Final Exam

Basic short run production rules

-A firm that is making economic profits should produce that level of output where MC = MR. At this point profits will be maximized -A firm that is losing money should produce where MC = MR as long as P > AVC. At this point losses are minimized. -If the P < AVC, the firm should shut-down and produce nothing because it isn't even covering its variable costs.

price discrimination

-A monopolist can sometimes increase economic profit by charging higher prices to customers who value the product more -The practice of charging difference prices to different customers when the price differences are not justified by differences in cost is called price discrimination -the business practice of selling the same good at different prices to different customers -price discrimination is not possible when a good is sold in a competitive market. In a competitive market, many firms are selling the same good at the market price. No firm is willing to charge a lower price to any customer because the firm can sell all it wants at the market price. And if any firm tried to charge a higher price to a customer, that customer would buy from another firm. For a firm to price discriminate, it must have some market power.

Short-run shutdown decision facing a monopolist.

-A monopolist is not assured of profit >>>>The demand for the monopolists good or service may not be great enough to generate economic profit in either the short run or the long run -In the short run, the loss-minimizing monopolist must decide whether to produce or to shut down >>>>If the price covers average variable cost, the firm will produce If not, the firm will shut down, at least in the short run

Short run losses and the shutdown decisions

-A monopolist is not assured of profit >>>The demand for the monopolists good or service may not be great enough to generate economic profit in either the short run or the long run --In the short run, the loss-minimizing monopolist must decide whether to produce or to shut down >>>If the price covers average variable cost, the firm will produce >>>If not, the firm will shut down, at least in the short run

describe more about monopoly

-A monopolist's profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. -A monopoly causes deadweight losses similar to the deadweight losses caused by taxes. -Policymakers can respond to the inefficiencies of monopoly behavior with antitrust laws, regulation of prices, or by turning the monopoly into a government-run enterprise. -If the market failure is deemed small, policymakers may decide to do nothing at all. -Monopolists can raise their profits by charging different prices to different buyers based on their willingness to pay. -Price discrimination can raise economic welfare and lessen deadweight losses.

Economies of scale:

-A monopoly sometimes emerges naturally when a firm experiences economies of scale as reflected by the downward-sloping, long-run average cost curve -In these situations, a single firm can sometimes supply market demand at a lower average cost per unit than could two or more firms at smaller rates of output

What is a natural monopoly? (examples, graphical illustration of average cost and marginal cost curves typical of a natural monopoly).

-A monopoly sometimes emerges naturally when a firm experiences economies of scale as reflected by the downward-sloping, long-run average cost curve -In these situations, a single firm can sometimes supply market demand at a lower average cost per unit than could two or more firms at smaller rates of output -They have very high upfront fixed costs to build up their infrastructure. They have very low marginal costs -Average output declines as output increases -The marginal costs are legit nothing -Result because they can buy other similar companies with large upfront costs, undersell other companies with the small market shares (who were trying to make up for the high fixed costs) -AT&T was a natural monopoly at first -Rather than regulating a natural monopoly that is run by a private firm, the government can run the monopoly itself (e.g. in the United States, the government runs the Postal Service).

Is a monopoly's profit a problem for society? Explain

-According to the economic analysis of monopoly, however, the firm's profit is not in itself necessarily a problem for society. -Welfare in a monopolized market, as in all markets, includes the welfare of both consumers and producers. Whenever a consumer pays an extra dollar to a producer because of a monopoly price, the consumer is worse off by a dollar and the producer is better off by the same amount. Because total surplus equals the sum of consumer and producer surplus, this transfer from consumers to the owners of the monopoly does not affect the market's total surplus. In other words, the monopoly profit itself represents not a reduction in the size of the economic pie but merely a bigger slice for producers and a smaller slice for consumers. Unless consumers are for some reason more deserving than producers—a normative judgment about equity that goes beyond the realm of economic efficiency—the monopoly profit is not a social problem. -The problem, instead, is that the monopoly firm produces and sells a quantity of output below the level that maximizes total surplus. The deadweight loss measures how much the economic pie shrinks as a result. This inefficiency is connected to the monopoly's high price: Consumers buy fewer units when the firm raises its price above marginal cost. But keep in mind that the profit earned on the units that continue to be sold is not the problem. The problem stems from the inefficiently low quantity of output. Put differently, if the high monopoly price did not discourage some consumers from buying the good, it would raise producer surplus by exactly the amount it reduced consumer surplus, leaving total surplus the same as that achieved by a benevolent social planner. -There is, however, a possible exception to this conclusion. Suppose that a monopoly firm has to incur additional costs to maintain its monopoly position. For example, a firm with a government-created monopoly might need to hire lobbyists to convince lawmakers to continue its monopoly. In this case, the monopoly may use up some of its monopoly profits paying for these additional costs. If so, the social loss from monopoly includes both these costs and the deadweight loss resulting from reduced output.

Short-run and Long-run adjustment process for the firm and industry in response to (say) an increase in demand

-An increase in demand raises price and quantity in the short run. -Firms earn profits because price now exceeds average total cost.

Control of essential resources:

-Another source of monopoly power is a firm's control over some nonreproducible resource critical to production >>>Professional sports teams try to block the formation of competing leagues by signing the best athletes to long-term contracts >>>>Alcoa was the sole U.S. maker of aluminum for a long period of time because it controlled the supply of bauxite, key raw material. >>>>China is the monopoly supplier of pandas >>>DeBeers controls the world's diamond trade

Antitrust

-Antitrust laws are a collection of statutes aimed at curbing monopoly power. -Antitrust laws give government various ways to promote competition. -They allow government to prevent mergers. -They allow government to break up companies. -They prevent companies from performing activities that make markets less competitive. -Two Important Antitrust Laws >>Sherman Antitrust Act (1890) >>>>Reduced the market power of the large and powerful "trusts" of that time period. >>Clayton Act (1914) >>>>Strengthened the government's powers and authorized private lawsuits.

Short-run Firm Supply Curve

-As long as the price covers average variable cost, the firm will supply the quantity resulting from the intersection of its upward-sloping marginal cost curve and its marginal revenue, or demand curve -Thus, that portion of the firm's marginal cost curve that intersects and rises above the lowest point on its average variable cost curve becomes the short-run firm supply curve

Long run market supply with entry and exit:

-At the end of the process of entry and exit, firms that remain must be making zero economic profit. -The process of entry and exit ends only when price and average total cost are driven to equality. -Long-run equilibrium must have firms operating at their efficient scale (lowest average unit costs)

Summary of the long run

-Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces. -The price of the good equals both the firm's average revenue and its marginal revenue. -To maximize profit, a firm chooses the quantity of output such that marginal revenue equals marginal cost. -This is also the quantity at which price equals marginal cost. -Therefore, the firm's marginal cost curve is its supply curve. -In the short run, when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if the price of the good is less than average variable cost. -In the long run, when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost. -In a market with free entry and exit, profits are driven to zero in the long run and all firms produce at the efficient scale. -Changes in demand have different effects over different time horizons. -In the long run, the number of firms adjusts to drive the market back to the zero-profit equilibrium.

Deadweight loss from a monopolist

-Because a monopoly sets its price above marginal cost, it places a wedge between the consumer's willingness to pay and the producer's cost. >>>This wedge causes the quantity sold to fall short of the social optimum. -The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax. -The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit. -Because the demand curve reflects the value to consumers and the marginal-cost curve reflects the costs to the monopoly producer, the area of the deadweight loss triangle between the demand curve and the marginal-cost curve equals the total surplus lost because of monopoly pricing. It represents the reduction in economic well-being that results from the monopoly's use of its market power. -The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax. Indeed, a monopolist is like a private tax collector. -As we saw in Chapter 8, a tax on a good places a wedge between consumers' willingness to pay (as reflected by the demand curve) and producers' costs (as reflected by the supply curve). Because a monopoly exerts its market power by charging a price above marginal cost, it creates a similar wedge. In both cases, the wedge causes the quantity sold to fall short of the social optimum. The difference between the two cases is that a tax generates revenue for the government, whereas a monopoly price generates profit for the firm.

example of price discrimination

-Because businesspeople face unpredictable yet urgent demands for travel and communication, and because employers pay such expenses, businesspeople are less sensitive to price than householders -Telephone companies are able to sort out their customers by charging different rates based on the time of day

price maker

-Because the monopolist can select the price that maximizes profit, we say the monopolist is a price maker -More generally, any firm that has some control over what price to charge is a price maker -*****monopoly

describe Marginal and average revenue

-Because the perfectly competitive firm can sell any quantity for the same price per unit, marginal revenue is also average revenue >>>>Average revenue, AR, equals total revenue divided by quantity → AR = TR / q -Regardless of the rate of output, the following equality holds along the firm's demand curve >>>>Market price = marginal revenue = average revenue

Describe the long run: market supply with entry

-Decisions about entry and exit in a market of this type depend on the incentives facing the owners of existing firms and the entrepreneurs who could start new firms. If firms already in the market are profitable, then new firms will have an incentive to enter the market. -This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits. Conversely, if firms in the market are making losses, then some existing firms will exit the market. -Their exit will reduce the number of firms, decrease the quantity of the good supplied, and drive up prices and profits. At the end of this process of entry and exit, firms that remain in the market must be making zero economic profit. -This equation shows that an operating firm has zero profit if and only if the price of the good equals the average total cost of producing that good. If price is above average total cost, profit is positive, which encourages new firms to enter. If price is less than average total cost, profit is negative, which encourages some firms to exit. The process of entry and exit ends only when price and average total cost are driven to equality. -Marginal cost and average total cost are equal, however, only when the firm is operating at the minimum of average total cost. Recall from the preceding chapter that the level of production with lowest average total cost is called the firm's efficient scale. Therefore, in the long-run equilibrium of a competitive market with free entry and exit, firms must be operating at their efficient scale. -we can determine the long-run supply curve for the market. In a market with free entry and exit, there is only one price consistent with zero profit—the minimum of average total cost. As a result, the long-run market supply curve must be horizontal at this price, as illustrated by the perfectly elastic supply curve in panel (b) of Figure 7. Any price above this level would generate profits, leading to entry and an increase in the total quantity supplied. Any price below this level would generate losses, leading to exit and a decrease in the total quantity supplied. Eventually, the number of firms in the market adjusts so that price equals the minimum of average total cost, and there are enough firms to satisfy all the demand at this price

Long run profit maximization

-For a monopoly, the distinction between the long and short run is not as important -If a monopoly is insulated from competition by high barriers that block new entry, economic profit can persist in the long run -However, short-run profit is no guarantee of long-run profit -A monopolist that earns economic profit in the short-run may find that profit can be increased in the long run by adjusting the scale of the firm -Conversely, a monopoly that suffers a loss in the short run may be able to eliminate that loss in the long run by adjusting to a more efficient size

Public policy toward monopolies

-Government responds to the problem of monopoly in one of three ways. -Making monopolized industries more competitive. -Regulating the behavior of monopolies. -Turning some private monopolies into public enterprises.

Difference between demand curve facing monopolist and a perfectly competitive firm. Why do the curves differ?

-How does monopolistic competition compare with perfect competition in terms of efficiency? -In the long run, neither can earn economic profit -However, a difference arises because of the different demand curves facing individual firms in each of two market structures -Exhibit 3 presents the comparison

Difference between demand curve facing monopolist and a perfectly competitive firm. Why do the curves differ?

-How does monopolistic competition compare with perfect competition in terms of efficiency? In the long run, neither can earn economic profit However, a difference arises because of the different demand curves facing individual firms in each of two market structures Exhibit 3 presents the comparison

perfect Price Discrimination (definition, welfare impact on consumer surplus, efficiency).

-If a monopolist could charge a different price for each unit sold, the firm's marginal revenue curve from selling one more unit would equal the price of that unit → the demand curve would become the marginal revenue curve -A perfectly discriminating monopolist charges a different price for each unit of the good -Perfect price discrimination gets high marks based on allocative efficiency -Because such a monopolist does not have to lower price to all customers when output expands, there is no reason to restrict output I-n fact, because this is a constant-cost industry, Q is the same quantity produced in perfect competition -As in perfect competition, the willingness to pay for the final unit of output produced just equals its marginal cost -And although perfect price discrimination yields no consumer surplus, the total benefits consumers derive just equal the total amount they pay for the good -Since the monopolist does not restrict output, there is no deadweight loss

Firm and industry short run supply curves

-If the price exceeds average variable cost, the firm will produce the quantity where marginal revenue equals marginal cost -Further, the firm will vary output as the market price changes -If the price is less than average variable cost, the firm will shut-down and produce nothing.

Why in the LR economic profit is driven to zero.

-In a market with free entry and exit, profits are driven to zero in the long run and all firms produce at the efficient scale. -Changes in demand have different effects over different time horizons. -In the long run, the number of firms adjusts to drive the market back to the zero-profit equilibrium. -The existence of economic profits attracts entry, economic losses lead to exit, and in long-run equilibrium, firms in a perfectly competitive industry will earn zero economic profit. -Given easy entry and exit, some firms in Industry B will leave it and enter Industry A to earn the greater profits available there. As they do so, the supply curve in Industry B will shift to the left, increasing prices and profits there. As former Industry B firms enter Industry A, the supply curve in Industry A will shift to the right, lowering profits in A. The process of firms leaving Industry B and entering A will continue until firms in both industries are earning zero economic profit. That suggests an important long-run result: Economic profits in a system of perfectly competitive markets will, in the long run, be driven to zero in all industries.

Welfare cost of monopoly. Who gains, who loses? What is the welfare impact of a monopolists producing at a price greater than marginal cost?

-In contrast to a competitive firm, the monopoly charges a price above the marginal cost. -From the standpoint of consumers, this high price makes monopoly undesirable. -However, from the standpoint of the owners of the firm, the high price makes monopoly very desirable.

short run production

-In the short run at least one resource is fixed -The law of diminishing product (returns) determines the shapes of the short-run cost curves. -The shape of the production function determines the shape of the total and variable cost curve. -The shape of the marginal product curve determines the shape of the marginal cost curve. -When the marginal product of labor increases, the marginal cost of output must fall. -When the marginal product of labor falls, the marginal cost of output must rise.

Perfect Competition in the Long Run when firms can enter or exit the industry

-In the short run, the quantity of variable resources can change, but other resources, which generally determine firm size, are fixed -However, in the long run, firms have time to enter and exit and to adjust their size → adjust the scale of their operations → there is no distinction between fixed and variable cost because all resources under the firm's control are variable -A short-run loss will, in the long run, force some firms to leave the industry or to reduce the scale of operation -In the long run, departures and reductions in scale shift market supply to the left → market price increases until the loss disappears and economic profit is zero. -Short-run economic profit will in the long run encourage new firms to enter the market and may prompt existing firms to expand the scale of their operations -Economic profit will attract resources from industries where firms earn no profit or suffer losses -The expansion in the number and size of firms will shift the industry supply curve rightward in the long run, driving down the price -New firms will continue to enter a profitable industry and existing firms will continue to increase in size as long as economic profit is greater than zero

describe characteristics of a monopoly

-Is the sole producer -Faces a downward-sloping demand curve -Is a price maker -Reduces price to increase sales

describe Barriers to entry are restrictions on the entry of new firms into an industry

-Legal restrictions -Economies of scale -Control of an essential resource The most important characteristic of a monopolized market is barriers to entry → new firms cannot profitably enter the market

Characteristics of competitive markets

-Many buyers and sellers → so many that each buys and sells only a tiny fraction of the total amount exchanged in the market -Firms sell a standardized or homogeneous product -Buyers and sellers are fully informed about the price and availability of all resources and products -Firms and resources are freely mobile → over time they can easily enter or leave the industry -If these conditions are present in a market, individual participants have no control over the price >>>>>Price is determined by market supply and demand → the perfectly competitive firm is a price taker → it must "take" or accept, the market price >>>>>Once the market establishes the price, each firm is free to produce whatever quantity maximizes profit

Characteristics of monopolistic competition

-Many producers offer products that are close substitutes but are not viewed as identical -Each supplier has some power over the price it charges → are price makers -Low barriers to entry → firms in the long run can enter or leave the market with ease → enough sellers that they behave competitively -Sellers act independently of each other

describe the relationship between MC and MP

-Marginal Cost = DTC/DQ -Adding an additional worker adds the wage paid to total costs. This is the same from worker to worker. >>>>>>Therefore DTC = "wage" -Adding an additional worker adds additional output according to the workers marginal product. This either rises or falls. -When marginal product increases as add more workers, marginal cost decreases. -When marginal product decreases as add more workers, marginal cost increases

Firm's long-run decision to either exit or enter a market.

-New firms will continue to enter a profitable industry and existing firms will continue to increase in size as long as economic profit is greater than zero -At the end of the process of entry and exit, firms that remain must be making zero economic profit. -The process of entry and exit ends only when price and average total cost are driven to equality. -Long-run equilibrium must have firms operating at their efficient scale (lowest average unit costs)

Legal restrictions:

-One way to prevent new firms from entering a market is to make entry illegal -Patents, licenses, and other legal restrictions imposed by the government provide some producers with legal protection against competition -Governments often confer monopoly status by awarding a single firm the exclusive right to supply a particular good or service >>>Broadcast TV and radio rights >>>State licensing of hospitals >>>Cable TV and electricity on local level

price taker

-Price is determined by market supply and demand → the perfectly competitive firm is a price taker → it must "take" or accept, the market price -*****competitive firm

Why firms stay in business if they make zero profit:

-Profit equals total revenue minus total cost. -Total cost includes all the opportunity costs of the firm. -In the zero-profit equilibrium, the firm's revenue compensates the owners for the time and money they expend to keep the business going.

what must a business do in the long run if they dont make a profit?

-Profit equals total revenue minus total cost. -Total cost includes all the opportunity costs of the firm. -In the zero-profit equilibrium, the firm's revenue compensates the owners for the time and money they expend to keep the business going.

condition of price discrimination

-The demand curve for the firm's product must slope downward → the firm has some market power and control over price -There are at least two groups of consumers for the product, each with a different price elasticity of demand -The producer must be able, at little cost, to charge each group a different price for essentially the same product -The producer must be able to prevent those who pay the lower price from reselling the product to those who pay the higher price

Describe the distinction between explicit and implicit costs:

-The distinction between explicit and implicit costs highlights a difference between how economists and accountants analyze a business. -Economists are interested in studying how firms make production and pricing decisions. Because these decisions are based on both explicit and implicit costs, economists include both when measuring a firm's costs. -By contrast, accountants have the job of keeping track of the money that flows into and out of firms. As a result, they measure the explicit costs but usually ignore the implicit costs.

Long-run Supply Curve

-The expansion in the number and size of firms will shift the industry supply curve rightward in the long run, driving down the price -New firms will continue to enter a profitable industry and existing firms will continue to increase in size as long as economic profit is greater than zero

Why do monopolies price discriminate?

-The first and most obvious lesson is that price discrimination is a rational strategy for a profit-maximizing monopolist. That is, by charging different prices to different customers, a monopolist can increase its profit. In essence, a price-discriminating monopolist charges each customer a price closer to her willingness to pay than is possible with a single price. -The second lesson is that price discrimination requires the ability to separate customers according to their willingness to pay. In our example, customers were separated geographically. But sometimes monopolists choose other differences, such as age or income, to distinguish among customers. -A corollary to this second lesson is that certain market forces can prevent firms from price discriminating. In particular, one such force is arbitrage, the process of buying a good in one market at a low price and selling it in another market at a higher price to profit from the price difference The third lesson from our parable is the most surprising: Price discrimination can raise economic welfare. >>>>price discrimination can eliminate the inefficiency inherent in monopoly pricing.

A general summary of the goal of a firm, firm's behavior, and graphs

-The goal of firms is to maximize profit, which equals total revenue minus total cost. -When analyzing a firm's behavior, it is important to include all the opportunity costs of production. -Some opportunity costs are explicit while other opportunity costs are implicit. -A firm's costs reflect its production process. -A typical firm's production function gets flatter as the quantity of input increases, displaying the property of diminishing marginal product. Total costs get steeper. -A firm's short-run total costs are divided between fixed and variable costs. Fixed costs do not change when the firm alters the quantity of output produced; variable costs do change as the firm alters quantity of output produced. -Average total cost is total cost divided by the quantity of output. -Marginal cost is the amount by which total cost would rise if output were increased by one unit. -The marginal cost eventually rises with the quantity of output. -Average cost first falls as output increases and then rises. -The average-total-cost curve is U-shaped. -The marginal-cost curve always crosses the average-total-cost curve at the minimum of ATC. -A firm's costs often depend on the time horizon being considered. -In particular, many costs are fixed in the short run but variable in the long run.

Firm's cost and profit maximization

-The monopolist can choose either the price or the quantity, but choosing one determines the other -Because the monopolist can select the price that maximizes profit, we say the monopolist is a price maker -More generally, any firm that has some control over what price to charge is a price maker

Why can a monopolist chose either its profit-maximizing price, or its profit-maximizing level of output. Why does choosing one determine the other?

-The monopolist can choose either the price or the quantity, but choosing one determines the other -The profit-maximizing monopolist employs the same decision rule as the competitive firm → the monopolist produces that quantity where total revenue exceeds total cost by the greatest amount

Marginal Revenue, marginal cost and the firm's short run decision on what quantity to supply

-The perfectly competitive firm has no control over price, however, what the firm does control is the amount produced - the rate of output → the question facing the wheat farmer is How much should I produce to earn the most profit? -The firm maximizes economic profit by finding the rate of output at which total revenue exceeds total cost by the greatest amount -We can analyze this profit-maximizing rate of ouput in two ways. >>>>1) By looking at what's happening to Total Costs and Total Revenue >>>>2) By looking at what's happening to Marginal Revenue and Marginal Cost -Another way to find the profit-maximizing rate of output is to focus on marginal revenue and marginal cost >>>>Marginal revenue, MR, is the change in total revenue from selling another unit of output >>>>Marginal cost, MC, is the change in total cost resulting from producing another unit of output Since the firm in perfect competition is a price taker, marginal revenue from selling one more unit is the market price → MR = P -The firm will increase quantity supplied as long as each additional unit adds more to total revenue that to total cost → as long as marginal revenue exceeds marginal cost.

Describe deadweight loss of a company:

-The planner tries to maximize total surplus, which equals producer surplus (profit) plus consumer surplus. Keep in mind that total surplus equals the value of the good to consumers minus the costs of making the good incurred by the monopoly producer. -The demand curve reflects the value of the good to consumers, as measured by their willingness to pay for it. The marginal-cost curve reflects the costs of the monopolist. the socially efficient quantity is found where the demand curve and the marginal-cost curve intersect. -Below this quantity, the value of an extra unit to consumers exceeds the cost of providing it, so increasing output would raise total surplus. -Above this quantity, the cost of producing an extra unit exceeds the value of that unit to consumers, so decreasing output would raise total surplus. -At the optimal quantity, the value of an extra unit to consumers exactly equals the marginal cost of production. -Thus, like a competitive firm and unlike a profit-maximizing monopoly, a social planner would charge a price equal to marginal cost. Because this price would give consumers an accurate signal about the cost of producing the good, consumers would buy the efficient quantity.

Describe a firms decision to enter the market in the long run:

-We can now describe a competitive firm's long-run profit-maximizing strategy. If the firm produces anything, it chooses the quantity at which marginal cost equals the price of the good. Yet if the price is less than the average total cost at that quantity, the firm chooses to exit (or not enter) the market. These results are illustrated in Figure 4. -The competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above the average-total-cost curve.

Describe the u shaped average total cost

-average-total-cost curve is U-shaped because remember that average total cost is the sum of average fixed cost and average variable cost. Average fixed cost always declines as output rises because the fixed cost is getting spread over a larger number of units. Average variable cost usually rises as output increases because of diminishing marginal product. -Average total cost reflects the shapes of both average fixed cost and average variable cost -At very low levels of output, average total cost is very high. Even though average variable cost is low, average fixed cost is high because the fixed cost is spread over only a few units. As output increases, the fixed cost is spread over more units. Average fixed cost declines, rapidly at first and then more slowly. -When the firm produces more than cups per hour, however, the increase in average variable cost becomes the dominant force, and the average total cost starts rising. The tug of war between average fixed cost and average variable cost generates the U-shape in average total cost. -The bottom of the U-shape occurs at the quantity that minimizes average total cost. >>>>Aka efficient scale

regulation

Government may regulate the prices that the monopoly charges. -The allocation of resources will be efficient if price is set to equal marginal cost.

firm's short-run decision to shut down

If the average variable cost of production exceeds the price of all rates of output, the firm will shut down -If the price of wheat were to fall to $2 per bushel, average variable cost exceeds $2 at all rates of output

How is price dicrimination not perfect?

In reality, of course, price discrimination is not perfect. Customers do not walk into stores with signs displaying their willingness to pay. Instead, firms price discriminate by dividing customers into groups: young versus old, weekday versus weekend shoppers, Americans versus Australians, and so on. Unlike those in our parable of Readalot Publishing, customers within each group differ in their willingness to pay for the product, making perfect price discrimination impossible.

long run production

In the long run no resource is fixed.

Production costs as opportunity costs

Non-hidden opportunity costs. -Cash price of a productive resource approximates its opportunity cost. -E.g. wages paid to an employee are at least equal to what the employee could earn in next best alternative. Hidden opportunity costs. -Company owns the building, therefore doesn't pay itself rent, but there still is an opportunity cost -Opportunity cost = alternative rental income -President works for "free", therefore no salary payment -Opportunity cost = foregone income -Company owns its own machines -What it could get by selling the machines and investing the money in a bank account. -Known as the implicit cost of capital

public ownership

Rather than regulating a natural monopoly that is run by a private firm, the government can run the monopoly itself (e.g. in the United States, the government runs the Postal Service).

Why doesn't a monopoly have a SR supply curve like a competitive firm?

Supply curve -The intersection of a monopolist's marginal revenue and marginal cost curve identifies the profit maximizing quantity, but the price is found on the demand curve -Thus, there is no curve that shows both price and quantity supplied → there is no monopolist supply curve

What is the general rule for a company shutting down?

When choosing whether to produce, the firm compares the price it receives for the typical unit to the average variable cost that it must incur to produce the typical unit. If the price doesn't cover the average variable cost, the firm is better off stopping production altogether. The firm still loses money (because it has to pay fixed costs), but it would lose even more money by staying open. The firm can reopen in the future if conditions change so that price exceeds average variable cost.

Describe the relationship between marginal cost and the average cost

Whenever the marginal cost is less than average total cost, the average total cost is falling. Whenever the marginal cost is greater than average total cost, the average total cost is rising.

accounting profit

a firm's total revenue minus explicit costs. If Accounting Profit covers implicit costs too, it is called a Normal Profit. -total revenue minus total explicit cost

economic profit

a firm's total revenue minus its explicit and implicit costs. -total revenue minus total cost, including both explicit and implicit costs -Economic profit is an important concept because it motivates the firms that supply goods and services -making positive economic profit will stay in business. It is covering all its opportunity costs and has some revenue left to reward the firm's owners. When a firm is making economic losses (that is, when economic profits are negative), the business owners are failing to earn enough revenue to cover all the costs of production. Unless conditions change, the firm owners will eventually close down the business and exit the industry.

variable resources

any resources that can be varied in the short run to increase or decrease output.

fixed resources

any resources that cannot be varied in the short run -In the short run at least one resource is fixed -In the long run no resource is fixed.

Explicit costs

are opportunity costs of a firm's resources that take the form of cash payments -input costs that require an outlay of money by the firm

implicit costs

are opportunity costs of using its own resources or those provided by its owners without a corresponding cash payment. -input costs that do not require an outlay of money by the firm

Long-run variable costs

associated with resources which can be varied in the short-run.

long run fixed costs

associated with resources which can't be varied in the short-run

fixed costs

costs that do not vary with the quantity of output produced -incurred even if the firm produces nothing at all.

variable cost

costs that vary with the quantity of output produced

Perfect price discrimination

describes a situation in which the monopolist knows exactly each customer's willingness to pay and can charge each customer a different price. In this case, the monopolist charges each customer exactly her willingness to pay, and the monopolist gets the entire surplus in every transaction.

average fixed costs

fixed cost divided by the quantity of output

total cost

is the market value of the inputs a firm uses in production -Total Costs = Fixed Costs + Variable Costs -TC = FC + VC -Graphically represented as a Total Cost curve

monopoly

is the sole supplier of a product with no close substitutes -The most important characteristic of a monopolized market is barriers to entry → new firms cannot profitably enter the market

marginal product

of any input in the production process is the increase in output that arises from an additional unit of that input. -the increase in output that arises from an additional unit of input -as the number of workers increases, the marginal product declines. -ΔQ/ΔL, assuming all other resources are fixed. -Measured as the slope of a line tangent to the Production Function (Total Product Curve)

short run fixed costs

pay for fixed resources. -Incurred even if output is zero -Includes implicit and explicit costs. -Not fixed in the long run -costs that do not vary with the quantity of output produced -incurred even if the firm produces nothing at all.

short run variable costs

pay for variable resources -Incurred only if variable resources are hired. -If : >>>>>>Wage rate (w) = $100 per worker-day >>>>>>Then.. Variable Cost (VC) = w x L

economies of scale

property whereby long-run average total cost falls as the quantity of output increases.

diseconomies of scale

property whereby long-run average total cost rises as the quantity of output increases

exit

refers to a long-run decision to leave the market.

shutdown

refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. -Thus, the firm shuts down if the revenue that it would earn from producing is less than its variable costs of production. -a firm chooses to shut down if the price of the good is less than the average variable cost of production.

production function

shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.

marginal cost

the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output. -MC = ΔTC / ΔQ -Slope of Total Cost curve

increasing marginal product

the marginal product of a variable input increases as the quantity of input increases

diminishing marginal product

the marginal product of an input declines as the quantity of the input increases. -Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment. -he property whereby the marginal product of an input declines as the quantity of the input increases -Eventually, the kitchen becomes so overcrowded that workers often get in each other's way. Hence, as more workers are hired, each extra worker contributes fewer additional cookies to total production. -The production function's slope ("rise over run") tells us the change in Chloe's output of cookies ("rise") for each additional input of labor ("run"). That is, the slope of the production function measures the marginal product. As the number of workers increases, the marginal product declines, and the production function becomes flatter.

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

efficient scale

the quantity of output that minimizes the average total cost -At higher levels of output, the average total cost is higher

average total cost

total cost divided by the quantity of output -Because total cost is the sum of fixed and variable costs, average total cost can be expressed as the sum of average fixed cost and average variable cost. -tells us the cost of the typical unit, but it does not tell us how much total cost will change as the firm alters its level of production -Total Cost divided by output. -ATC = TC/Q -ATC = AFC + AVC -Slope of ray from origin to point on Total Cost curve.

true or false? If accounting profit equals normal profit then economic profit is zero because accounting profit just covers all opportunity costs (explicit plus implicit)

true

true or false?If accounting profit > normal profit then there is extra revenue above all opportunity costs and the extra profit is what we mean by economic profit

true

average variable costs

variable cost divided by the quantity of output Average Variable Cost = Variable cost divided by output. -AVC = VC/Q -Slope of ray from origin to point on the Variable Cost curve