Microeconomics Final

1. There must be many buyers and many firms, all of which are small relative to the market. 2. The products sold by all firms in the market must be identical. 3. There must be no barriers to new firms entering the market.

A price taker is a buyer or seller that is unable to affect the market price.

Because a firm in a perfectly competitive market is very small relative to the market, and because it is selling exactly the same product as every other firm, it can sell as much as it wants without having to lower its price. If the firm raises its price, the firm will sell nothing. *(it sells the same thing as every other market)*

A firm in a perfectly competitive market is a price taker and can sell as many units as it wishes at the market price P. By selling an additional unit, the firm receives additional (or marginal) revenue of P. Because each unit is sold at P, the average revenue will also equal P, and we get the result P = MR = AR.

In a perfectly competitive market, MR = P, making these two conditions equivalent.

The perfectly competitive firm's supply curve can be directly derived from its marginal cost curve. The firm will produce where P = MC if price is at or above the shutdown point at the minimum of AVC.

The cost of all the inputs used by a firm. FC + VC

Costs that remain constant as a firm's level of output changes

Costs that change as the firm's level of output changes.

An increase in total cost resulting from producing another unit of output. MC= (change in TC)/(change in output)

ATC=TC/Q

AFC=FC/Q

AVC=VC/Q

a NON-MONETARY opportunity cost ex: wages that an employee could have earned if a vacation was not taken

a cost that involves spending money

The short run is the period of time during which at least one of a firm's inputs is fixed. The long run is the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.

The length of time that separates the short run from the long run differs from firm to firm.

Fixed cost is a cost that remains constant as output changes. An example would be rent. Variable cost is a cost that changes as output changes. An example would be labor costs.

the total cost of production divided by the number of units produced.

the change in a firm's total cost from producing one or more unit of a good or service.

If the marginal production of labor is rising, the marginal cost of production is falling. As long as the additional output from each new worker is rising, the marginal cost of that output is falling.

As the level of output increases, the value of average fixed cost gets smaller and smaller. This happens because in calculating average fixed cost, we are dividing something that gets larger and larger- output- into something that remains constant- fixed cost.

a market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products

Marginal Revenue

MR=MC

Because P > MR for a monopolistically competitive firm, a profit-maximizing monopolistically competitive firm producing where MR = MC will necessarily produce where P > MC.

If, by grooming another dog, Stephen adds $68.50 to his costs and only $60.00 to his revenues, his profit will fall by $8.50 if he grooms 126 dogs rather than 125 dogs.

New firms entering an industry cause the demand curves for the products of existing firms to shift to the left. Existing firms will be able to sell less at every price, so their profits will decline.

As more firms enter the industry, the existing firm's demand curve shifts to the left because the firm will sell fewer units of output when there are additional firms in the area selling similar products. And the demand curve becomes more elastic because consumers have additional firms from which to buy their products.

A monopolistically competitive firm is not productively efficient because it does not produce at minimum average total cost. Excess capacity stems from the fact that when a monopolistically competitive firm produces where MR = MC, it produces a level of output that is below the quantity for which average total cost is minimized.

A monopolistically competitive firm is not allocatively efficient because it charges a price that is greater than marginal cost.

Monopolistic competition is a market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products. A perfectly competitive market is a market that meets the conditions of many buyers and sellers, all firms selling identical products, and no barriers to new firms entering the market.

electronics and food.

fish at a fish market and vegetable and fruit at a farmers market.

Oligopoly is a market structure in which a small number of interdependent firms compete. Examples include cigarettes, beer, aircraft, breakfast cereals, automobiles, and pet food.

Barriers to entry keep new firms from entering an industry, reducing the extent of competition in the industry. The important barriers to entry are economies of scale, ownership of a key input, and government-imposed barriers.

Government-imposed barriers to entry include patents, occupational licenses, barriers to international trade (like tariffs and quotas), and franchises. One reason governments are willing to erect barriers to entering an industry is that these barriers may improve the standard of living in the long run; for example, granting patents encourages the development of new products and technologies. Another reason is that politicians may intentionally reduce competition to aid certain firms in exchange for campaign contributions or other favors from the firms.

A patent gives a firm the exclusive right to a product for a period of 20 years from the date the patent is filed with the government. Governments issue patents to encourage firms to carry out research and development, which increases output and living standards in the long run.

the study of how people make decisions in situations in which attaining their goals depends on their interactions with others.

A cooperative equilibrium is one in which players in a game cooperate to increase their mutual payoff.

A noncooperative equilibrium is one in which players don't cooperate but pursue their own self-interest.

A dominant strategy is one that is best for a player, no matter what strategies other players use.

A Nash equilibrium is a situation in which each player chooses the best strategy, given the strategies chosen by the other player or players.

Because there are so few firms in oligopoly markets, each firm must pay attention to the moves (strategies) of the other firms, just as players do in actual games, such as poker or Monopoly. Game theory is the methodology that examines how to make decisions when attaining one's goals depends on interactions with others, so it is natural to use game theory when studying oligopoly.

A prisoners' dilemma is a game in which pursuing dominant strategies results in a noncooperative equilibrium that leaves everyone worse off than they would be if they could achieve the cooperative equilibrium. The outcome of noncooperative pricing (competition, in other words) will leave firms worse off than if they cooperated and set higher prices.

1) competition from existing firms 2) the threat from potential entrants 3) competition from substitute goods or services 4) the bargaining power of buyers 5) the bargaining power of suppliers

A monopoly is a firm that is the only seller of a good or service that does not have a close substitute. The firm can't have a monopoly if a close substitute for its product exists.

The most important ways a firm becomes a monopoly are when 1) government blocks the entry of other firms into the market: 2) the firm has control of a key resource: 3) there are important network externalities in supplying the product: and 4) economies of scale are so large that one firm has a natural monopoly.

The government grants patents because it hopes that in the long run society will be better off. The potential profits to be earned by the temporary monopoly will encourage more rapid technological progress and will encourage risk-taking on the part of firms (pharmaceutical companies, for example) that would otherwise not occur. Competition still exists, but it focuses more on coming up with new products and processes.

A natural monopoly arises when one firm can supply the entire market at a lower average total cost than can two or more firms. In these cases, the firm doesn't need a special law or strategy to become a monopoly. The monopoly happens naturally.

The monopolist's demand curve is the market demand curve. The marginal revenue curve is derived from the demand curve. For a linear demand curve, the marginal revenue will be below the demand curve (and it is also twice as steep as the demand curve, because in absolute value, the slope of the marginal revenue curve will be twice the slope of the demand curve).

If a perfectly competitive industry is monopolized, the price will rise and the quantity produced will fall. Consumer surplus will decrease, producer surplus will increase, and there will be a deadweight loss.

The avowed purpose of antitrust laws is to eliminate collusion and promote competition among firms. The Department of Justice's Antitrust Division and the Federal Trade Commission enforce these laws.

A horizontal merger is between firms in the same industry, while a vertical merger combines firms at different stages in the production of a good. Horizontal mergers are more likely to increase the market power of the newly merged firm because these mergers reduce the number of firms competing in the market for a particular good or service.

MR=MC ALWAYS

Prohibited "restraint of trade," including price fixing and collusion. Also outlawed monopolization.

created by squaring the percentage market shares of each firm, and adding up the results.

d

b

a

c

c

c

a

b

The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product increases, and when the price of a product rises, the quantity demanded of the product will decrease.

The rule that, holding everything else constant, when the price of a product falls, increases in price cause increases in the quantity supplied, and decreases in price causes decreases in the quantity supplied.

The ability of an individual, a firm, or a country to produce more of a good or service than competitors using the same amount of resources.

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

The highest valued alternative that must be given up to engage in activity.

C

C

5 units

change in total revenue from selling one or more unit of a product.

b

d

b

d

a

d

analysis concerned with what ought to be

analysis concerned with what is

not using all available resources and inefficiency