Econ Midterm 2 Study Guide• Chapter 13- The Costs of Production•Industrial Organization: the study of how firms’ decisions about prices and quanti-ties depend on the market conditions they face•Opportunity cost:•The total costs for a businesses is the sum of explicit costs and implicit costs•Financial capital is an important opportunity cost. This money could be earning interest in a bank.•Accounting profit: total revenue - explicit costs•Economic profit: total revenue - explicit and implicit costs•Production function: the relationship between quantity of inputs used to make a good and the quantity of output of that good•Marginal product: the increase in output that arises from an additional unit of input•Diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases•Average total cost = average fixed cost + average variable cost•Marginal cost: the increase in total cost that arises from an extra unit of production•MC = ΔTC/ΔQ•Efficient scale: the quantity of output that minimizes average total cost•Marginal cost curve crosses Average Total cost curve at its minimum point. •When marginal cost curve is below average total cost curve, ATC falls, when MC is above ATC, ATC rises.•Rules of typical cost curves:•Marginal cost eventually rises with the quantity of output•The ATC curve is U-shaped•The marginal-cost curve crosses the ATC curve at the minimum of ATC•Economies of scale: the property whereby long-run average total cost falls as the quantity of output increases•Diseconomies of scale: the property whereby long-run average total cost falls as the quantity of output increases•Constant Returns to scale: the property whereby long-run average total cost stays the same as the quantity of output changes •EoS occurs with specialization, DoS occurs with coordination problems•Long run supply curve is horizontal line at the price that makes economic profit 0•Demand will always slide towards equilibrium with the long run supply curve af-ter a shift•Chapter 14- Firms in Competitive Markets•Competitive market: a market with many buyers and sellers trading identical prod-ucts so that each buyer and seller is a price taker•Firms can freely enter or exit the market•Average revenue: total revenue divided by the quantity sold•Average revenue = price of the good•Marginal revenue: the change in total revenue from an additional unit sold•MR = Change in revenue / units sold•If marginal revenue > marginal cost, it is profitable to increase production•If marginal cost > marginal revenue, profit can be increased by reducing pro-duction•At the profit maximizing level of output, marginal revenue and marginal cost are exactly equal. MR = MC•The competitive firm’s marginal-cost curve is essentially the firm’s supply curve because it determines the firms Q produced at any price•A firm’s short-run decision to shut down:•Shutdown: a short-run decision not to produce anything during a specific periodof time because of current market conditions•Exit: a long run decision to leave the market•A firm should:•Shut down if TR < VC•SHUT DOWN IF P < AVC•A firm’s short run supply curve is the part of the marginal cost curve that lies above average variable cost.•A firm should exit if:•Exit if P < ATC.•Profit = (P-ATC) x Q•Chapter 15 - Monopoly•Monopoly- a firm that it the sole seller of a product without close substitutes •Main reason for monopoly is barriers to entry:•resources•government regulation•production process•When a monopoly increases the amount it sells, the action has two effects on total revenue:•The Output Effect: more output is sold, so Q is higher, which tends to increase total revenue•The price effect: the price falls, so P is lower, which tends to decrease total rev-enue•For a monopoly to maximize profits, P > MR = MC•In a monopolized market, price exceeds marginal cost•Profit = (P-ATC) x Q•The slop of the marginal revenue curve is twice as steep as the demand curve•Welfare cost of monopolies:•Deadweight loss is caused by the monopolist producing less than the socially efficient quantity of output•Costs to society are the deadweight loss and profits used to insure monopoliza-tion•Price Discrimination: the business practice of selling the same good at different prices to different consumers•Price discrimination can raise economic welfare by getting rid of deadweight loss•This is only higher producer surplus, not higher consumer surplus•Chapter 16 - Monopolistic Competition•Oligopoly: a market structure in which only a few sellers offer similar of identical products•Monopolistic competition: a market structure in which many firms sell products that are similar but not identical•Many sellers•Product differentiation•Free entry and exit: the number of firms in the market adjusts until economic profits are driven to zero•Concentration ratio: the percentage of total output in a given market supplied by the market’s four largest firms•SHORT RUN: exactly like a monopoly. Find where MR=MC then get the price from the demand curve.•LONG RUN: •As in a monopoly market, price exceeds marginal cost because of the down-ward-sloping demand curve•As in a competitive market, price equals average total cost. This is because freeentry/exit drives economic profit to zero.•Profit maximization occurs where price = ATC•Monopolistic vs Perfect Competition:•Two main differences: excess capacity and the markup•Excess capacity: monopolistically competitive firms are capable of increas-ing the quantity of goods they produce while lowering ATC, but they don’t because they would need to cut prices to sell the additional output.•Markup over Marginal Cost: Price exceeds marginal cost for a mon. compet-itive firm because the firm always has some market power•Monopolistic competition and Societal Welfare:•Has the normal deadweight loss of monopoly pricing•Externalities:•Entry of a new firm creates new surplus for consumers•Other firms lose customers and profits when a new firm enters•Advertising:•Critique:•Creates desires that otherwise might not exist•Impedes competition–tries to convince consumers larger product differencesexist.•Makes buyers less concerned with price differences and therefore creates a larger markup because of an inelastic demand