ECON 201 1st EditionExam # 2 Study Guide Lectures: 8-17Lecture 8: February 5thI. Organizing Production- Economic Profit vs. Accounting Profito π= TR – TC (total revenue – total cost)- Costso Explicit vs. implicit costso Explicit costs are those that are paid directlyo Implicit costs are incurred but not paid directlyo Economic Profit (π) is total revenue net explicit costso Accounting π is total revenue net explicit costs- Technological vs. Economic Efficiency- Firm Costs/Productiono Total production: curve for a firm is the maximum that a firm can produce with agiven amount of inputs o Marginal Product: the additional output form one additional input hired (MP= ∆Q/∆L o Average Product: AP= Q/L (output /input)o Relationship between the margin and average – interrelated (if the margin < average then the average isfalling and Likewise for costsLecture 9: February 10thI. Firm Costs Cont.- Marginal costo 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 outputwhere MR=MC (marginal revenue = marginal cost)** QUESTION ON THE FINALo If marginal revenue is bigger than marginal cost then you get more than it costs youII. Firm Behavior in a Competitive Market- The market and firm revenueo Marginal revenue to a competitive firm is just the market priceo 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 versao AVC – Average variable costs: total variable costs/outputoo if the firm produces, then is should produceQ*o π= 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 industryoo 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 equilibriumo- Suppose demand increaseso- Short-run questionso What happens to market price? Goes upo What happens to market quantity? Goes upo What happens to firm level output? MR=MC goes upo What happens to firm level profits in the short-run? Goes up; ATC doesn’t moveo 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? increaseso What happens to the firm profits? Returns to 0o What happens to firm level output relative to the short-run equilibrium? Each firm produces less relative to the short-run MR=MCo What happens to firm level output relative to the initial long-run equilibrium? Did not changeo What happens to market quantities? Demand shifted  and in long-run supply shifted right; quantity went upo 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 demandoo MR=MC; firm level output dropso FOR EXAM: it will be going through the short and long-run market questionsLecture 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 selleroo Monopolist Choice of Outputoo Monopolist Choice of Priceoo Monopoly and Profit (π)oo Monopoly and Consumer Surplusoo Monopoly and Dead Weight LossoLecture 12: February 19th I. Monopolies Cont.- Natural Monopoly is an industry that exhibits large economics at scales such that ATC aredeclining over market levels of outputoII. Regulator of Monopolies- Solution for Natural Monopolyo Average cost pricing – normal rate of returnoo Municipal productiono Price capo- General Regulation of Monopolyo Sherman Act 1980o Clayton Act 1950Lecture 13: February 24thI. 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 payo- 3rd 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- 2nd Degree Price Discriminationo Strategy: Change different prices based on different quantities purchased (Bundles)- Two-Part Tariffo Strategy: First, charge a fee to acquire right to purchase goods. Second, charge price per unit.oLecture 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 individualso- Positive Consumption Externalityo 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 Externalityo - Solutions to Externalities o Coase Theoremo Taxes/Subsidieso Organized market – Government interventionLecture 15: March 3rd I. Political Economy- Public Goodso Goods are non-rivalrous (non-rival) if consumption by one agent does not limit consumption by otherso Free Rider Problem: Once a public good is provided, there is no limit to the number of consumers who can enjoy it.- Social Choiceo 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 consistentlyreveals the same social preferences among different voterso Arrow’s Impossibility Theorem: Transitivity There is no voting system that guarantees all these criteria are metLecture 16: March 5thI. Game Theory- Strategies in Gameso Pure Strategy: specific action taken by a playero Mixed Strategy: probabilistic action, with