ECON 201 1st Edition Exam 2 Study Guide Lectures 8 17 Lecture 8 February 5 th I Organizing Production Economic Profit vs Accounting Profit o TR TC total revenue total cost Costs o Explicit vs implicit costs o Explicit costs are those that are paid directly o Implicit costs are incurred but not paid directly o Economic Profit is total revenue net explicit costs o Accounting is total revenue net explicit costs Technological vs Economic Efficiency Firm Costs Production o Total production curve for a firm is the maximum that a firm can produce with a o o o given amount of inputs Marginal Product the additional output form one additional input hired MP Q L Average Product AP Q L output input Relationship between the margin and average interrelated if the margin average then the average is falling and Likewise for costs Lecture 9 February 10th I Firm Costs Cont Marginal cost o Additional cost incurred form producing one more unit of output the derivative of the total product o The optimal production strategy of any firm is to produce the level of output where MR MC marginal revenue marginal cost QUESTION ON THE FINAL o If marginal revenue is bigger than marginal cost then you get more than it costs you II Firm Behavior in a Competitive Market The market and firm revenue o Marginal revenue to a competitive firm is just the market price o The optimal level of production is such that the MR equates the MC if they produce o Short run production choices is the time frame such that firms can t enter or exit an industry o If the marginal is above the average the average is rising and vice versa o AVC Average variable costs total variable costs output o o if the firm produces then is should produceQ o TR TC In the long run a competitive firm will produce only if price is greater than or eual to average total cost P ATC and the optimal level of production is where MR MC Long run equilibrium in an industry o o At any given price there are fewer firms that are willing and able to produce Lecture 10 February 12th I Market and Firms in a Competitive Economy Long run competitive equilibrium o Suppose demand increases o Short run questions o What happens to market price Goes up o What happens to market quantity Goes up o What happens to firm level output MR MC goes up o What happens to firm level profits in the short run Goes up ATC doesn t move o How does the number of firms change In the short run the of firms does not change Long run questions shock firms can enter and exit o What happens to the of firms increases o What happens to the firm profits Returns to 0 o What happens to firm level output relative to the short run equilibrium Each firm produces less relative to the short run MR MC o What happens to firm level output relative to the initial long run equilibrium Did not change o What happens to market quantities Demand shifted and in long run supply shifted right quantity went up o What happens to the market price relative to its initial long run equilibrium Profit goes back to 0 changes nothing Suppose there is a reduction in demand o o o MR MC firm level output drops FOR EXAM it will be going through the short and long run market questions Lecture 11 February 17th I Imperfect Competition The main reason that imperfect competition is because firm s have market power There has to be a barrier to entry in the market place Barriers to entry in the market patent protection government licensing supply chain control natural barriers lack of close substitutes Monopoly is a firm that is the only producer of a good for which there is no close substitute and no threat to competition o There is one seller o o o Monopolist Choice of Output o Monopolist Choice of Price o o o Monopoly and Profit o Monopoly and Consumer Surplus o o Monopoly and Dead Weight Loss o Lecture 12 February 19th I Monopolies Cont Natural Monopoly is an industry that exhibits large economics at scales such that ATC are declining over market levels of output o II Regulator of Monopolies Solution for Natural Monopoly o Average cost pricing normal rate of return o o o Municipal production Price cap o General Regulation of Monopoly o Sherman Act 1980 o Clayton Act 1950 Lecture 13 February 24th I Strategies of Price Discrimination 1st Degree Price Discrimination Perfect Price Discrimination o Strategy Charge each consumer his or her individual maximum willingness and ability to pay o 3 Degree Price Discrimination o Strategy Use a signal about buyers to determine if each is a high type or low type and charge different prices to each High or Low o rd 2nd Degree Price Discrimination o Strategy Change different prices based on different quantities purchased Bundles Two Part Tariff o Strategy First charge a fee to acquire right to purchase goods Second charge price per unit o Lecture 14 February 26th I Externanlities An externality is a benefit or cost by a non market participant form another s consumption or production behaviors Negative Consumption Externality occurs when private consumption behavior imposes costs on other individuals o Positive Consumption Externality o Ex Vaccinations Nick has a child that he brings to the UO daycare on campus and students living in the dorms work there Sly receives a benefit from the students getting the Meningitis B vaccine because his child is safer from the bacterial infection o Negative Production Externality o Solutions to Externalities o Coase Theorem o Taxes Subsidies o Organized market Government intervention Lecture 15 March 3rd I Political Economy Public Goods o Goods are non rivalrous non rival if consumption by one agent does not limit consumption by others o Free Rider Problem Once a public good is provided there is no limit to the number of consumers who can enjoy it Social Choice o We have seen with monopolies and public goods that there may be a rile for government to intervene in the market place Difficulty in determining social preferences o Codorcet voting paradox states that there is NO pair wise voting system that consistently reveals the same social preferences among different voters o Arrow s Impossibility Theorem Transitivity There is no voting system that guarantees all these criteria are met Lecture 16 March 5th I Game Theory Strategies in Games o Pure Strategy specific action taken by a player o Mixed Strategy probabilistic action with different weights or probabilities assigned to each action o Dominant Strategy an action that is the best that a player can choose