest bid wins, but pays the amount of the second highest bid.

Ascending Price Auction

also referred to as an English auction. Bidders can bid an amount greater than the previous high bid, and the bidder that first offers the highest bid win the item.

Subsidies

are payments made by governments to producers, often farmers. Subsidies result in greater production and a reduction in price.

Factors of Production

are the resources a firm used to generate output, and include: 1) Land 2) Labor 3) Capital - sometimes called physical capital or plant and equipment. 4) Materials

Economies Vs Diseconomies of scale

economies of scale - the downward sloping segment of the LRATC curve. result from factors such as labor specialization, mass production, and more efficient equipment and tech. A firm operating with economies of scale can increase its competitiveness by expanding production and reducing costs. Diseconomies of scale - upward sloping segment of LRATC curve. May result as the increasing bureaucracy of larger firms leads to inefficiency. A firm operating under diseconomies of scale will want to decrease output and move back toward the minimum efficient scale.

Utility Theory

explains consumer behavior based on preferences for various alternative combinations of goods, in terms of the relative level of satisfaction they provide Utility theory is an important aspect of the *consumer choice theory*, which relates consumers' wants and preferences to the goods and services they actually buy.

Monopolistic Competition

face downward-sloping demand curves (they are price searchers). Demand curves are highly elastic b/c competing products are perceived by consumers as close substitutes. Firms in monopolistic competition also maximize economic profits by producing where MR = MC, and by charging the price for that quantity from the demand curve. again, profits will lead to market entry, and the demand curve will shift back due to the increased supply, to a point where P = ATC, which is the point where there is no longer an incentive to enter the market (price bottoms out)

Monopoly

faces a downward-sloping demand curve for its product, so profit maximization involves a trade-off between price and quantity sold if the firm sells at the same price to all buyers. will expand output until MR = MC which is the point of profit maximization. Due to high entry barriers, profits do not attract new market entrants, therefore long run profits do exist. seek to maximize profits, not price.

Calculating Consumer and Producer Surplus

find the area of the triangle 1/2(base x height). Height: Find the price intercept by setting Q = 0 and solving for P. this will give the p intersect (or y axis). Must be considered in relation to the price. Base: for the given price, solve for Q

Noncompetitive bid

indicates that those bidders will accept the amount of securities indicated at the price determined by the auction, rather than specifying a maximum price in their bids

Price Elasticity of Demand

is a measure of the responsiveness of the quantity demanded to a change in price. it is the ratio of the percentage change in quantity demanded to a percentage change in price. When quantity demanded is very responsive to a change in price, we say demand is elastic. easiest to think of the word elastic as price sensitivity. Perfectly elastic = extremely sensitive. Perfectly inelastic = not sensitive to price changes at all.

Price Ceiling

is an upper limit on the price which a seller can charge. If the ceiling is above the equilibrium price, it will have no effect. If the ceiling is below the equilibrium price, the result will be a shortage (excess demand). are called *rent ceilings* in the housing market.

Kinked Demand Curve Model

is based on the assumption that an increase in a firm's product price will not be followed by its competitors, but a decrease in price will. each firm believes that it faces a demand curve that is more elastic above a given price (the kink) than it is below the given price. The kink in the curve is the profit maximizing point. the kinked demand curve is incomplete because what determines the market price (where the kink is) is outside the scope of the model

Per-Capita real GDP

is defined as real GDP divided by population. Often used to measure the economic well-being of a country's residents.

Short-run supply curve for a firm

is its MC line above the AVC line. *short run market supply curve* is the horizontal sum of MC curves for all firms in a given industry

Normal Profit

is the accounting profit that makes economic profit zero. economic profit of zero is what we expect in equilibrium, which is why economic profits are called abnormal profits. Normal profit is a minimum requirement for a firm to continue operating in the long run.

Producer Surplus

is the excess of the market price above the opportunity cost of production; that is, total revenue minus total variable cos of producing those units.

National Income

is the sum of the income received by all factors of production that go into creation of final output.

Economic Rent

is used to describe a payment to a factor of production above its vale in its next highest-valued use (its opportunity cost). best described as a payment for a resource in excess of the minimum payment to retain resources in their current use. Firms that earn economic profits attract competition, but if the fir's resources are very difficult to replicate and produce accounting profits in excess of opportunity costs, the firm will continue to earn rents.

Calculating equilibrium price

setting the supply and demand functions equal to each other and solving for P (Price)

Two pricing strategies for a monopoly

single price - charging a single price (picture attached) Price Discrimination - if the monopoly's customer cannot resell the product to each other, the monopoly can maximize profits by charging different prices to different groups of customers

Long Run Average Total Cost curve represents?

the LRATC curve is drawn for many different plant sizes or scales of operation, each point along the curve represents the minimum ATC for a given plant size or scale of operations. The lowest point on the LRATC corresponds to the scale or plant size at which the average total cost of production is at a minimum (called *minimum efficient scale*)

Marginal Cost

the addition to total cost of producing one more unit MC = Chg in TC/Chg in Output

Arc Elasticity

the calculated elasticity over a specific range of the demand curve.

Consumer Surplus

the difference between the total value the consumers of the units of a good that they buy and the total amount they must pay for those units.

Equilibrium

the point at which the supply and demand curves intersect. If price is above equilibrium we will have *excess supply*. (too much is produced for consumer wants at the given price) If price is below equilibrium we have *excess demand* (too much is demanded to what is supplied at the given price).

Deadweight Loss

the reduction in consumer and producer surplus due to underproduction or overproduction.

Income Elasticity of Demand

the sensitivity of quantity demanded to changes in income. is measured as the ratio of the percentage change in quantity demanded to the percentage change in income. Normal Goods - an increase in income leads to an increase in the quantity demanded. Inferior goods - an increase in income leads to a decrease in quantity demanded. Normal and inferior goods can be different for different income ranges.

Production Quotas

used to regulate markets by imposing an upper limit on the quantity of a good that may be produced over a specified time period. are often used by governments to regulate agricultural markets. As long as the equilibrium price is above the quota price, quota will result in increased price and lower production that equilibrium.

Calculating Income elasticity and cross price elasticity.

uses the same formula.

Effects of permanent increase in demand

when demand initially rises, firms will realize economic profits at the higher prices. but has firms enter the market and increase supply, price will return to the original level

Unitary elasticity

when price elasticity equals -1.0, which is were total revenue is maximized at that price. a 1% increase in price leads to a 1% decrease in quantity demanded.