ECON 201 1st Edition Lecture 11Outline of Last Lecture I. Exam RemindersII. Equilibriuma. Definition of equilibriumb. Definition of stable equilibrium modelIII. Analyzing the Events Affecting the MarketIV. Analyzing Multiple Events Affecting a MarketV. Example of Effects of Multiple Events on a MarketOutline of Current Lecture I. Exam RemindersII. Consumer Theorya. Definition of consumer theoryb. Definition of total utilityc. Definition of marginal utilityIII. Producer Theorya. Definition of producer theoryIV. Costs and Profitsa. Definition of explicit costsb. Definition of implicit costsc. Definition of economic profitd. Definition of accounting profitV. Market Structurea. Definition of market structureb. Definition of perfect competitionc. Definition of monopolistic competitiond. Definition of oligopolye. Definition of monopolyVI. Why Monopolies Arisea. Definition of natural monopolyVII. Public Policy toward MonopoliesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Current LectureI. Exam RemindersJust a reminder, our exam for this class is Wednesday, February 4th. For the exam, you need a full-size scan-tron, a #2 pencil, and a non-programmable calculator (TI-83 and TI-84 are prohibited).II. Consumer TheoryTo understand better what is happening on the demand side of the market, we can use consumer theory. Consumer theory focuses on stepping back from the market to analyze the individual. Recall that market demand is the sum of quantities demanded by all buyers at each price. There are two common approaches to the consumer theory; the first is that the individualis willing to pay for the satisfaction (benefit) received from the purchase. Remember that utility is the same as satisfaction. Total utility is the total satisfaction from the consumption of a good or service. Marginal utility is the additional satisfaction received from consuming one more unit. Eventually, there will be diminishing marginal utility with more consumption. In other words, more consumption of a good or service will result in a little less satisfaction than the utility before; this is similar to the law of diminishing returns. The other approach to the consumer theory is that willingness to pay falls as marginal benefit falls. Suppliers, with respect to satisfaction, then need to lower the price because the consumer is purchasing lower satisfaction with each consecutive purchase. This holds true to the law of demand. III. Producer TheoryBehind the supply curve is producer theory. Producer theoryshows what influences the supply curve and focuses on industrial organization. Industrial organization is a field in economics that focuses on firms, firm structure, and firm cost. It all comes down to how much a supplier can produce at a certain cost. The ultimate goal of any business firm is to maximize profit, and this ishow firms stay in business. Profit can be calculated by subtracting the total cost from the total revenue.The total revenue is the price of the good multiplied by the quantity of the good sold.Profit = Total Revenue – Total CostTotal Revenue = Price * QuantityIV. Costs and ProfitsThere are two types of costs we need to know for this course: explicit costs and implicit costs. Explicit costs require an outlay of money; they are an expenditure and are listed on the expensesheet. Implicit costs do not require a cash outlay; these costs focus on what a person could havedone with the same resources. Implicit cost is very similar to opportunity cost. There are also two types of profit related to these costs: accounting profit andeconomic profit. Accounting profit is the total revenue minus the total explicit costs. Economic profit is the total revenue minus the total costs (including explicit and implicit costs). With economic profit, you arelooking not just at the explicit costs but also at what you have given up in order to do what you are doing now. An example of this is the following situation: a man quits a job where he makes $75,000 per year to start a business. At the end of the first year, he hires an accountant to review his statements. He finds that he made $40,000 in his first year of business. The accountant thinks this is good news; the man was not in the red but was successful in business. The businessman, on the other hand, is unhappy; he could have made $35,000 more by remaining with the job he left. In this example, the accountant sees the profit in terms of explicit costs while the businessman sees the profit in terms of implicit and explicit costs – what he could have had. V. Market StructureMarket structure is the environment a firm “lives in”, i.e. the environment a firm produces and sells in. It is determine by three characteristics:1. The number of firms in the marketa. Is there one firm, a few firms, or many firms?2. Product differentiationa. Are the products identical, similar, or different?3. Entry into and exit from the marketa. Is it easy, hard, or impossible?Answering these questions allows us to roughly group firms with like characteristics. There are four categories of these firms which are perfect competition, monopolistic competition, oligopoly, and monopoly. The following diagram shows these categories on a scale of competition and concentration.Perfect competition is a firm category that is identified as having lots of firms, selling identical products, and having an easy entry in to and exit out of the market. This category has firms that are primarily “price takers”; they have very little influence, if any, over the prices of the market. Monopolistic competition also has a large number of firms but instead of selling identical products they sell differentiated products. This is their key difference from perfect competition. Additionally, they too have an easy entry/exit process. However, monopolistic competitors are more of price “makers” than takers; they have some influence on the prices of the market. Monopolistic competitors also rely heavily on advertising and brand loyalty to make sales. Manymarket structures operate in a monopolistic competitive market. An oligopoly is a firm category that has a few firms but each firm holds a lot of influence on the market. These firms sell either standardized or differentiated products, and are most certainly price makers (such as collusions and cartels). There are significant barriers to