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Microeconomics - Reference Guides

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ECN 102
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l e a r n • r e f e r e n c e • r e v i e w permacharts TM Microeconomics Microeconomics TYPES OF MARKETS PRODUCTION PURE & PERFECT COMPETITION LAW OF DIMINISHING RETURNS • Pure competition is a market situation in which individual • If increasing quantities of a variable factor are applied to a given buyers and sellers are too small to influence the price of a quantity of fixed factors, then the marginal and average homogeneous item, as the price is free to move, and there are products of the fixed factor eventually decrease (also known as no limits on who can buy or sell the law of variable proportions) • Perfect competition is pure competition with perfect • If the input of only one resource is increased, then total output knowledge that enables the market to adjust instantaneously to will initially increase change • Beyond some point, output increases will become smaller (if it is carried further, then eventually total output will reach a maximum and may begin to decrease) OLIGOPOLY • An oligopoly is a market in which the number of sellers is small enough for the activities of one to affect the activities of others RESOURCE ALLOCATION • A differentiated oligopoly occurs where the few sellers sell • The allocation of an economy’s scarce resources of land, labor, products with differences and capital among alternative uses • A pure oligopoly occurs where the few sellers sell homogeneous or identical goods (cartels function as oligopolies) ECONOMIC RENT • The surplus of total earnings over what must be paid to prevent MONOPOLY a factor from transferring to another use • A monopoly is a market in which a single seller sells a product for which there are no substitutes; a monopoly exerts control PROFIT MAXIMIZATION over price and supply • Firms seek to maximize profits by adjusting their price/output • It can raise sales without lowering the price by convincing consumers that they cannot be without the good, thereby combination to the point where Total Revenue – Total Cost is lowering the price elasticity maximized • This is also where Marginal Revenue = Marginal Cost MONOPSONY • A monopsony is a market in which a single buyer purchases an item with no substitute available PRODUCTION COSTS PRODUCTIVE RESOURCES • Anything used to create goods or services (e.g., natural • The difference between total cost and total revenue is greatest at 1 , where tangents Mtcnd M atr parallel resources, human resources) • Includes entrepreneurship, which is an intangible resource • Total profit is plotted from the difference total cost – total because it is difficult to place a quantitative value on vision revenue; at 1 , marginal cost = marginal revenue • The market refers to any place in which buyers and sellers • From q2to q 1 the gap between revenues and costs are conduct transactions increasing (profit is growing); fr1m q t3 q , further production results in decreased profits ALTERNATIVE (OPPORTUNITY) COST • Losses occur to the left 2f q and to the right3of q • The value of the resources needed to produce a good if those resources were used to their best alternative use • Also applies to the resources that must be given up to produce a good REAL CAPITAL GOODS • All non-human goods used to aid production of goods or services; excludes raw materials or money used to purchase capital goods • When MR = MC, profits are maximized; q is the optimal output for profit maximization 1 • Money capital refers to the money that is used to purchase real capital goods Marginal Cost (MC) Measures the increase in total cost that results from raising the rate of EXPLICIT & IMPLICIT COSTS production by 1 unit (also known as • External resources (e.g., labor, materials, overhead) incremental cost) Marginal Revenue (MR) Measures the change in total • Explicit costs are ruled by opportunity cost principles revenue due to a change in the • Implicit costs include costs of self-employed resources used in sales rate by 1 unit (also known as production (e.g., a sole proprietor paying him/herself profits in incremental revenue) lieu of salary) 1 MICROECONOMICS • 1-55080-742-2 www.permacharts .com © 1997-2013 Mindsource Technologies Inc. permachartsTM l e a r n • r e f e r e n c e • r e v i e w GOVERNMENT INTERVENTION MONOPOLY PRICE CONTROLS • A natural monopoly occurs • Prices may be affected by when the minimum size of a direct price control regulation firm is so large compared to the or lump-sum taxation market size that it would not be • In a pure monopoly, output is profitable for any other firm to X (where MC = MR) enter • With price controls, a • Includes utilities and government endorsed industries monopoly can charge a maximum of P 1 • Monopoly uses inefficient plant • Price controls result in a size to maximize profit producer’s surplus of c abp • X is the optimum output, being transferred to 1 1 1 where LMC = MR; here, consumer’s surplus LAC = SAC and MR = SMC • A tax is a fixed cost and does • The factor limiting entry of not affect the marginal cost other firms is LAC > MR curve; output and price are not affected Short Run Profit • Maximized when a monopoly’s • The tax shifts the average cost SMC (Short Run Marginal Cost) curve from AC to AC 1 is equal to marginal revenue • Therefore, profits are abcd = profit area decreased by C 1X (shaded ad = profit per unit of X area represents lost profits) OLIGOPOLIES Cartels Perfect Collusion • A cartel exists when firms organize to control • Perfect collusion management decisions that would otherwise be (or working as a made by each independent firm, making the centralized cartel) organization act like a collective monopoly can block • A cartel earns maximum profit when MR newcomers to (marginal revenue) = MC (marginal costs) for the market, every member but any member firm has an • Although individual firms are different sizes, incentive to break quotas can be established; the MC of each firm (at quota) = MC (at quota) of every other firm away and act Imperfect Collusion independently, threatening the • Occurs when a group of firms attempt to agree cartel as a group on prices and/or outputs without the specific • At X , the market’s MR is lower than the firm’s MR; the firm has an incentive to lower umbrella of a cartel; these firms often attempt to 1 avoid antitrust laws costs to increase its own profits SUPPLY & DEMAND FACTORS SUPPLY CURVE & CHANGES IN DEMAND • Supply refers to the • Supply increases as consumers relationship between the will pay more for X quantity of a good that • An outside factor influences producers want to sell per demand (e.g., change in period of time and the price of that good (all things income, price change of substitute good) being equal) • An increase in consumer • Quantity supplied may be income may shift demand from determined by the good’s DD to D D price, input prices, 2 2 companies’ goals, and the • A decrease in the price of a substitute good may move • A rise in demand increases current state of technology demand from DD to D D 1 1 • Demand refers to the • Real cost is the amount equilibrium price and quantity relationship between the given up to obtain a good • As an increase in income shifts exchanged quantity of a good that • Equilibrium takes place the demand curve from D to • A fall in demand decreases D2, consumption of good X equilibrium price and quantity buyers want to purchase per when buyers are willing to increases from X to X2, and exchanged period of time and the price purchase all goods put on price increases from P to 2 of that good the market by sellers • A rise in supply decreases • Quantity demanded may • At XP, the market is in • If a superior good becomes
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