Econ 102 Final Exam Study Guide- Chapter X: Consumer and Producer Surpluso Demand Curve – Willingness to Pay WTP diminishes because of decreasing marginal utility A consumer is willing to pay less for each additional good consumer Shown by height of demand curve at quantity corresponding with priceo Supply Curve Upward sloping due to increasing production costs due to diminishing marginal product  causes marginal cost to increase Willingness to Sell - the lowest price a producer is willing to accept for a unit produced Shown by height of the supple curveo Consumer Surplus The difference between the willingness to pay and the price actually paid for the good Area below the demand curve and above the price for all units purchased CS= WTP-Price Actually Paid CS decreases, PS increaseso Producer Surplus The difference between the price the good is sold at and the lowest price the producer would have been willing to sell the good at Area below the price and above the supply curve for all units sold PS= (Price good sold at) – (Willingness to Sell/MC) As PS increases, CS decreases- Buying less units- Paying higher prices As price increases, PS increases- Sell more units- Sell at higher priceso Total Economic Surplus/Economic Welfare The sum of the producer and consumer surplus When maximized, we say the market is efficient  equilibrium priceo Deadweight Loss CS or PS that disappears and is transferred to nobody Market not running efficiently if exists Price ceilings/Price floors cause some DWL- Don’t allow price to reach equilibrium- Due to reduced # of transactions- Price Ceilingso As CS increases, PS decreases- Price Floorso As PS increases, CS decreases Government intervention creates overall losses when redistributes surplus between buyers and sellers- Still do it b/c work to help specific groupso Farmers, renters, low-income families- Chapter 23: Perfect Competitiono Market Structures All features of a market that effect the behavior and performance of the firms within the market- # of sellers, entry barriers, product differentiation Importance  predict behavior, output, efficiency, price-cost marginso Market Power A firm is said to have market power when the firm can influence the price of the product or the terms in which the product is sold Competitive markets  firms have little/no market power Non-Comp. markets  firms have a lot of market powero Perfect Competition A market structure in which the decisions of individual buyers and sellers have no effect on the market price Perf. Comp. Firm  cannot affect the price of the product it sells b/c small part of industry- No market power- Ex: Farmingo Price Taker A competitive firm that must take the price of its product as given because the firm influences its price Firm chooses output based on the market price Price chosen independently of other firmso Perfect Competitor = Price taker Large # of buyers and sellers Homogenous product Everyone has full access to price info No barriers to entry or exito Free Entry: anyone can start a firm in industry Sandwich shop, crafts, photographer, web page, appso Entry Barriers: car manufacturing, diamond mining, etc.o Demand Curve of Perfect Competitor Individual firm has perfectly elastic demand at going market price (if price taker) Perfect competitor accepts given price- Raise price  nothing sells- Lower price  earns less profito Profit-Maximization Model Helps perfect competitor decide how to produce Assumes firms attempt to maximize total profits/minimize losses Profit = Total revenues – Total Costs  Profit represented as Pi Losses – negative profitso Optimal/Maximum Profit Total Costs and Total Revenues  biggest gap where revenues exceed costs Marginal Costs = Marginal Revenue Implication that we are increasing output- MR = Change in Total Revenue/ Change in Q- MC= Change in Total Cost/ Change in Q MR = Price- Why? An individual firm cannot affect the market price- The additional revenue received is equal to market priceo Profits/Losses  leave industry? Profit = # units sold * average profit/unit If loss of staying in business < loss from shutting down  continue to produce Shutting down IS NOT exiting the industry  just stop production temporarily/ still in businesso Short-Run Industry  Break-Even Price- Price = minimum average total cost- Profits = Price > min ATC- Losses = Price < min ATC  exit industry in long run Shut Down Price- P < minimum average variable cost  shut down in SR- Minimum AVC < P < minimum ATCo Still produce Q b/c better to cover some of total fixed costs rather than none Small loss > big losso Long-Run Industry Signals: convey info to economic decision makers  provides incentive to react appropriately Economic Profits (positive)- Signal telling competitors to join market- Industry supply shifts right- Prices fall until TP = 0 Economic Losses (negative profit)- Signals for existing firms to exit- Industry supply shifts left- Price rises until TP = 0 Equilibrium- Firm can adjust plant size  no further incentive to change- Firm produces where P, MR, MC, SRAC, & LRAC are equal- Marginal Cost Pricingo The opportunity cost of last unit producedo Price = MC of last unit produced- Allocative Efficiencyo Marginal value to consumers equals the marginalcost of productiono Occurs at output Q* where P=MCo No Deadweight LossChapter 24: Monopoly- Monopoly – a market containing a single firm- Monopolist – a firm that is the only seller in a market- When monopolist makes profits, other firms don’t join industry in long run because of entry barriers- Entry Barrier – any barrier to the entry of new firms into an industry; can be natural or createdo Owning all the resources You own everything, so no one else can make a substituteo Economies of Scale  Exist when firm has decreasing average cost over large range of outputs Large firms more efficient than small firms Difficult for other firms to enter and compete- New firms usually produce low output at high costs Natural Monopoly- Average production costs for entire industry are lowest when there is only one firm- High fixed costs and low MC- Downward sloping ATCo Created Barriers to entry Government granted  Patent- Incentive to innovate Tariffs- Tax imported goods- Set up to