Microeconomics Chapter 14 Notes

 

Find Pm from the demand curve at this Q

Find Pm from the demand curve at this Q

Price Discrimination

Microeconomics Chapters 8-11 Prep

 

Market failure- a situation in which the market, on its own, fails to allocate resources efficiently

 

Externalities in the market may cause economic efficiency to be enhanced by government intervention

 

Since the benefit each citizen receives from having an educated community is a public good, the private market is not the best way to supply education

 

The government provides public goods because the freerides make it difficult for private markets to supply the socially optimal quantity

 

The total surplus with a tax = consumer, producer surplus, and tax revenue

 

If a company does not bear the entire cost of the dioxin it emits it will emit higher levels of dioxin than is socially efficient

 

A positive externality is a benefit to a market bystander

 

When the government places a tax on a product the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government

 

The amount of deadweight loss from taxes depends on the price elasticity of demand and supply

 

The demand curve for a product reflects the value of the product to consumers

 

Donald produces nails at a cost off 200 per ton if she sells the nails for 500 his producer surplus is 300 per ton

 

A 100 dollar head tax is an example of a tax that is most economically efficient

 

Moving production from a high cost producer to a low-cost producer will raise total surplus

 

Taxes cause dead weight losses beause they prevent buyers and sellers from realizing some of the gains from tade and marginal buyers and seller leave the market causing the quantity sold to falls

 

In an economy, when do not have a price the government primarily ensures that the good is produced

 

Examples of private goods are : tennis shoes, pizza, french fires, beer

 

A concept of negative exnalieities can be made using a college student plays his new stereo system in the residence at 2am

 

In the market for a good like ice-cream cones price adjusts to balance supply and demand

Microeconomics Chapter 13

 Competitive Market

• Full info

• Everyone knows what they are trading and at what price

• No info asymmetries (one party has more or better than the other)

• Price takers

• Competitive markets have so much competition that no one has the ability to affect market price. Thus all price-takers

• If a buyer or seller has the ability to noticeably affect market prices, that person/firm has a market (and it's not a competitive market)

• The only seller of food on a plan can charge a very high price, knowing that some people would be hungry enough to pay it.

• The only buyer of food at a market at the end of the day could offer a very low price, knowing that some sellers would be willing to sell.

• Participation in a competitive market places very specific constraints on a firm's ability to max profits.

• Standardized goods

• Goods and services have the same things and they are interchangable

• In real life, goods are differentiated by qaulity, brand, or things that appeal to different tastes.

• Comoodities under certain defnied things are consider standardized goods.

• Free Entry and exit

• Free entry and exit is not an essential condition for a competitive market, but when it does not hold, there are incentive to collude breaking the price-taking requirement

• Not all markets it is as easy to entry

 

Revenues in a perfectly competitive market

• In a perfectly competitive market, producers are able to sell as much as they want without affecting the market price.

• Total revenue = Price * Quantity

• Average Revenue = Total Revenue/Total Quantity

• Marginal Revenue = deltaTR/deltaQ

• Price does not changes

• Total revenue is the price times quantity produced

• Average Revenue is the total revenue divided by the quantity

• Marginal revenue is the revenue generatedby selling an additional unit of a good

• Notice that Price = Marginal Revenue = Average Revenue

 

 

Profits and production decisions

• Firms seek to max profits

• In a competive market, the only choice that a pric-taking firm can make to affect profits is the quantity of outpout to produce.

• The profit-max quantity corresponds to the quantity at twhich marginal revenue is equal to the marginal cost.

• Profit max occurs where MR = MC for a perfectly competitive firm.

• Increase production as long as MR>MC, as total profit increases as another unit is produced.

 

Deciding when to operate

• Producing the quantity where MR = MC may not always be to the firm's advantage

• When a firm shuts down production, it avoiding incurring variable costs

• Fixed costs remain and are sunk in the short-run

• Because fixed costs are sunk, they are irrelevant in deciding whether to shut down in the short run.

• The short decision to produce depends on variable costs, not fixed costs

• Shut down if P < min(AVC)

• The long run decision to produce depends on total cost, since all costs are variable in the long run

 

Long run supply

• The key difference between short run and long run is that firms are able to enter and exit the market in the long run

• The process of market entry and exit causes firms in the long run in a perfetly comptitive market:

• TO earn 0 economic profits in the long run

• Accountingprofits are positive in the long run)

• Firms operate at an efficient scale

• Supply is perfectly elastic

• If positive economic profits exist:

• P>ATC

• New firms enter to gain profits

• The market supply curve shifts outward until P = ATC

• Economic profits go to zero for all firms

• If economic profits are negative

• P< ATC

• Some firms exit the market

• The market spply curve shifts inward until P = ATC

• Economic profts go to zero for all firms

• Efficient Scale: Quantity that minimizes average total cost

• Firm's optimal production : P = MR = MC

• MC intersects the average total cost curve at its lowest point : MC = min (ATC)

• In the long run, economic profits are 0: P = ATC

Microeconomics Chapter 12 Notes

 

The goals of every firm

• Economists assume the firm's goal is to max profits

• Profit=R-E

• Total revenue is the amount a firm receives from the sale of its output

• Price per unit * by the quantity sold

• The cost is the market value of the inputs a firm uses in production

• Total costs includes one-time expenses, like buying a machine, as well as ongoing expenses, like rent, employee salaries, raw materials, and advertising

• Costs are more complex and harder to calculate than total revenue

• A firm's total cost is defined as

• Total cost= fixed costs +  variable costs.

 

Fixed Costs

• Costs that do not depend on the quantity of output produced: They are constant as quantity increases

• One time, upfront payments before production begins, like buying equipment

• Ongoing payments, like monthly rents

• Even if a firm produces nothing, it still incurs a fixed cost

 

Variable Costs

• Costs that depend on the quantity of output produced

• Includes the cost of raw materials, machinery, and equipment, and labour

• Variable cost increases with each additional unit produced

• If firm produces nothing, variable cost is zero

 

Explcit vs Implicit cots

• The opportunity cost of something is what you have to give up to obtain it

• Opportunity cost has 2 compnents: explicit costs and implicit costs

• Both matter for firms' decisions

• Explicit costs require an outlay of money

• Paying wages to workers

• Implicit cots do not require a cash outlay: rather they represent opportunities that could have generated revenue if the firm had invested its resources in another way

• The opportunity costs of the owner's time

• Both costs must be included to properly account for a firm's total cost.

 

Economic Profit vs Accounting Profit

• When companies report their profits, they provide accounting profit

• Accounting profit= total revenue- explicit costs

• Accountants keep track of how much money flows into and out of the firm so they ignore implicit costs

• As a result, accounting profit may be a misleading indicator of how well a business I really doing.

• Economic profit on the other hand accounts for both explicit and implicit costs

• Economic profit = accounting profit- implicit costs

• Economic profit = (Total revenue - explicit costs)- implicit costs

• Economists study the pricing of the production decisions of the firm, which are affected by implicit as well as explicit costs

• Since accounting profit ignores the implicit costs, it's always higher than economic profit

 

 

The production function

• The relationship between the quantity of inputs used to produce a good and the quantity of output that is produced given technology

• Indicates what is physically possible to produce

• The short run production fucntion is also called the total product function

• It can be represented by a table, a graph of an equation

• Example

• 
  

L = number of workers on horz axis	Q= wheat
0	0
1	1,000
2	1800
3	2400
4	2800
5	3000

• 
  
  

Why is the MPL important?

• When the farm hires an an extra worker:

• Her costs rises by the wage she pays the worker, w

• Her output rises by the MPL

• The value of that extra output rises by p * MPL

•  p * MPL is the farmers's benefit from hiring the extra worker

• Comparing the value of the extra output to the increase in costs helps the farmer decide wther she would benefit from hiring the worker

• If the benefit exceeds the costs (p *MPL > w, ) hire the extra worker

Why the MPL falls

• Why does the farmer's output rise by a smaller and smaller amount for each additional worker she hires?

• When output I low, the MPL may increase because workers can work together and specialize in the tasks in which they have a comparative advantage

• However as the farmer adds more work the additional worker, wokers will be less productive

• MPL will always falls as L rises wether the fixed inpout is land or capital

• This relationship between outpout and variable inputs is called the law of diminishing marginal product or returns

• The marginal prodict of a variable input envenutally declines as the quantity of the inpout increases

Maginal Costs

• The increase in total cost from producting one more unit

• MC= deltaTC/deltaQ

• Total costs= fixed costs + variable costs (FC = land, VC = Labour) = wL + FC

• The MPL is increasing , MC Is falling

• The MPl Is at its max, MC is at min

• MPL decrasing, MC is rising

 

Average fixed cost = fixed cost/quantity

Average variable cost = variable cost/quantity of output

Average total cost =  TC/Q