Microeconomics Final Chapters 11-15 econ 102

What is a Game?

All games share 4 common features: rules, strategies, payoffs and outcome.

Output

The amount of something produced by a person, machine, or industry.

Output, Price, and Profit in the Long Run

The firms in a perfectly competitive are making an economic profit when new firms enter. The entry shifts the short-run market supply curve ________, the market price ________, and each firm's economic profit ________. C) rightward; falls; decreases Suppose firms in a perfectly competitive industry are making economic profits. As a result I. new firms enter the industry. II. the market price falls. III. the economic profits of the existing firms decrease. A) I, II and III *In the long run, for a perfectly competitive market, if economic profit is A) less than zero, then some firms will exit the market and the market supply curve will shift leftward. B) greater than zero, then some firms will enter the market and the market supply curve will shift rightward. C) equal to zero, then there is no entry or exit of firms into or out of the market. D) All of the above answers are correct.* memorize *Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $15, the firm will C) stay in the market in the long run.* *Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $22, the firm will C) stay in the market in the long run.* memorize *Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day and a variable cost schedule in the table above. The profit-maximizing level of output for Sue's Sea Shells by the Sea Shore is B) 204 dozen sea shells by the sea shore per day.* Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day and a variable cost schedule in the table above. The maximum profit attainable by Sue's Sea Shells by the Sea Shore is C) $302.00 per day. Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day and a variable cost schedule in the table above. Based on this information, we can expect the number of firms in the sea shell market to B) increase. *The apple market is perfectly competitive and is in long-run equilibrium. Now a disease kills 50 percent of the apple orchards. In the short run, the price of a bag of apples ________ and the remaining apple growers make ________ economic profit. In the long run, the ________. D) increases; positive; orchards will be replanted and economic profit will return to zero* Suppose some firms in a perfectly competitive market are incurring an economic loss. B) some firms will leave the market and the price of the good will rise. *If perfectly competitive firms exit a market, the A) market supply curve shifts leftward.* *A perfectly competitive firm initially is earning zero economic profit. Then, a decrease in demand for the firm's product occurs. Of the following, in the long run which action listed below is the firm most likely to take? C) Exit the market.* *Suppose that newspaper companies are now required to use recycled paper, which is more expensive than new paper. Which of the following is most likely to result if the newspaper industry is highly competitive? C) The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts leftward in the long run.* *The figure above shows the costs for the typical grower in the perfectly competitive turnip market. Currently, the price of a ton of turnips is $1,200. The demand for turnips increases permanently. The turnip industry experiences neither external economies nor external diseconomies. In the long run, the price of a ton of turnips ________. B) is $1,200 and turnip growers will make normal profit* In the long run, fixed costs are B) zero and variable costs are positive. *In the long run, which of the following is present in a perfectly competitive market? B) many firms in the market In the long run, perfectly competitive firms make zero economic profit. This result is due mainly to which of the following assumptions? B) unrestricted entry and exit For a perfectly competitive firm, in the long-run equilibrium A) P = MC = ATC = MR. n the long run, perfectly competitive firms earn just enough revenue to C) pay all opportunity costs. Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If the market price is 4 cents per page, what is Fast Copy's profit maximizing level of output? C) 48 pages per hour Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If the market price is 4 cents per page, what is Fast Copy's economic profit? C) between $0.51 and $1.00 per hour

Marginal Unit

The unit that is relevant for action

Fixed Cost

A cost that does not change, no matter how much of a good is produced.

Variable Cost

A cost that rises or falls depending on how much is produced.

Monopoly Price Setting Strategies

A major difference between a monopoly and competition is that a monopoly sets its own price. In doing so, the monopoly faces a market constraint: to sell a larger quantity, the monopoly must set a lower price. There are two monopoly situations that create two pricing strategies. Single price and Price discrimination.

Chapter 15: Oligopoly

An oligopoly like monopolistic competition lies between a perfect competition and monopoly. It is a market structure in which natural or legal barrier to entry prevents new firms from entry and a small number of firms are able to compete.

Nash Equilibrium in the Duopolist' Dilemma

Do the firms in he duopoly comply or cheat- that is their dilemma and to answer this we reference the Nash Equilibrium. They think that if the other firm cheats I will incur a loss so to prevent that I also have to cheat. Either they will have zero economic profit or make a large profit so it is a win win and that is usually what they do and they both make zero economic profit.

Changes in Demand and Supply as Technology Advances: An Increase in Demand

Producers of computers are in long run equilibrium making zero economic profit when the arrival of high speed internet brought an increase in demand for computers and what they are made out of. The equilibrium price of a component rises and the producers make economic profit. New firms enter the market. Supply increases and the price stops rising and then begins to fall. Eventually enough firms have entered for the supply and the increased demand to be in balance at a price that allows markets to return to zero economic profit which is long run equilibrium.

Selling Costs and Total Costs

Selling costs are fixed costs and they increase the firms total cost. Like fixed cost of producing a good, advertising costs per unit decrease as the quantity produced increases. The total cost of advertising is fixed but the average cost of advertising decreases as output increases. If ads increase the quantity sold by a large enough amount, it can lower average total cost of ads. If quantity sold increases with ads, average total cost falls. The reason is that although the total fixed costs increased, the greater fixed cost is spread over a greater output, so average total cost decreases.

Redistribution Surplus

Some of the lost consumer surplus goes into the monopoly. The monopoly takes the difference between the higher price, Pm and the comp price Pc not eh quantity cold Qm. So the monopoly takes that part of the consumer surplus. This portion of the loss of consumer surplus in not a loss to society. It is a redistribution from consumers to the monopoly producer.

Profit Maximizing Product Development

The choice to develop a new item is based on a profit maxing calculation. Product development is costly yet it brings revenue- this must be wisely balanced at the margin. The marginal dollar spent on this is the marginal cost of the product development. The marginal dollar that the new product earns for the firm is the marginal revenue of product development. At low level product development the marginal revenue from a better product exceeds marginal cost. At high level product development the marginal cost of a better product exceeds marginal revenue. When MC and MR are equals the firm is undertaking profit maxing product development.

Demand for Firm's Product (Perfectly Competitive Market)

The firm can sell any quantity at market price. The demand curve is horizontal at the market price, the same as the marg rev curve. A horizontal demand curve means perfectly elastic demand so the demand is perfectly elastic. A sweater from campus sweaters is a perfect sub for a sweater from any other factory. Market demand for sweaters is not perfectly elastic; its elasticity depends on the substitutability of sweaters for other goods and services. Questions: The market demand for wheat is not perfectly elastic and the demand for wheat produced by an individual farm is perfectly elastic *If Steve's Apple Orchard, Inc. is a perfectly competitive firm, the demand for Steve's apples has infinite elasticity.* In a perfectly competitive market, the price elasticity of demand for the market demand is ________ and the price elasticity of demand for an individual firm's demand is ________. B) less than infinite; infinite The market for fish is perfectly competitive. So, the price elasticity of demand for fish from a single fishing boat is greater than the elasticity of demand for fish overall. Marginal revenue is equal to the change in total revenue divided by the change in quantity sold. Marginal revenue is defined as the change in total revenue that results from a one-unit increase in the quantity sold. **In perfect competition, the marginal revenue of an individual firm equals the price of the product.** In perfect competition, at all levels of output the market price is the same as the firm's marginal revenue A perfectly competitive firm's marginal revenue equals the market price of its product. For a perfectly competitive firm, no matter how much the firm produces, price always equals marginal revenue. Which of the following is ALWAYS true for a perfectly competitive firm? *P = MR* *In perfect competition, the firm's marginal revenue curve A) cuts its demand curve from below, going from left to right. B) cuts its demand curve from above, going from left to right. C) always lies below its demand curve. D) is the same as its demand curve.* The marginal revenue curve for a perfectly competitive firm is a horizontal line. In the above figure, if the milk industry is perfectly competitive, then the firm's marginal revenue curve is represented by curve H. which is perfectly horizontal Which of the following characterizes a perfectly competitive market? The demand for each individual firm's product is perfectly elastic. The above figure shows the total revenue curve / for Dizzy Discs. The demand curve for CDs sold by Dizzy Discs is horizontal.-- *the market demand curve becomes the marginal revenue curve.*

Repeated Games and Sequential Games

This feature of games turns out to enable real world duopolist to corporate, collude, and make a monopoly profit. The players move simultaneously. In many real world situations player one moves first and the other then moves- the play is sequential rather than simultaneous. This feature of real world games creates a large number of possible outcomes.

Average Total Cost

Total cost divided by the quantity of output produced

An Oligopoly Price Fixing Game: Collusion to Maximize Profits

What is the payoff if both firms (cartel) collude and act like a monopoly. The calculations that the two firms perform are the same as a monopoly performs. The duopoly must agree on how much of the total output each of them will produce. The MR curve is like that of single monopoly. The curve labeled as MC is the same if each firm produces the same quantity of output. These curves are determined by adding together the outputs of the two firms at each level of marginal cost. Because the two firms are the same size the level of marginal cost the industry outputs is twice the output of one firm. To max profits dipoles agree to restrict output to the rate that makes the industry's marginals cost and marginal revenue equal. The demand curve shows that the highest price for which the quantity of items can be sold at a a certain price each. Both firms agree to charge this price. To hold a certain price there needs to be a certain quantity produced by both firms- they have to work together to produce these output rates. Because the firms are identical they will split the quantity in half. Economic profit is made. (reference graphs on p.347) Bottom line: the two firms collude to produce the monopoly profit maxing output and divide that output equally between themselves. Indistinguishable from a monopoly. The economic profit that can be made when two firms collude is the max total profit that can be made by a monopoly.

Small Number of Firms: Interdependence

With a small number of firms, each firms actions influence the profits of all others. Penny had a coffee shop near starbucks, the moment she set up, starbys lost customers so they began to entice them back with offers and promotions. Eventually penny when out of business and starbys remained. Poor penny, but for the time being they were interdependent.

Maximizing Profit output

A firm's max profit output is its quantity supplied at the market price. The quantity supplied is 9 sweaters a day for $25, if the price were higher than $25 the firm would increase production and if the price were lower the firm would decrease production. These profit maximizing responses to different market prices are the foundation of the law of supply: other things remaining the same, the *higher the market price of a good, the greater is the quantity supplied of that good, the lower the price of a good, the smaller is the quantity supplied*. Questions: *A perfectly competitive firm that is producing a positive quantity of a good maximizes its economic profit if it produces so that marginal revenue = marginal cost.* *The difference between a perfectly competitive firm's total revenue and its total cost is greatest at the profit-maximizing level of output.* A perfectly competitive firm maximizes its profit by choosing to produce the quantity that sets MC equal to MR. A firm is producing the profit-maximizing amount of output when it is producing where its ________ curve intersects its ________ curve. A) MC; MR A perfectly competitive firm's economic profit is *maximized* by producing the amount of output such that marginal revenue equals marginal cost. key word is maximized A perfectly competitive firm maximizes its profits by producing the amount of output such that MR = MC. A perfectly competitive firm maximizes its economic profit when it produces the quantity that sets MR = MC. When the firm produces the quantity that sets marginal revenue equal to marginal cost, a perfectly competitive firm is maximizing its profit. As long as it does not shut down, a perfectly competitive firm earns the maximum profit as long as it operates so that its marginal revenue equals its marginal cost. As long as it does not shut down, a profit-maximizing perfectly competitive firm will produce so that marginal revenue equals marginal cost. *Charlie's Chimps is a perfectly competitive firm that produces cuddly chimps for children. The market price of a chimp is $10, and Charlie's produces 100 chimps. The marginal cost of the 100th chimp is will maximize its profit if it produces more than 100 chimps* *For a perfectly competitive firm, as its output increases its marginal revenue does not change and its marginal cost changes. does not change; changes* when output increases its marginal revenue does not change but marginal cost does.* *The table above shows the total cost incurred by Sue's Coat Shop, a perfectly competitive firm. If the market price of a coat is $285, Sue's will maximize economic profit by selling ________ coats a day. D) 9...1910/9=212* i dont understand this one Tammy sells woolen hats in a perfectly competitive market. The marginal cost of producing 1 hat is $24. The marginal cost of producing a second hat is $26 and the marginal cost of producing a third hat is $28. The market price of a hat is $26. To maximize profit, Tammy produces ________ per day. C) 2 hats In the above figure, the firm will produce A) D) 20 units. where MR=MC In the above figure, the marginal cost of the last unit produced by the profit maximizing firm is B) $10. that is the price at marginal cost of producing 20 hats Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip's profit- maximizing output is B) between two and three tons. $2200-$1600=600 subtract total cost 3 from 2. *Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip will D) stay open because the price is above his minimum average variable cost.* *Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip C) incurs an economic loss, but should stay open in the short run.* *Based on the table above which shows Chip's costs, if Chip shuts down in the short run, his total cost will be B) $1,000.* because at 0=1000 Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $15, what is Giuseppe's profit-maximizing output? A) 2 pizzas per hour because 30/2 *Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $20, what is Giuseppe's profit-maximizing output? B) 3 pizzas per hour* i just dont understand these *Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. The firm's shutdown point is C) $8.* I don't understand this Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $12.50 and if Archibald's does not shut down, what is the firm's profit-maximizing output? A) 2 tattoos per hour Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. What is Archibald's shut-down point? D) $12.50 i have no clue why In the above figure, if the price is $16, a profit-maximizing perfectly competitive firm will B) produce 35 units. where the MC curve meets both *Paul runs a shop that sells printers. Paul is a perfect competitor and can sell each printer for a price of $300. The marginal cost of selling one printer a day is $200; the marginal cost of selling a second printer is $250; and the marginal cost of selling a third printer is $350. To maximize his profit, Paul should sell B) two printers a day.*

Questions Regarding Total Revenue, Total Cost and Economic Profit

*In the above figure, the firm is incurring an economic loss at A) point a.* point a is a -20 and the graph looks like an upside u. *In the above figure, the firm is breaking even at points B) b and d.* *In the above figure, when the firm produces output corresponding to point c (highest point of the u), the firm's marginal cost equals its marginal revenue.*

Monopolistic Competition: Ignore Other Firms

A firm in MC must pay attention to the average market price of their products however it doesn't need to concentrate on a single competitor because all the firms are small and no single one of them can dictate the market or other firms for that matter.

Chapter 13: Monopolies

A monopoly is a market with a single firm that produces a good or service with no close subs and that is protected by a barrier that prevents other firms from entering that market.

Efficiency of Advertising and Brand Names

Ads and brandnames are useful because they give information about a product to a consumer and this allows them to make an informed decision but the opportunity cost of the additional information must be weighed against the gain to the consumer. The final verdict about efficiency in MC is ambiguous. In some cases the gains from product variety offset the selling costs and the extra cost arising from excess capacity.

Two Ways of Price Discriminating

Among groups of buyers: people differ in the value they place on the good- their marginal benefit and willingness to pay. Can be associated with features of age, employment status, and other easily identified characteristics. When such a correlation is present firms can profit from price discriminating among different groups. Example: prices of flights where someone doing business in hopes of closing a large deal, their marginal benefit is higher than a leisure traveller thus the business traveler has a flight price that is higher. The airline will discriminate and profit. Among units of a good: Everyone experiences diminishing marginal benefit so if all the units of the good are sold for a single price buyers end up with a consumer surplus equal to the value they get from each unit minus the price paid for it. Like a pizza place that charges a certain price for the first slice and a lower price for the second in accordance with diminishing marginal return, that is how the firm captures some consumer surplus. Reference figures 13.8 and 13.9 on page 309

Antitrusts Laws

Antitrust laws regulate oligopolies and prevent them from becoming monopolies or behaving like monopolies. Two government agencies enforce these laws: the Federal Trade Commission and the Antitrust Division of the US Dept. of Justice. The US has two main antitrust laws the Sherman Act of 1890 and the Clayton Act of 1914.

Price and Output Decisions

As a monopoly sets its price and output at the levels that maximize economic profit. To determine this and output level, we need to study the behavior of both cost and rev as output varies. A monopoly faces the same types of technology and cost constraints as a competitive firm, so its costs (total cost, average cost, and marginal cost) behave just like those of a firm in perfect competition. And a monopoly's revenues (total rev, price, and marginal rev) behave in the way we've just described.

Games and Price Wars

Fluctuations in the market can lead to one firm thinking the other is cheating and thus this begins a price war where they punish until they believe the firm is ready to cooperate again. There will be cycles of price wars and restoration of collusive agreements. Fluctuations in the world price of oil might be interpreted in this way. Some price wars can occur from small new firms entering into an industry that was once a monopoly like where ibm only made computer chips in 95 (there were a monopoly and MC=MR and make econ profit) but in 96 new firms joined the market and the industry became an oligopoly. If the firms maintained intels price and shared the market together they could have both made a profit but the firms were in a prisoners' dilemma so prices fell toward the competition level.

Monopolistic Competition: Small Market Share

In monopolistic competition each firm supplies a small part of total industry output, given this each firm has only limited power to influence the price of its product. Each firm can only deviate slightly from the average.

Chapter 12: Output, price and profit

In the above figure, the vertical distance between the ATC and AVC curves is C) the average fixed costs. Using the above figure, of the prices below, which price enables a perfectly competitive firm to earn the maximum economic profit? D) $16 per unit. *if there are 1,000 rutabaga farms, all perfectly competitive, an increase in the price of fertilizer used for growing rutabagas will C) decrease the total quantity of rutabagas supplied, because each farm's supply curve shifts leftward.* *The short-run market supply curve for a perfectly competitive market is obtained by summing the part of each firm's B) MC curve that lies above its AVC curve* *In a perfectly competitive market, the market supply curve is the sum of the A) supply curves of all the individual firms* *In the short run, a perfectly competitive firm's economic profits C) might be positive, negative (an economic loss), or zero (a normal profit).* In the short run, a perfectly competitive firm A) can either make an economic profit, incur an economic loss, or make zero economic profit. In the short run, a perfectly competitive firm can make an economic profit, incur an economic loss, or make zero economic profit. In the short run, a perfectly competitive firm A) might not make an economic profit. *in the short run, a perfectly competitive firm will make an economic profit as long as A) it maximizes its profit. D) P > ATC.* In the short run, the firm makes zero economic profit when the price is ________ minimum average total cost, makes an economic profit when the price is ________ minimum average total cost, and incurs an economic loss when the price is ________ minimum average total cost. A) equal to; higher than; lower than *A perfectly competitive firm is making an economic profit when A) its total revenue is greater than its total cost. B) the price is greater than the minimum of its average total cost. C) the price is greater than the minimum of its average variable cost. D) Both answers A and B are correct.* *A perfectly competitive firm will have an economic profit of zero if, at its profit-maximizing output, its marginal revenue equals its A) average total cost.* In a perfectly competitive market, which of the following will increase the economic profit the firms make in the short run? B) an increase in market demand In a perfectly competitive market in the short run, as the market demand increases, the firms ________ their output and their economic profit ________. A) increase; increases In the short run, an increase in demand for a good that is sold in a perfectly competitive market B) increases the economic profits of existing firms in the market. Which of the following statements is TRUE? C) If a profit-maximizing firm in a perfectly competitive market is making an economic profit, then it must be producing at a level of output where price is greater than average total cost. memorize *Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $17.50, what is the firm's economic profit? B) $2.50 per hour* Dont know how this was reached. Memorize *The above table shows the per day total cost for Kiley's Baseball Glove Company. Each glove is priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm. At which of the following amounts of output is the economic profit maximized for Kiley's Baseball Glove Company?C) 5* Memorize *The above table shows the per day total cost for Kiley's Baseball Glove Company. Each glove is priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm. Between which two amounts of output does Kiley's Baseball Glove Company make an economic profit?* D) 3 and 6 memorize *Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $15, how much economic profit does the firm make? A) $0* memorize *Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $20, how much economic profit does the firm make? B) $12* The figure above shows Mollie's Mugs' costs of producing mugs. The mug market is perfectly competitive. If the market price of a mug falls to $5 and Mollie's shuts down temporarily, its total variable cost is ________ an hour and it incurs an economic loss of ________ an hour. C) $0; $120 when she shuts down you have to see where the AVC curve is a zero quantity The figure illustrates the short-run costs of Paul's Picture Frames Inc. The picture frame market is perfectly competitive and the market price is $30 a frame. Paul produces ________ frames each week, makes ________ of total revenue, and makes zero ________ profit. D) 300; $9,000; economic in long term MR, MC and ATC are all at the same point In the above figure, if the price is P1 and the firm produced Q1, the firm's economic profit is ________ than if it produced Q2 and ________ than if it produced Q3.(to the right of the ATC) B) less; more *The short-run market supply curve is A) the sum of the quantities supplied by all the firms.* A perfectly competitive firm is definitely making an economic profit when P>ATC.

Temporary Shutdown Decision

MR is less than avg total cost then the firm incurs economic loss. Max profit is at a loss (a min loss). If the firm makes an economic loss, it must decide whether to exit the market or to stay in the market. If the firm decides to stay in the market, it must decide whether to produce something or to shut down temporarily. The decision will be the one that minimizes the firm's loss.

Marginal Cost Curve

Shows how the cost of producing one more unit depends on the quantity that has already been produced

Maximizing Economic Profit

TC and TR both rise as output increases but TC rises at an increasing rate and TR rises at a decreasing rate. Economic profit which equals TR minus TC, increases at small output levels, reaches a max, and then decreases.

Marginal Revenue

The additional income from selling one more unit of a good; sometimes equal to price. The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies. If the firm increases its output from 2 pounds of cookies to 3 pounds, the marginal revenue is ________ per pound of cookies. because at 3 it is 45 and at 2 it is 30 B) $15

The Dilemma

The dilemma arises when each prisoner contemplates the consequences of his decision and puts himself in the place of his accomplice. Each knows it would be best if they both denied however they dont know if they can rely on other another to both deny and risk the 10 yr if one confesses. The dilemma leads to the equilibrium of the game.

A Bad Outcome

The equilibrium of the game with each confessing, is not the best outcome, If neither of them confesses each gets only 2 years for the lesser crime. No better outcome can be achieved because the players can not communicate with each other. They both must confess and this is a bad outcome for both of them. The firms of an oligopoly are in a similar situation to player 1 and 2s' dilemma in the game.

Marginal Social Benefit

The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.

Finding Nash Equilibrium

There best bets are to confess because if they both do then they will get 3 years and if only one does then that player still only gets one year. Because each player realizes this they both confess and both go to jail and the DA solved the case. The prisoners dilemma is called a dominant strategy equilibrium which is an equilibrium in which the best strategy of each player is to cheat (confess) regardless of the strategy of the other player.

Oligopoly Games

We think of oligopoly as a game between 2 or a few players and use game theory to study these markets. Game Theory: is a set of tools for studying strategic behavior- behavior that takes into account the expected behavior of others and the recognition of mutual interdependence. Major research field in economics. Seeks to understand oligopoly as well as social, political, economic, and even biological rivalries by using a method of analysis specifically designed to understand games of all types.

Price Discrimination

You encounter price discrimination selling a good or service at a number of different prices- when you travel, go to the movies, go to a museum or theme park, get a haircut or buy pizza. These are all examples of firms with market power where they set prices of an identical good or service at different levels for different customers. Not all differences are price discrimination: they reflect differences in production costs. Like producing electricity at peak times costs more so they have to charge more but its not discrimination. Charing students and old people at a discount is nice so how does it work for a business: it is economically profitable and increases economic profit. In order to price discriminate like this a firm must sell a product that is not able to be resold; it must be able to identify and separate different buyer types.

**Increasing Profit and Producer Surplus

By getting a consumer to pay a price as close as possible to their max willingness to pay a monopoly captures the consumer surplus and converts it into producer surplus and more producer surplus means more economic profit. Economic Profit= TR - TC Producers surplus is total revenue minus the area under the marginal cost curve. But the area under the marginal cost curve is total variable cost, TVC, or Producer Surplus = TR -TVC You can see that the difference in economic profiting producer surplus is the same as the difference between TC and TVC. But TC minus TVC equals total fixed cost, TFC. So Economic Profit = Producer Surplus - TFC For a given level of TFC, anything that increases producer surplus also increases economic profit.

An Oligopoly Price Fixing Game

Duopoly with only two firms captures the scenario of all oligopolies. Cost and demand conditions were 2 firms produce an item. They have identical costs, they are both perfect sub for each other and the market price of each firms product is identical. The quantity demanded depend on that price-the higher the price the smaller than quantity demanded. The two firms can produce these items at a lower price than either one could alone. Production of 3000 units at a price of $6000 where ATC=MC.

Monopolistic Competition and Perfect Competition

MC and PC have two key differences: excess capacity and Markup Excess capacity: a firm has excess capacity if it produces less than its efficient scale which is the quantity at which average total cost is a minimum- the quantity at the bottom of the u shaped ATC curve. Say an efficient scale is to produce 100 jackets a day. Firm a produces 75 jackets a day and has an excess capacity of 25 jackets a day. But if all jackets were alike and were produced by firms in PC each firm would produce 100 jackets a day (which is the bottom of the ATC curve and means quantity is at an efficient scale). You can see excess capacity in MC everywhere- family restaurants (minus the best of the best) always have some empty tables, you can always get a pizza delivered in 30 minutes, it is rare that every pump in a gas station is being used, real estate agents are ready to help you buy...all of these industries are examples of MCs, they all have excess capacity, they could sell more by cutting prices but would incur a loss. Markups: A firms markup is the amount by which price exceeds marginal cost. In PC price always equals marginal cost and there is no markup. In MC, buyers pay higher prices than in PC and also pay more than marginal cost.

Monopolistic Competition: Entry and Exit

MC has no barriers to prevent new firms from entering the industry in the long run however a firm in MC can not make an economic profit in the long run. When existing firms make an economic profit, new firms enter the industry. This entry lowers and eventually eliminates economic profit. When firms incur economic losses some will exit the industry in the long run. This exit increases prices and eventually eliminates the economic loss. In long run equilibrium firms neither enter or exit the industry and the firms in the industry make zero economic profit.

Marginal Revenue Equals Marginal Cost

MR and MC: When bobbie increases output from 2 to 3 haricuts MR is $10 and MC is $6. MR exceeds MC by $4 and Bobbies profit increases by that amount. If Bobbie increases output yet further, from 3 to 4 haircuts, MR is $6 and MC is $10. In this case MC exceeds MR by $4 so profit decreases by that amount. *When MR exceeds MC, profits increases if output increases. When MC exceeds MR profit increases if output decreases. When MC equals MR, profit is maximized.

A closer look at entry

Making an economic profit signals for new and more firms to enter the market, then supply increases with no change in demand and the curve shifts right. The market price will generally fall due to this. At this lower price each firm makes zero economic profit and the entry stops. Entry results in an increase in market output but each firms output decreases because price falls and each firm moves down the supply curve to produce less.

An Oligopoly Price Fixing Game: Collusion

When a duopoly enters into a collusive agreement which is an agreement between two or more producers to form a cartel to restrict output raise the price and increase profits. Such an agreement is illegal in the United States and is undertaken in secret. The firms in the cartel can pursue two strategies: comply and cheat. A firm that complies carries out the agreement. A firm that cheats breaks the agreement for its own benefit and to the cost of the other firm. Because each has to options there are four different possible combination of actions for the firms: 1. both firms comply 2. both firms cheat 3. one complies and one cheat 4. one cheat and one complies.

Example of Oligopoly

Batteries, Glass container, Breakfast cereals, Computer hard drives, Light Bulbs, Airplane engines, Major Appliances, Dog and Cat food, Soap and Detergent, Telephones. The dividing line between oligopoly and MC is hard to pin down as a practical matter we identify oligopoly by looking a concentration ratios, the HH index and info about geographical scope of the market barriers to entry. The HHI that divided MC from Oli is generally taken to be 2500. An HHI below 2500 is usually an example of MC and a market that exceeds is an oligopoly.

Small Number of Firms

Because barriers to entry exist, oligopoly consists of a small number of firms, each which has a large share of the market. Such firms are interdependent, and they face temptation to cooperate to increase their joint economic profit.

Changes in Demand and Supply as Technology Advances: An Decrease in Demand

A decrease in demand triggers a a lower price, economic losses and exit. Exit decreases supply which raises the rice to its original level and economic profit returns to zero in a new long run equilibrium.

Changes in Demand and Supply as Technology Advances: An Decrease in Demand

A decrease in demand triggers a lower price, economic losses and exit. Exit decreases supply which raises the price to its original level and economic profit returns to zero in a new long run equilibrium.

Firm's output decision

A firms cost curves, total cost, avg cost and marginal cost, describe the relationship between its output costs and a firms revenue curves, total revenue and marginal revenue which describe the relationship between its output and revenue. From the firm's cost and revenue curves we can deduce the firm's output. TR= total revenue and TC= total cost. For example campus sweaters produces 9 sweaters a day with a TC of $183 and a TR of $225, the economic profit is $42 which is higher than any other combination. At an output of less than 4 or over 12 campus sweaters would incur and economic loss. In the above figure, by increasing its output from 124 (Q2) to 161 (Q3), the firm increases its profit. *In the above figure, by increasing its output from 161 (Q3) to 124 (Q2), the firm decreases its profit.* he above figure illustrates a firm's total revenue and total cost curves. Which one of the following statements is FALSE? At output 124 (Q2) the firm incurs an economic loss. The feature of the above figure that indicates that the firm is a perfectly shape of the total revenue curve. Given the total cost and total revenue curves in the above figure, what are the output levels at which the perfect competitor will earn a positive economic profit? between 30,000 (Q2 124) and 80,000 (Q3 161) bushels Given the total cost and total revenue curves in the above figure, what are the output levels at which the perfect competitor will incur economic losses? below 30,000 (Q1 65) bushels and over 80,000 (Q3 161) bushels Given the total cost and total revenue curves in the figure above, what is the profit- maximizing output level? 60,000 bushels (Q2 124)

Perfect Competition

An extreme form of competition in which many firms sell identical products to many buyers. there are no restrictions on entry into the market, established firms have no advantage over new ones, and sellers and buyers are well informed about prices. Each firms supply curve is its marginal cost curve. ***Arises from the min. efficient scale of a single producer is small relative to the market demand for the good or service.*** There is room for many firms. A firm's min. efficient scale is the smallest output at which long run avg cost reaches its lowest level. Produces a good that has no unique characteristics so consumers don't mind which firm they buy from. Highly competitive industries involve: fishing, grocery bag making, paper milling, fresh flower retailing, painting, plumbing, and dry cleaning to name a few. Questions: In perfect competition, the A) market demand for the good or service is large relative to the minimum efficient scale of a single producer. there are many firms that sell identical products there are many firms in it, each selling an identical product. many buyers and many sellers. has many perfect substitutes produced by other firms. no restrictions on entry into the industry Which of the following is TRUE regarding perfect competition? I. The firms are price takers. II. Marginal revenue equals the price of the product. III. Established firms have no advantage over new firms. Ans: I, II and III there are many firms in the market. all firms are price takers. all firms are producing the same identical product. Established firms have no advantage over new firms. Sellers and buyers are well informed about prices. Complete information about prices Example: the market for corn in the United States.an oat farmer in the United States. all firms in the market sell their product at the same price.

Price Fixing Always Illegal

Colluding with competitors to fix price is always illegal and violates anti trust laws. A price fixing cartel is also called a horizontal price fixing agreement. To achieve a monopoly outcome the cartel restrict production and fixes prices at the monopoly level. The consumer suffers because consumer surplus shrinks and the outcome is inefficient because a deadweight loss arises. Other practices raise anti trust concerns but are more controversial and generate debate amount lawyers and economists: resale price maintenance, tying arrangements and predatory pricing.

A Contestable Air Route

If AA has an air route and the charge monopoly price United will come in a set a competitive price in order to gain business away from AA. AA is in a dilemma if they set their price at monopoly prices then United will enter and take away customers to the point where they will lose profit. If AA sets their price as competitive then United wouldn't enter and AA will be able to keep the air route with no completion and no economic loss. AA will make zero economic profit. Another less costly strategy is called Price Limiting: AA will set the highest possible price it can that will inflict loss on the new entrant. Sets price at the highest level that inflicts a loss on the entrant. Any loss is big enough to deter entry so it is not always necessary to set the price as low as the competitive price, United incase a loss of 10 if it enters. A smaller loss would still keep United out. This game is interesting because is shows a monopoly behaving like a competitive industry and serving the social interest without regulation. But the result is not general and depends on the one crucial feature of the setup of the game: at the second stage AA is locked into the price it set a the first stage. These games provide insight into the complex forces that determine prices and profits.

A Repeated Game of Duopoly

If two firms play a game repeatedly then one firm has the power to punish the other for previous bad behavior. One might cheat one week and one might cheat the next ect. There are numerous possibilities for equilibrium like the NE where both cheat and make zero economic profit there is no incentive for a firm to comply one week and detract from cheating because it would mean a loss. A cooperate equilibrium: in which the players make and share the monopoly profit is possible. This might occur if cheating is punished. Two extreme punishments are: tit for tat: (smaller of the two) where one player cooperates in the current period if the other player cooperated in the previous period but cheats in the current period if the other player cheated in the previous period. Both are making monopolistic profits. A more severe punishment is the trigger strategy: in which one player cooperates if the other player cooperates but plays the NE strategy forever thereafter if the other player cheats. Whether the cartel works like a one play game or a repeated game depends primarily on the number of players and the each of detecting and punishing cheating. The larger the number of players the harder it is to maintain a cartel.

A Sequential Entry Game in a Contestable Market

If two firms play a sequential game one firm makes a decision at the first stage of the game and the other makes a decision at the second stage of the game. A contestable market: is a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants. Examples are routes served by airlines and barge companies. These markets are contestable because firms could enter if an opportunity for economic profit arose and could exit with no penalty if the opportunity for economic profit disappeared. The HHI determine how competitive a market is and a contestable market seems uncompetitive but can behave in perfect competition.

Does Resale Price Maintenance Create a Inefficient or Efficient use of Resources?

Inefficient Resale Price Maintenance: If it enables dealers to charge a monopoly price. By setting and enforcing the resale price the manufacturer might be able to achieve the monopoly price. Efficient Resale Price Maintenance: if it enables a manufacturer to induce dealers to priced the efficient standard of service. If a high level of service is provided the price can be set higher but if no service is provided then that justifies a lower price. Consumers have an incentive to buy the higher priced items that was serviced well. The manufacturer can pay a fee to retailers that demonstrate the product with service and leave the retail price to be determined by the competitive forces of supply and demand. It could be costly to monitor the prices of each shop by the manufacturer to ensure they are providing the desired level of service.

The Payoff Matrix

It is similar to the Nash Equilibrium Square, the squares show the payoffs for the two firms- the payoffs and the profits (for the prisoners dilemma). If both firms cheat they get a perfectly competitive outcome where each firm makes zero economic profit. If both comply then both make an economic profit. If one cheat and one complies one loses and more majorly gains.

The Sharman Act of 1890

Made it a felony to create or attempt to create a monopoly or a cartel. During the 1880s lawmakers and the general public were outraged by the practices of the big capitalists of the day like Rockefeller, J.P. Morgan, ad Vanderbilt (robber barons). The most reprehensible things weren't their creation of monopolies but the actions to damage one another. However soon monopolies that damaged the common interest did emerge, Rockefeller has a monopoly on oil and conspired with others to restrict competition which is now illegal.

Mergers and Acquisitions

Mergers: occur when two or more firms agree to combine to create one larger firm and Acquisitions: which occur when one firm buys another firm are common events. Example is when beverage giant InBev bought Anheuser-Busch and created a new combined company. An acquisition occurred when Rupert Murdochs News Corp bought Myspace. Mergers and acquisitions that occur don't create a monopoly but two or more firms might be tempted to try to merge so that they can gain market power and operate like a monopoly. If such a situation arises the FTC takes an interest in the move and stands ready to block the merger. The FTC uses guidelines from the HHI. A market where the HHI is less than 1500 is regarded a competitive and an index between 1500 and 2500 indicates a moderately concentrated market and a merger in this market that would increase the index by 100 points is challenged by the FTC. An index at 2500 indicates a concentrated market and a merger in the market that would increase the index by 200 points is generally blocked.

A Game of Chicken

Not all games have a unique equilibrium, and one that doesn't is a game called chicken. For example, two race cars moving toward each other the first driver swerves to avoid a crash is the chicken. The payoffs are a big loss for both if no one chickens out; zero for both if both chicken out; and zero for the chicken and a gain for the one who stays the course. If player 1 swerves then player 2s best strategy is to stay the course; and if player 1 stays the course, player 2s best strategy is to swerve. An economic example: can arise when research and development (r and d) creates a new tech that cannot be kept secret or patented so both firms benefit from the R and D of either firm. The chicken in this case is the firm that does the R and D. Suppose for example that either apple or nokia spends $9 mil developing a new touch screen tech that both would end up being able to use regardless of which of them developed it. Each firm has two strategies: do the r and d (chicken out) or do not do the r and d. Each entry shows the additional profit (the profit from the new tech minus the cost of the research), given the strategies adopted. If either firm does the r and d each makes zero additional profit. If both firms conduct the r and d each firm makes an additional $5 mil. If one of the firms does the r and d (chickens out) the chicken makes $1 mil and the other firm makes $10 mil. Nokia is better off doing the r and d of apple doesn't and vice versa. NE outcomes: Only one of them does the r and d but we can't predict which one. No firm doing r and d is not NE because one firm would be better off not doing it. To decide which firm does the r and d the firms might flip a coin which is called a mixed strategy.

Three Antitrust Policy Debates

Resale price maintenance: occurs when a distributor agrees with a manufacturer to resell a product at or above a specified min price. Most manufactures sell their products to the final consumer indirectly through a wholesale and retail distribution system. A resale price agreement is also known as a vertical price fixing and in not illegal under the Sharman Act provided it is not anticompetitive. Nor is it is illegal for a manufacturer to refuse to supply a retailer who doesn't accept guidance on on what the minimum price should be. Many manufactures impose min retail prices. The practice is judged on a case by case basis. Tying arrangements: an agreement to sell one product only if the buyer agrees to buy another, different product. With try the only way the buyer can get the one product is to also buy the other product. Microsoft has been accused of tying Internet Explorer and Windows. Textbook publishers tie a website to the book and force students to buy both. Bundles sometime work in order to price discriminate. There is no clear cut way to determine whether a fire is engaging in tying or whether by doing so it has increases its market power and profit and created efficiency. Predatory pricing: is setting a low price price to drive competitors out of business with the intention of setting a monopoly price when the competition has gone. Rockefeller Standard Oil Co. was the first to be accused of this practice in the 1890s and has been claimed often in antitrust cases. Predatory pricing is an attempt to create a monopoly and as such it is illegal under section 2 of the Sherman Act. It is easy to see that PP is an idea and not a reality and economists are skeptical that it actually occurs. They point out that the firm that lowers its price below profit maxing levels loses during the low price period. Even if it succeeds in driving its competition out of business, new competition will enter as soon as the price is increased so any potential gains from a monopoly position is temporary. A high and certain loss is a poor exchange for a temp and uncertain gain. No case PP has been definitively found.

Short Run Market Supply Curve

Shows the quantity supplied by all the firms in the market at each price when each firms plant and the number of firms remains he same. The market supply curve is determined from the individual supply curves. The quantity supplied by the market at a given price is the sum of the quantities supplied by all the firms in the market at that price. To construct we sum the quantities supplied by all the firms at each price. Each of the 1000 firms in the market has a supply schedule like campus sweaters. At prices below $17 a sweater, the market supply curve runs along the y axis. At $17 a sweater the market supply curve is horizontal- supply is perfectly elastic. When the price rises over $17 each firm increases its quantity supplied and the QS by the market increases by 1000x that of one firm. Bubba's BBQ has fallen on some hard times. Bubba has analyzed his past revenue and cost information and knows that if he shuts down, he will incur an economic loss equal to $20,000 in remaining lease payments. Apparently, Bubba's current planning horizon is A) the short run because he still faces some fixed costs.

An Oligopoly Price Fixing Game: What if both firms cheat?

Suppose that both firms cheats, each tells the other that they agree to a collusive agreement and that they are then unable to sell its output at the going price and that it plans to cut its price. Because each cheats each will propose a successively lower price. As long as the price exceeds MC than there is an incentive to increase production and cheat. Only when price = MC is there not further incentive to cheat and price = ATC. Each firm has lowered its price and increased its output to try and gain an advantage over the other firm. Each pushes the process as far as it can without incurring and economic loss. Bottom Line: if both firms cheat on a collusive agreement the output of each firm is producing the same thing and thus making the same economic profit as before because they are doing the same thing.

The Clayton Act of 1914

The Clayton Act's ban on attempting to monopolize supplemented the Sherman Act and clarified/strengthened that antitrust laws. Upon establishing the Clayton Act the FTC also was established which was charged with preventing monopoly practices that would damage consumers. The Robinson Patman Act of 1936 and the Kefauver Act of 1950 also outlawed specific practices and provided even greater precision to the antitrust laws. These acts prohibit the following practices in they substantially lessen competition or create a monopoly: 1. price discrimination 2. contracts that require other goods to be bought from the same firm (called tying arrangements) 3. contracts that require a firm to buy all its requirements of a particular item from a single firm (called requirement contracts) 4. contracts that prevent a firm from selling competing items (called exclusive dealing) 5. contracts that precent a buyer from reselling a product outside a specified area (called territorial confinement) 6. acquiring a competitor's shares or assets 7. becoming a director of a competing firm.

Marginal Social Cost

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

Product Development

The purpose of new firms entering into the industry keeps new firms on their toes, in order to gain economic profit they must continuously seek ways of keeping one step ahead of imitators (which are firms who imitate successful products). To do this a firm must develop a new product or develop significant improvements to existing products. A firm that introduces a new improved or differentiated items face demand that is less elastic and is able to increase its price and make an economic profit. Imitations will eventually roll out which are a close sub and compete away the economic profit from the initial advantage..and the process begins all over again.

Total Fixed Cost

The sum of those costs that are fixed in total - no matter how much is produced. The cost of the firm's fixed factors of production - the cost of land, capital, and entrepreneurship. *In the above table, the firm's total fixed cost of production is . B) $4.00. Because that is the smallest amount needed to stay open at 0 units it cost $4* no clue why *In the above table, the average fixed cost at 4 units of output is A) $1.00. 4 units at $17.20* no clue why *you take TFC and divide buy number of units. = AVC* In the above table, the average variable cost at 2 units of output is B) $2.00. Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's fixed cost is equal to C) $16,000.

A closer look at exit

This economic loss signals for firms to exit the market. As this happens supply decreases and the market supply curve shifts leftward toward S. Supply decreases with no change in demand., the market price gradually rises from $17 to $20 a sweater. At this higher price losses are eliminated., each firm makes zero economic profit and exit stops. Exit results in a decrease in market output but each firm's output increases because the price rises and each firm moves up the supply curve and produces more. Because the number of firms decreases the market produces less.

The firm's decisions

To achieve max economic profit a firm must decide: how to produce at min cost. what quantity to produce and whether to enter or exit a market. Makes the first decision by operating with a plant that minimizes the long run avg cost by being on its long run avg cost curve.

The Shut Down Point

The lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs. The point where a firm is indifferent between producing and shutting down, where the price of a good or service is equal to the minimum point on the average variable cost curve. If the price falls below min AVC the firm shuts down temporarily and continues to incur loss equal to total fixed cost. At prices above min AVC but below average total cost the firm produces the loss minimizing output and incurs a loss but a loss that is less than total fixed cost. *The table above provides cost data for a perfectly competitive firm producing toy cars. The firm is producing non-divisible goods. If the market price is $70 and the firm is a profit maximizer, the firm can earn a maximum economic profit of ________. A) a loss of $500* By producing less, a firm can reduce its variable costs but not its fixed costs. The costs incurred even when no output is produced are called A) fixed costs. *A firm's shutdown point is the quantity and price at which the firm's total revenue just equals its B) total variable cost.* *A perfectly competitive firm shuts down if the price of its product is B) less than its minimum average variable cost.* *The owners will shut down a perfectly competitive firm if the price of its good falls below its minimum C) average variable cost.* *A firm's shutdown point is the output and price at which the firm just covers its B) total variable cost.* For a perfectly competitive firm, the shutdown point is the A) amount of output at which price equals minimum average variable cost. *A perfectly competitive firm's short-run shutdown point is the level of output at which price equals the minimum average variable cost.* A perfectly competitive firm's short-run shutdown point is the level of output at which C) price equals the minimum average variable cost. In the short run a perfectly competitive firm will B) shut down if P < ATC. A perfectly competitive firm will shut down rather than produce if its A) price is less than average variable cost. In the short run, a perfectly competitive firm will shut down if C) total revenue is less than total variable cost. In the short run, a perfectly competitive firm will shut down if at the profit maximizing quantity the A) P < AVC. *if a perfectly competitive firm decides to shut down in the short run, its loss will equal its C) total fixed cost, TFC.* if a firm that shuts down and produces no output incurs a loss equal to its A) total fixed costs. *In the short run, a firm will B) produce and incur an economic loss if its total revenue covers its total variable cost but not its total cost.* The shutdown point occurs at the level of output for which the ________ is at its minimum. B) average variable cost A perfectly competitive firm is more likely to *shut down during a recession*, when the demand for its product declines, than during an economic expansion, because during the recession it might be unable to cover its. B) variable costs. If the price of its product falls below the minimum point on the AVC curve, the best a perfectly competitive firm can do is to D) shut down and incur an economic loss equal to its total fixed cost. *When a perfectly competitive firm produces the profit-maximizing output and it is at its shutdown point, the firm's ________. B) total revenue equals its total variable cost* At its shutdown point, a perfectly competitive firm earns total revenue that C) just equals its total variable cost. *If the market price of a perfectly competitive firm's product is below its average variable cost, then the firm's C) total revenue if it stayed open would be less than its total variable costs.* *In the short run, a perfectly competitive firm NEVER B) incurs a loss greater than its total fixed costs.* *In the short run, a perfectly competitive firm might D) operate even though it is incurring an economic loss.* In the short run, a perfectly competitive firm B) incurs an economic loss if it shuts down. *A perfectly competitive firm will operate and incur an economic loss in the short run if A) the loss is smaller than its total fixed costs* **If the price of its product just equals the average variable cost of production for a competitive firm, B) total revenue equals total variable cost and the firm's loss equals total fixed cost.** *If the market price in a perfectly competitive market is less than a firm's minimum average variable cost, then the firm's total revenue will always ________. D) be less than its total variable cost* *Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $12.50 what is the firm's economic profit? C) -$10 per hour* no clue Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $12, the firm Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $17.50 what is the firm's profit-maximizing output? B) 3 tattoos per hour The figure above shows a perfectly competitive firm. In the short run, the firm will shut down B) only if the AVC of producing 10 units is more than $20. *The figure above shows a perfectly competitive firm. The firm will shut down in the short run if total fixed costs C) are less than $200. this makes no sense bc why would it shut down if total costs are less than that makes no fcuking sense. total fixed costs are like rent or equipment and if they are smaller than that is better why would a company shut down if its costs decrease?!?!?!!?!? Consider the perfectly competitive firm in the above figure. The shutdown point occurs at a price of A) $11.00. Consider the perfectly competitive firm in the above figure. What will the firm choose to do in the short-run and why? C) stay in business because the firm's economic loss is less than fixed costs *Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's shut down in the short run? D) No, because he can cover all of his variable costs. Answer: D*

An Oligopoly Price Fixing Game: One Firm Cheat on a Collusive Agreement

With price greater than marginal cost either firm might think of trying to increase profit by cheating on the agreement and producing more than the agreed amount. How it works: firm one tells firm 2 that demand has decreased and that it cannot sell the agreed upon about of an item and plans to cut its price. Because the two firms have the same products firm 2 matches firm 1s price cut but still produces only the agreed upon amount. In fact, there has been no decrease in demand firm 1 plans to increase output which it knows will lower the price and firm 1 wants to ensure than firm 2s output remains at the agreed upon level. The complier (firm 2) incurs economic loss and the cheat (firm 1) makes an economic profit. In this case the industry output is larger than the monopoly output for the cheat and the monopoly output and the industry price is lower than the monopoly price. The total economic profit made by the industry is also smaller than the monopoly's economic profit. The industry profit is less than the profit would be if it was a monopoly but it is very unevenly distributed.

Price and Output in Monopolistic Competition: Profit Maximizing Might be Loss Minimizing

A firm can have a level of demand that is too low for it to make an economic profit. The firm in in MC looks like a single price monopoly, it produces the quantity at which marginal revenue equals marginal cost and then charges the price at which buyers are willing to pay for that quantity as determined by the demand curve. The key difference between a monopoly and MC is what happens next when firms either make an economic profit or incur an economic loss. (like Excite@home internet service on p.327 which quantity demanded $40 but needed to meet ATC at $50 so they incurred an economic profit loss)

Price and Output in Monopolistic Competition: Long Run- Zero Economic Profit

A firm like ecite@home is not going to incur an economic loss for long and eventually it will go out of business. There is no restriction on entry into MC so if firms in an industry are making economic profit other firms have an incentive to enter that industry. As the gap and other firms start to make items similar to those made by its competition the demand for that item decreases. The demand curve and marginal revenue curve shift leftward and as that shift happens the profit maxing quantity and price fall to where no economic profit is made. When all firms in the industry are making zero economic profit there is no incentive to enter and this is long term equilibrium. When the demand curve touches the ATC curve at the quantity at which MR = MC the market is in long run equilibrium. If demand is so low that firms are incurring economic losses there will be exits until there is a reestablishing of zero econ profit. As firms leave demand rises and shifts rightward on the graph.

Product Differentiation

A firm practices product differentiation if it makes a product that is slightly different from the products of competing firms. It is a close sub but NOT a perfect sub (remember that) for the products of the other firms. Some people are willing to pay more for a variety of a product so when price rises the quantity demanded of that variety decreases but it does not always decrease to zero. Example would be running shoes like nike, adidas, reebok, ect if nike raises the price of their shoe than the demand for that will decrease and people will buy another brand however nike will not disappear as a result, unless they raise a price by a large enough amount.

Advertising

A firm with a differentiated product needs to ensure that its customers know how its product is different from the competition. A firm also might attempt to create a consumer perception that its product if different, even when that difference is small. Firms use advertising and packaging to achieve this goal. Advertising expenditures: Firms in MC incur huge costs to ensure that buyers appreciate and value the differences between their own products and those of their competitors. So a large portion of the price we buy an item for is covering the cost of selling it and this proportion is increasing. Advertising on tv, radio, internet, papers ect. are the main selling costs. Selling costs include- malls, glossy catalogues, brochures, salaries, airfare, and hotels of salespeople. Advertising expenditure effects a firm in two ways: they increase costs and they change demand.

Loss Comparisons

A firm's economic loss equals total fixed cost, TFC, plus total variable cost minus total revenue. So: Economic loss= TFC + (AVC - P) xQ Economic loss= TFC + TVC - TR =TFC + (AVC-P) x Q If the firm shuts down it will produce no output (Q=0). The firm has no variable costs and no revenue but it may pay its fixed costs, so its economic loss equals total fixed cost. If a firm produces, then in addition to fixed cost it will incur its variable costs. But, it also relieves revenue. Its economic loss equals total fixed cost--the loss when shut down--plus total variable cost minus total revenue. If total variable cost exceeds total revenue this loss exceeds total fixed costs and the firm has to shut down. If average variable cost exceeds price, this loss exceeds total fixed cost and the firm shuts down.

Economic Profit and Revenue

A firm's total goal is to max. economic profit which is equal to total revenue minus total cost. Total cost is the opportunity cost of production which includes normal profit. Questions: *The goal of a perfectly competitive firm is to maximize its revenue.* *Economic profit is equal to total revenue minus total opportunity cost* The difference between a firm's total revenue and its total opportunity cost is the firm's economic profit. A competitive firm's total revenue minus its total opportunity cost equals its economic profit Total economic profit is total revenue minus total opportunity cost. *The economic profit of a perfectly competitive firm is less than its total revenue.* In perfect competition, a firm that maximizes its economic profit will sell its good at a price that is at the market price. *The return that the entrepreneur can obtain in the best alternative business is called the normal profit.* *A perfectly competitive firm is definitely making an economic profit when B) P > ATC.* For prices above the minimum average variable cost, a perfectly competitive firm's supply curve is C) the same as its marginal cost curve. In the figure above, a firm is operating at point A on the graph. At point A, the firm's average cost curve C) is horizontal. Carol's Candies is producing 150 boxes of candy a day. Carol's marginal revenue and marginal cost curves are shown in the figure above. B) decrease her output. because 150 is to the right of the MC curve

Total Revenue

A firm's total revenue equals the price of its output multiplied by the number of units of output sold (price x quantity). If campus sweaters sells 9 sweaters and the sweaters cost $25 a piece, its total rev would be 9 x 25. Total rev is shown by a supply looking upward sloping straight diagonal line and labelled TR. Point a on the line lays at 25 (y) and 9 (x). *TR/output= price* TR-TC= Economic Profit or Loss In a perfectly competitive market marginal revenue is constant. In a table you would subtract the TR1 from TR2 and the difference = MR If output is 2 and the TR is 60 and the TC is 69 what is the price? We divide the TR by the output and that gives us 60/2=30 *A perfectly competitive firm has a total revenue curve that is upward sloping with a constant slope.* Graph of a slope going like so / The above figure shows a firm's total revenue line. The firm must be in a market with perfect competition. For a perfectly competitive firm, curve A in the above figure is the firm's *total revenue curve.* The figure above portrays a total revenue curve for a perfectly competitive firm. Curve A is straight because the firm is a price taker. The figure above portrays a total revenue curve for a perfectly competitive firm. The firm's marginal revenue from selling a unit of output equals $2.00. *Because it is $20 (P) /10 (Q)= TR* The figure above portrays a total revenue curve for a perfectly competitive firm. The price of the product in this industry equals $2.00. In the above figure showing a perfectly competitive firm's total revenue line, the does not change as output increases. Quantity sold 5, 6, 7 Price $15, $15, $15 In the above table, if the firm sells 5 units of output, its total revenue is $75. *because 5x15=75* In the above table, if the quantity sold by the firm rises from 5 to 6, its marginal revenue is $15. The first table shows the market demand schedule for CDs, and the second table shows the cost structure of each firm. The CD market is perfectly competitive and there are 100 identical firms. The market price of a CD is ________, and ________ CDs are produced and sold. B) $9.50; 15,000

The Prisoners' Dilemma

A particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial Rules: Two prisoners are convicted of a crime they are placed in separate rooms either they can both confess to the crime and get 3 years or one can confess while the other doesn't and the one gives the other away and one will get one year and the other will get 10 years. Strategies: in game theory strategies are all the possible actions of each player. Player 1 and 2 each have two possible actions: 1. confess to the crime or 2. deny having anything to do with it because there are two players each with two strats there are four possible outcomes: 1. both confess. 2. both deny 2. player 1 confesses and 2 denies 4. player 2 confesses and 1 deneis. Payoffs: Each prisoner can work out his payoff in each other situations and we can tabulate the four possible payoffs for each of the prisoners in what is called a payoff matrix for the game. A playoff matrix: is a table that shows that payoffs for every possible action by each player for every possible action by each other player. Outcome: the choices of the players determine the outcome of the game. To product the outcome we use an equilibrium idea proposed by John Nash who was the subject of a beautiful mind. The Nash Equilibrium player 1 takes the best possible action given the action of player 2 and player 2 takes the nest possible action given the action of player 1. In this particular case the Nash equilibrium occurs when player 1 makes his best choice given player 2s choice and when player 2makes his best edison given player 1s choice. To compare all possible outcomes assc with each choice and climate those that are dominated- that are not as good as some other choice. Let's find the Nash equilibrium for the prisoners' dilemma game.

A Firm's Supply Curve

A perfectly competitive firm's supply curve shows how its profit maximizing output varies as the market prices varies over things remaining the same. It is derived from the firm's MC curve and AVC curve. In SHORT: Can't produce below minimum AVC- firm will temp shutdown, can produce above minimum AVC and will continue to do so if the price exceeds it and will move up the MC curve to maximize profit. If the price equals AVC they can either shutdown or produce the min AVC- this equals the shutdown point, T. When price exceeds min AVC (more than $17 for campus sweaters) the firm maximizes profit by producing output at which marginal cost equals price. If price rises the firm increases its output, it moves up along its MC curve. When the price is less than min AVC (less than $17) the firm maximizes profit by temporarily shutting down and producing no output. The firm produces zero output at all prices below min AVC. When the price equals min AVC the firm maximizes profit by either shutting down temporarily and producing no output or by producing the output at which the AVC is at a minimum-the shutdown point, T. The firm never produces a quantity between zero and the quantity at the shutdown point T. In the above figure, if the price is P1, the firm will produce C) where MC equals P1. In the above figure, if the price is P1, the firm maximizes its profit by producing C) where MC equals P1. *In the above figure, if the firm increases its output from Q1 to Q2, it will increase its profit.* *In the above figure, if the firm increases its output from Q2 to Q3, it will C) decrease its profit.* i dont get why but ok, maybe bc increasing quantity but keeping it the same price.

Single Price Monopoly

A single price monopoly is a firm that must sell each unit of its output for the same price to all its customers. De Beers sells diamonds (of a given size and quality) for the same price to all its customers. If it tried to sell at a low price to some customers and not others only the low customers would buy. De Beer is a single price monopoly.

Single Price Monopoly: Marginal Revenue and Elasticity

A single price monopoly's marginal revenue is related to the elasticity of demand for its good. The demand for a good can be elastic (the elasticity is greater than 1) inelastic (the elasticity is less than 1) or unit elastic ( the elasticity is equal to 1). Demand is elastic if a 1 percent fall in the price brings a greater than 1 percent increase in the quantity demanded. demand is inelastic if a 1 percent fall in the price bring a less than 1 percent in the quantity demanded. If demand is elastic, a fall in the price brings an increase in total revenue- the revenue gain from the increase in quantity sold outweighs the revenue loss from the lower price- and marginal revenue is positive. If demand is inelastic, a fall in the price brings a decrease in total rev- the rev gain from the increase in Q sold is outweighed by revenue loss from the lower price- and marginal rev is negative. If demand in unit elastic total rev does not change- the rev gain from the increase in the quantity sold offsets the rev loss from the lower price and marginal rev is zero.

Using Advertising to Signal Quality

Ads are a signal that this is a high quality product. A signal is an action taken by an informed person (or firm) to send a message to uninformed people. Think about the colas: Coke and Oke, Oke does not advertise because they know they do not have a high quality product and if they released ad the people who tried it would discover its poor quality and switch back to what they were drinking. Coke knows its product is high quality so they spend money convincing people of the same thing and once the consumer tries it they know they have them hooked. The flashy ad says that it really is good without saying anything about it. Notice that ads are a signal that need to be expensive and hard to miss (they don't have to say anything about the product). The signaling theory predicts much of the ads we see today.

Selling Costs and Demand

Advertising and other selling effort change the demand for the firm's product but how does this occur? Advertising increases demand by informing people about the quality of its products or by persuading people to switch from the old product version they were using. All firms in MC advertise because they all seek to persuade customers that they have the best deal. If ads enable a firm to survive than more firms will come into the market. To the extent that the number of firms do increase then the ads decrease demand faced by any one firm and also makes demand for any one firms product more elastic. Ads can lower ATC as well as lower the markup and the price. (reference graph on p.332)

Marginal Analysis and the Supply decision

Another way to find profit maximizing output which compares marginal revenue MR and marginal cost MC. As output increases the firms marginal rev is constant but marginal cost eventually increases. If MR>MC then the revenue from selling one more unit exceeds the cost of producing it and an *increase in output increases economic profit.* If MR<MC then the revenue from selling one more unit is less than the cost of producing that unit and *a decrease in output increases economic profit.* If MR=MC then the revenue from selling one more unit equals the cost incurred to produce that unit. *Economic profit is maximized* and either *an increase or a decrease in output decreases economic profit.* When campus sweaters increases output from 9 to 10 sweaters a day it increases marginal cost ($27) and decreases marginal revenue ($25) so by producing that 10th sweater economic profit decreases. When producing from 8 to 9 sweaters marginal cost ($23) is less than marginal revenue ($25) and this increase economic profit by $2 from $40 to $42. Campus sweaters maximizes economic profit when it produces 9 sweaters a day at which MR=MC. Questions: A perfectly competitive firm maximizes its profit by producing the output at which its marginal cost equals its marginal revenue. *For a firm in perfect competition, a diagram shows quantity on the horizontal axis and both the firm's marginal cost (MC) and its marginal revenue (MR) on the vertical axis. The firm's profit-maximizing quantity occurs at the point where the: MC curve intersects the MR curve from below, going from left to right.* A perfectly competitive firm is producing at the point where its marginal cost equals its marginal revenue. If the firm boosts its output, its total revenue will ________ and its profit will ________. B) rise; fall *A perfectly competitive firm is producing at the point where its marginal cost equals its marginal revenue. If the firm boosts its output, its total revenue will rise and its total variable cost will rise even more.* *A perfectly competitive firm's marginal revenue exceeds its marginal cost at its current output. To increase its profit, the firm will increase its output.* A perfectly competitive firm's marginal cost exceeds its marginal revenue at its current output. To increase its profit, the firm will decrease its output *A perfectly competitive firm is producing more than the profit-maximizing amount of its product. You can conclude that its marginal cost exceeds the price of the product.* If a perfectly competitive firm finds that it is producing an amount of output such that MR > MC and P > AVC, it will increase its output. If marginal revenue exceeds marginal cost, to increase its profit the firm will A) decrease its output. increase its output. *If the price exceeds the average variable cost, by producing the level of output such that marginal revenue equals marginal cost, earn the largest profit possible.* In a perfectly competitive market, if a firm finds it is producing an amount of output such that its marginal cost exceeds its price, it will decrease its output to increase its profit. Jane's Garage Cleaning is a perfectly competitive firm that currently cleans 40 garages a week. Jane's marginal cost is less than the price she charges. Jane can increase her profit if she cleans more than 40 garages a week. Bob's Lawn Care Services is a perfectly competitive firm that currently mows 22 lawns a week. Bob's marginal cost exceeds the price he charges. Bob can increase his profit if he mows fewer than 22 lawns a week. The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies. If the firm is producing 1 pound of cookies, to maximize its profit it will A) increase its output. The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies. If the firm is producing 4 pounds of cookies, to maximize its profit it will B) decrease its output. The table above shows some of the costs for a perfectly competitive firm. The firm will produce 9 units of output if the price per unit is. 1000 (TVC)/ 500 (TFC) B) $200. The table above shows some of the costs for a perfectly competitive firm. If the price is $160 per unit, how many units of output will the firm produce? Just divide TVC/TFC to get the number the question is asking for 800/500=1.6 or 160 A) 8 Consider the perfectly competitive firm in the above figure. The profit maximizing level of output for the firm is equal to C) 17 units. where MR=MC

Examples of Monopolistic Competition

Audio and video equipment, men and boys clothing, book printing, seafood, china and pottery, frozen food, jewelry, athletic goods, commercial printing, and signs. Each of these have 4 largest firms in their group which make up about half (41%) of the industry and then the next 4 largest make up another sizable chunk and the the next 12 largest are the rest of them which is a smaller chunk. This list with the 20 (72%) largest in each group is called the Herfindahl-Hirschman Index.

Choices, Equilibrium, and Efficiency: Choices

Consumers allocate their budgets to get the most value possible out of them. We derive a consumers demand curve by finding how the best budget allocation changes as the price of the good changes. So consumers get the most value out of their resources at all points along their demand curves. If the people who consume a good or service are the only ones who benefit from it, then the market demand curve measures the benefit of the entire society and is the marginal social benefit curve. Competitive firms produce whatever will maximize profits. We derive a firms supply curve by finding the profit maxing quantity at each price. So firms get the most value out of their resources at all points along the SC. If firms that produce a good or service bear all the costs of production then the market SC measures the marginal cost to the entire society and the market supply curve is the marginal social cost curve.

Entry and Exit

Entry occurs when new firms come into the market and the number of firms increases, Exit occurs when existing firms leave a market and the number of firms decreases. Firms respond to economic profit or loss by either entering or exiting the market. New firms enter and existing firms continue to generate profit. Firms exit the market in which they are incurring an economic loss. Temp economic profit or loss do not trigger entry and exit, it is the prospect of persistent economic profit or loss that triggers entry and exit. E and E changes the market supply which influences price and the quantity produced by a firm and its prospective economic profit or loss. When firms enter the supply increases the market supply curve shirts right and vice versa where market price rises and economic loss decreases. With entry when economic profit reaches zero entry stops. With exit eventually economic loss is not longer happening and exiting stops.

Monopolistic Competition: Collusion Impossible

Firms in MC would like to conspire to fix a higher price which is called collusion. But, because the number of firms in MC is large coordination of such a collective effort is not possible.

Price Takers

Firms in perfect competition are price takers. A price taker is a firm that cannot influence the market price because its production is an insignificant part of the total market. An example would be wheat where no matter where you produce it, it is all the same from the US to Ukraine. Wheat goes for $4 a bushel, try to sell it for $4.10 and no one will buy try to sell for $3.90 and you'll sell you in an instant. Here you take the market price. Questions: The assumption that a perfectly competitive industry has many sellers, each selling an identical product, leads to the conclusion that firms are price takers. When a firm is considered to be a "price taker" that means that the firm cannot influence the market price of the good that it sells. Each individual firm is too small to affect the market price. Each firm takes the good's price as given to it by the market. Price taking behavior exists in competitive markets. *In perfect competition, the market demand for the good *is not* perfectly elastic and the demand for the output of one firm *is* perfectly elastic. *Firms in perfectly competitive industries have a ________ individual demand curve when the price is on the vertical axis and the quantity is on the horizontal axis. The shape of the curve is result of the firm being a ________. A) horizontal; price taker An individual firm in perfect comp determines the quantity it sells in the marketplace but has no influence over its price. The market for lawn services is perfectly competitive. Larry's Lawn Service cannot increase its total revenue by raising its price because the demand for his lawn services is *perfectly elastic* *The price elasticity of demand for any particular perfectly competitive firm's output is infinite* The demand for wheat from farm A is perfectly elastic because wheat from farm A is a perfect substitute for wheat from farm B. In a perfectly competitive industry, the demand for a single firm's product is perfectly elastic because this firm's output is a perfect substitute for any other firm's output. *In perfect competition, the elasticity of demand for the product of a single firm is infinite; In perfect competition, the elasticity of demand for the product of a single firm is infinite because many other firms produce identical products.* Each firm's output is a perfect substitute for the output of any other firm. *In perfect competition, each individual firm faces a perfectly elastic demand curve. Which is a horizontal line.* In perfect competition, an individual firm faces a perfectly elastic demand. *In a perfectly competitive market, which of the following determines the market price? market demand and market supply* *In perfect competition, the price of the product is determined where the market supply curve and market demand curve intersect.*

Perfect Price Discrimination

Firms try to capture an every larger part of consumer surplus by devising a host of special conditions each one of which appeals to a tiny segment of the market but at the same time excludes others from taking advantage of a lower price. The more consumer surplus a firm is able to capture the closer it gets to the extreme case called Perfect price discrimination: which occurs if a firm can sell each unit of output for the highest price someone is willing to pay for it. In this extreme case consumer surplus is eliminated and captured as producer surplus. With PPD something special happens to marginal revenue- the market demand curve becomes the marginal revenue curve. This occurs because the monopoly cuts the price to sell larger quantities, it sells only the marginal unit at the lower price. All the other units continue to be sold for the highest price that each buyer is willing to pay. So for the PPD the MR = P and the market demand curve becomes the monopoly's marginal rev curve. Monopolies increase its output to the quantity demanded at marginal cost, extract the entire consumer surplus on that quantity and maximize economic profit.

Price and Output in Monopolistic Competition: The Firm's Short Run Output and Price Decision

How do firms decide the quantity of an item to produce and the price at which to sell at? In the short run a firm in MC makes its output and price decision just like a monopoly firm does. The demand curve tells un the quantity demanded at each given price of other items. It is not the demand curve for the item in general. The MR curve shows the MR curve associated with the demand curve for the item. It is derived just like the marginal revenue curve of a single price monopoly. The ATC curve and the MC curve show the average total cost and the marginal cost of producing the items. The firm's goal is to maximize its economic profit. In order to do so it produces the output at which marginal revenue equals marginal cost. (reference graph to understand better, p.326) The item's price that people are willing to pay is determined by the demand curve. The amount produced is determined by the MC and MR equaling eachother on the graph, we use that amount on the x axis and follow it up to where it meets on the demand curve and find our price.

Efficiency and Product Development

If profit maxing of product development also the efficient amount? Efficiency is met when the new products MSB=MSC. MSB of the new item will be the rise in price one is willing to pay and the MSC is the amount the firm is will in pay for the improvement. In MC the marginal revenue is less than the price so product development is not pushed to its efficient level. In MC the improvements are futile and usually low costing cosmetic tweaks like a change in scent of laundry detergent and even when there is a truly valid improvement its never as good as the customer would like or for which the customer is will to pay a higher price.

Larger Number of Firms

In monopolistic competition, as in PC, the industry consists of a large number of firms. The presence of a large number of firms has three implications for the firms in the industry: small market share, ignore other firms and collusion impossible.

Profits and Losses in the Short Run

In short run equilibrium a firm can produce profit maximizing output, it does not mean that it ends up making an economic profit. It might but it also might break even or incur an economic loss. Economic profit (or loss) per sweater is price, P, minus ATC. So economic profit (or loss) is (P-ATC)xQ. If price exceeds ATC than it makes a profit. If price is less than ATC it incurs an economic loss. Reference figure 12.8 for more visuals. In the above figure, the firm's total economic profit is equal to A) $60. where at MR and MC 20x10=200 and at average total cost it equals 7 and 20 which is 140 so 200-140= 60

Average Variable Cost Curve

Initially falls because of increasing marginal returns but then rises because of diminishing marginal returns. Is generally U shaped. Production is relatively inefficient at low levels of production, become more efficient at greater levels of production, but then become inefficient again due to crowding.

Chapter 14 Monopolistic Competition

Is a market structure in which: - a large number of firms compete -each firm produces a differentiated product -firms compete on product quality, price, and marketing -firms are free to enter and exit the industry Most real world markets are competitive but not perfectly competitive because firms in these markets have some power to set their prices. as do monopolies.

Marginal Revenue

Is the change in total revenue that results from a one unit increase in the quality sold. Marg. revenue is calculated by dividing the change in total rev. by the change in quantity sold. (Total rev./∆ quantity). When the quantity sold increases from 8 to 9 sweaters total rev increase from $200 to $225, so marginal rev is $25. Because the firm is in perfect competition with all others, it is a price taker and the change in total rev that results from a one unit increase in the quantity sold equals the market price. In perfect competition, the firm's marginal rev equals the market price. In the above figure, the line represented by the "1" is the A) average fixed cost. The horizontal line B) marginal revenue. memorize:The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What is Evan's marginal revenue from the 2nd sandwich sold? D) $6.00 memorize:The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. If Evan's sells the 5th sandwich, the marginal cost is ________ the marginal revenue, so the firm's profit ________. A) greater than; decreases memorize:The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What quantity of sandwiches produced will maximize Evan's economic profit in the short run? B) 3 sandwiches per hour memorize: 106) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What is Evan's maximum short-run economic profit? C) -$6 per hour memorize: The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What is Evan's shut-down price? D) $5 per sandwich 108) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. If the market price does not change, Evan's will A) continue to operate in the short run, but will exit the industry in the long run.

Short Run

Is the concept that, within a certain period in the future, at least one input is fixed while others are variable like a plant.

Short Run Equilibrium

Market demand and short run market supply determine market price and market output. Each firm takes this price as given and produces its profit maximizing output, which is 8 sweaters a day. Because, the market has 1000 individual firms all the same the market output would be $8000 a day. A change in demand: will either increase the firms from producing 8 to 9 sweaters a day and the output will be $9000, if demand decreases than the market output will have to drop to 7 a day with a market output of $7000 where some firms will have to close and some will stay open perfectly to meet demand. They incur economic loss equal to total fixed cost. Questions: Consider the perfectly competitive firm in the above figure. At the profit maximizing level of output, the firm is A) incurring an economic loss equal to $119.00.

Barriers to Entry

Natural or legal barriers can create oligopoly. Economies of scale and demand form a natural barrier to entry that can create a natural monopoly. These same forces can create a natural oligopoly. If the average total cost curve of a taxi company is ATC1 the market is a natural duopoly: an oligopoly market with two firms like only two taxi companies, two college bookstores, to rental car companies, ect. The lowest price at which the firm would remain in business is $10 a ride. At that price the quantity of rides demanded is 60 a day, the quantity that can be provided by just two firms. There is no room on the market for 3 firms however if there was only one firm then it would make an econ profit a second business takes some of the business and some of the econ profit. If the ATC of firm two has an efficient scale of 20 rides than there is room for a third company bc 60 is the demanded quantity. A legal oligopoly occurs when legal barrier to entry produces a small number of firms. A city might license two taxi firms or two bus companies , even though the completion of demand and economies of scale leaves room for more than two firms.

How does a monopoly arise?

No close substitutes and a barrier to entry. No close substitutes: if a good has a close sub even though only one firm produces it, that firm effectively faces competition from the producers of the sub. A monopoly sells a good or service that has no good sub. Tap water and bottled water are close subs for drinking but tap water has no effective subs for showering or washing a car and a local public utility that supplies tap water is a monopoly. Barrier to Entry: A contraint that protects a firm from potential competitors is called a barrier to entry. There are three types of barrier to entry: Natural, Ownership and legal. Natural: a natural barrier to entry creates a natural monopoly: a market in which economies of scale enable one firm to supply the entire market at the lowest possible price. The firms that deliver gas, water and electricity to our homes are examples of natural monopolies. For example electricity the long run average cost is LRAC. Economics of scale prevail over the entire length of the LRAC curve. At a price of 5 center per kw the quantity demanded is 4 mil kw and one firm can produce that at 5 cents per kw. If two firms shared the market equally it would cost each of them 10 cents per kw to produce 4 mil kw hours. Ownership barrier to entry: An ownership barrier to entry occurs of one firm owns a significant portion of a key resource. For example De Beers with the diamond industry who control up to 90 percent of the world's diamonds. Legal Barrier to Entry: A legal barrier to entry creates a legal monopoly which is a market where competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright. A public franchise has an exclusive right to supply a good or service. The U.S. postal service has the exclusive rights to carry first class mail. A government license control entry into certain occupations like medicine, law, dentistry and teaching- this all restricts competition. A patent is an exclusive right granted to the inventor of a product or service. A copyright is an exclusive right granted to the author or composer of a literary, musical, dramatic or artistic work. Patents and copyrights are valid for a limited time period that varies from country to country. In the united states a patent is valid for 20 years, they stimulate new growth an innovation.

Comparing Price and Output

Perfect Competition: Initially with many small firms in perfect competition (the supply curve SC they have is the same because they are producing the same, we usually add them all together). In perfect competition, equilibrium occurs where the supply curve and the demand curve intersect. Each firm takes the price and maximizes their profit by producing the output at which its own MC equals. Each firm is small so there is no incentive for any firm to try to manipulate the price by caring output. Monopoly: Now suppose all those small firms are bought by a single firm. Consumers do not change nor does the demand however the monopoly recognizes that the demand is the only constraint on the price at which it can sell the output. The monopoly maximizes profit and produces quantity where MR =MC. Each firms supply curve is its marginal cost curve so when the all the small firms are taken over that SC becomes the monopoly's marginal cost curve. A single price monopoly will have a higher price and a smaller output. An independent PC firm will have a lower price and a larger output.

Efficiency Comparison

Perfect competition is efficient and serves as a benchmark of how to measure inefficiency of a monopoly. Along the demand and marginal social benefit curve (D=MSB) consumers are efficient. Along the supply curve and marginal social cost curve (S=MSC), producers are efficient. In competitive equilibrium, the price is Pc, the quantity is Qc and the marginal social benefit = marginal social cost. Consumer surplus is above producer surplus and total surplus is CS and PS added together and it is maximized. In long run comp. equilibrium entry and exit ensures that each firm produces their output at the minimum possible long run average cost. At comp. equilibrium MSB = MSC; total surplus is maximized; firms produce at the lowest possible long run average cost. and resource use is efficient. In a monopoly the smaller the output and higher the prices drives a wedge between MSB and MSC and create deadweight loss and its magnitude is the way we measure inefficiency of a monopoly. Consumer surplus shrinks for two reasons: they lose because they now have to pay more for a good- this is a gain for a monopoly and increases their producer surplus. They also lose by getting less of that good and this loss is part of dead weight loss. Although a mono. gains from higher prices it also loses some producer surplus because it produces a smaller output which is another part of deadweight loss. A monopoly produces less and sells higher than a PC firm while facing not comp.so it does not produce at the lowest possible LRAC. This results in damage to consumer interest in 3 ways: 1) produces less 2) increases cost 3) raises price by more than the interested cost of production

Competing on Quality, Price and Marketing

Product differentiation allows for a fir to compete with other firms in the 3 areas of quality, price and marketing. Quality: physical attribute that make it different from another firms', includes design, material, reliability and service to the buyer (ease to access product). It is a spectrum that lies from high to low. Apple offers a superior computer with great customer service thus their quality is high however another firm offers the opposite (usually at lower prices). Price: because of product differentiation a firm in MC faces a downward sloping demand curve. The firm can set its own price and output (like a monopoly) however the tradeoff between the product's quality and price. A firm that makes higher quality items can charge a higher price than a firm that makes a low quality product. Marketing: because of product differentiation, a firm in MC must market its product. Two ways of marketing: advertising and packaging. If they are saying a high quality product the firm must advertise as such and provide packaging that reflects the quality. A low quality producer uses advertising and packaging to persuade buyers that although quality is low, the low price more than compensates for this fact.

Efficient Use of Resources

Resource use is efficient when we produce the goods and services that people value most highly. If it is possible to make someone better off without anyone else becoming worse off, resources, are not being used efficiently. For example suppose we produce a computer that no one wants and no one will ever use and at the same time, some people are clamoring for more video games. If we produce fewer computers and reallocated the unused resources to produce more video games, some people will be better off and no one will be worse off. So the initial resource allocation was inefficient. By comparing marginal social benefit and marginal social cost we can determine if resources are allocated efficiently. In the example above the marginal social benefit of video games exceeds its marginal social cost, the marginal social cost of the computer exceeds its marginal social benefit. So, producing fewer computers and more video games, we move resources toward a higher valued use.

Choices, Equilibrium, and Efficiency: Equilibrium and Efficiency

Resources are used efficiently when marginal social benefit equals marginal social cost. Competitive equilibrium achieves this efficient outcome because with no externalities, price equals marginal social benefit for consumers, and price equals marginal social cost for producers. The gains from trade are the sum of consumer surplus and the sum of producers surplus. The gains from trade that consumers make are measured by consumer surplus which is the area below the demand curve and above the price paid. The gains from trade from producers are measured by producer surplus which is the area above the supply curve and below the price received. The total gains from trade equals total surplus which is the sum of consumer surplus and producer surplus. When the market for a good or service is in equilibrium the gains from trade are maximized. D=MBS for consumers where they get the most value from their budgets at all points on the demand curve. S=MSC Producers get the most value from their resources at all points on the market supply curve.

Is Monopolistic Competition Efficient?

Resources are used efficiently when marginal social benefit equals marginal social cost. Price equals marginal social benefiting the firms marginal cost equals marginal social benefit (assuming there is no external benefits or costs). So if the price of an item exceeds the marginal cost of producing it, the quantity of that item produced is less than the efficient quantity. MC has to equal price to be efficient. Making the relevant comparison: Before we can conclude that something needs fixing we must check out the available alternatives. The markup that drives a price gap between marginal cost in MC arises from product differentiation- the items are not quite the same, they are not perfectly elastic. The only way it could be perfectly elastic is if there was only one kind of item all firms made. If there was only one kind of item the total benefit of the item would be less than it would be with variety because people value variety not only because it lend to choice but it has external benefit. We like seeing the variety in the choices of others. If people value variety so highly why don't we see an endless amount of it? Because it is expensive, each item must be designed and customers informed about it. These initial costs of design and marketing are called setup costs which mean that some varieties that are too close to others already available are just mot worth creating. The bottom line: Variety of items is both valued and costly and the efficient degree of product variety is the one for which the marginal social benefit of product variety equals marginal social cost. The loss is offset by the greater interest in the variety produced. Comparing to the alternative, product uniformity, monopolistic competition might be efficient.

Marginal Cost

The cost of producing one more unit of a good. The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies. If the firm increases its output from 2 pounds of cookies to 3 pounds, the marginal cost is ________ per pound of cookies. because you subtract the total cost of 39 from 24 B) $15 In the above figure, the line represented by the "4" is the A) average fixed cost. D) marginal cost. (it is the line that slopes down the most below MR and looks like a hook.

Single Price Monopoly: Price and Marginal Revenue

The demand curve facing the firm is the market demand curve. Total revenue TR is the price P multiplied by the quantity sold Q. Marginal revenue MR is the change in total revenue ∆TR resulting from a one unit increase in the quantities sold- like if a price falls the increase in demand goes up as well at the revenue and you calculate the difference of total revenue to find the marginal revenue. $42 (TR) -$32 (TR) =$10 (MR). Finding TR is PxQ (price multiplied by quantity). MR related to the change in quantity sold. At each level of output the MR is less than the price because the MR curve lies below the demand curve. When the price is lowered to sell one more unit two opposing forces affect total revenue. The lower price= rev loss on original units sold. Rev gain = increased quantity sold.

The Long Run

The long run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels.

Break-even point

The point at which the costs of producing a product equal the revenue made from selling the product. Campus sweaters would make zero economic profit called a break-even point. Questions: *At a firm's break-even point, its total revenue equals its total opportunity cost.* *When Sidney's Sweaters, Inc. makes exactly zero economic profit, Sidney, the owner makes an income equal to his best alternative forgone income.* The break-even point is defined as occurring at an output rate at which total revenue equals total opportunity cost. In the above figure, if the price is $12, a profit-maximizing perfectly competitive firm will have an economic profit where 12 is at ATC=MC D) of zero, that is, it will break even with a normal profit.

In Monopoly, Demand is Always Elastic

The relationship between marginal rev and elasticity of demand that you've just discovered implies that a profit maxing monopoly never produces an output in the inelastic range of the market demand curve. If it did so, it could charge a higher price, produce a smaller quantity and increase its profit.

Supply Curve and Supply Schedule

The term supply refers to the entire relationship between the quantity supplied and the price of a good. The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers' planned sales remain the same. *A perfectly competitive firm's short-run supply curve is the same as its D) MC curve above the minimum of the AVC curve.* *The short-run supply curve for a perfectly competitive firm is its B) marginal cost curve above its shutdown point.* The short-run supply curve for a perfectly competitive firm is its marginal cost curve B) above its shutdown point. The short-run supply curve for a perfectly competitive firm is its marginal cost curve above the minimum point on the B) average variable cost curve. *The firm's supply curve is its A) marginal cost curve, at all points above the minimum average variable cost curve.* A perfectly competitive firm's short-run supply curve is A) its marginal cost curve above the shutdown point. The section of the marginal cost curve that lies above the average variable cost curve is A) a perfectly competitive firm's supply curve. A perfectly competitive firm's supply curve A) shows the relationship between the price and the quantity the firm will produce. B) is the portion of the marginal cost curve above the average variable cost curve. C) is upward sloping. D) All of the above are correct. A perfectly competitive firm's short-run supply curve is A) its marginal cost curve above the shutdown point. The firm's short run supply curve is equal to the B) marginal cost curve above the AVC curve. Which of the following best describes the short-run supply curve for an individual perfectly competitive firm? C) It is the vertical axis at prices less than minimum average variable cost and is the firm's marginal cost curve at prices above minimum average variable cost. An individual perfectly competitive firm has a supply curve A) with a positive slope. The figure above shows short-run cost curves for a perfectly competitive firm. If the price of the product is $8, in the short run the firm will where MC + ATC=12 and MR=8 C) incur an economic loss. The figure above shows short-run cost curves for a perfectly competitive firm. If the price of the product is $8 and the firm does not shut down, the firm's output in the short run B) will be between 0 and 10. The donut market is perfectly competitive. The figure shows the costs of a typical donut producer. In the short run, the donut producer's supply curve is the curve running from point ________ to point E. B) B from lowest point of AVC to MC In the above figure, the perfectly competitive firm's shutdown point is at a price of B) $8 per unit. where AVC and MC intersect In the above figure, if the price is $16 per unit, how many units will a profit maximizing perfectly competitive firm produce? D) 35 at MC In the above figure, if the price is $12 per unit, how many units will a profit maximizing perfectly competitive firm produce? C) 30 In the above figure, if the price is $8 per unit, how many units will a profit maximizing perfectly competitive firm produce? B) 20 In the above figure, if the price is $4 per unit, how many units will a profit maximizing perfectly competitive firm produce? A) 0 even though it says 5 on the graph where MC is it will be 0 bc its too low a point The figure above shows a firm in a perfectly competitive market. The firm will shut down if price falls below B) P2. where AVC=MC The figure above shows a firm in a perfectly competitive market. If the firm does not shut down, the least amount of output that it will produce is C) 8 units. The figure above shows a firm in a perfectly competitive market. If the price rises from P3 (10) to P4 (11) then output will increase by B) 1 unit. The figure above shows a firm in a perfectly competitive market. The firm's supply curve is the curved line linking B) point b to point d and continuing on past point d along the MC curve. *In the above figure, if the price is $10, a profit-maximizing perfectly competitive firm will C) produce 10 units. no clue why* In the above figure, at any price between $8 per unit to $12 per unit, how many units will a profit-maximizing perfectly competitive firm produce? all you have to do is look b/t 8 and 12 C) Between 20 and 30, because variable costs are covered so the firm's losses will be minimized by producing rather than shutting down. In the above figure, below what minimum price will a perfectly competitive firm shut down rather than produce? where MC=AVC C) for any price less than $8 per unit In the above figure, if the price is $10, a profit-maximizing perfectly competitive firm will C) produce 10 units. In the above figure, below what minimum price will a perfectly competitive firm shut down rather than produce? C) for any price less than $8 per unit In the above figure, at a price of $4 per unit, a profit-maximizing perfectly competitive firm will A) shut down because its total revenue is less than its variable costs. B) incur an economic loss. C) produce 5 units. D) Both answers A and B are correct.

Maximum Price the Market Will Bear

Unlike a firm in perfect competition a monopoly influences the price of what it sells. The monopoly doesn't set the price at the max it possibly could. *At the highest possible price the monopoly would only be able to sell one unit of output which is not profit maximizing quantity. A monopoly produces profit maximizing quantities and sells accordingly, still for the highest price in mind, but with that constraint. *All firms maximize profit by producing the output at which MR = MC. For a competitive firm price equals MR so price also equals MC. For a monopoly, price exceeds marginal revenue, so price also exceeds marginal cost. New firms can't enter due to barriers for entry or exit when a monopoly is present- they dont have to worry about that. Monopolies can make a positive economic profit instead of zero economic profit like perfectly competitive ones do. Example De Beers they have very little overhead since diamonds are a resource produced by the earth.

Average Variable Cost

Variable cost (A cost that rises or falls depending on how much is produced.) divided by the quantity of output produced. Questions: In the above figure, the line represented by the "2" is the. it is the one that is below ATC which is kind of symmetrical is it meets with MR that is the shut down point. B) average variable cost. Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's variable cost is equal to B) $5,000. Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's economic profit is equal to B) -$9,000, that is, an economic loss of $9,000. 12000-16000-5000= -9000

Price Discrimination

When a firm practices price discrimination, it sells different units of a good or service for different prices. Many firms price discriminate. Microsoft sells windows and office for two different prices and to different buyers at different prices. Students, the government, business all pay different prices. If a pizza producers offered a second slice of pizza at a lower price than the first - this is price discrimination. It looks like these firms are favoring customers however they are in fact selling for the highest possible price, making the highest possible profit.

Small Number of Firms: Temptation to Cooperate

When a small number of firms share the market they can increase their profit by forming a cartel and acting like a monopoly. A cartel is a group of firms acting together-colluding-to limit output, raise price, and increase economic profit. Cartels are illegal but they do operate in some markets. Cartels tend to break down.

Long Run Equilibrium

When economic profit and economic loss have been eliminated and entry and exit have stopped, a competitive market is a long run equilibrium. In a competitive market this rarely happens instead it is usually in a state of constant evolution toward LR equilibrium. The market is constantly bombarded with with events that change the constraints that firms face- they have to keep up with changing tastes, changing demand, changing tech, and changing costs.

Brand Names

Why does firms promote a brand name? Because, it signals quality and provides information to a consumer about an item and is an incentive to the producer to consistently produce a high quality product. For example if youre on a road trip and you need to stop and see 3 hotel signs for holiday inn, annie's hotel and joe's motel- you'll probably pick the holiday inn because you know it from advertising and have probably stayed their before. You don't know about the others- they could be great or not but you have no information like ads provide. If you don't know if joe or annie are offering a high standard of service you have no incentive to stay there. Holiday in has a strong incentive to deliver what they promise in their ads or else they will lose that customer to a competitor.