Important Things To Know For Exam 2 Production Revenue Price x Quantity o Revenue Money coming In o Costs Expenditures money going out Goal of firms is to maximize profits o Profit TR TC Variable Inputs inputs that CAN vary in the short run o Ex Labor Fixed Inputs inputs that CANNOT vary in the short run o Ex Capital number of factories rented office space large machinery Long Run vs Short Run comparison o Short run time frame in which some inputs are fixed o Long run time frame in which no inputs are fixed all are variable Average product of Labor APL average productivity of workers Marginal Product of Labor MPL additional output by adding workers o Decreasing MPL diminishing returns to labor o APL Q L o MPL Q L Costs Two types of Costs o Variable costs VC costs associated with variable inputs vary as q changes o Fixed costs FC costs associated with fixed inputs do not vary as q changes o Total Costs formula FC VCFC VC ATC TC q AFC FC q AVC VC q MC TC q or VC q Profit Maximization and Perfect Competition Profit Maximization MR TR q o MR MC producing another unit increases revenue more than costs o MR MC increases costs more than it increases revenue o Produce moreore o Produce less Perfect Competition 1 Many firms 2 Firms are price takers 3 Identical goods or services 4 Free entry and exit o Firms should produce where P MC Profit TR TC or P ATC x q o Positive profit P ATC o Negative profit P ATC o No profit P ATC Long Run and Perfect Competition Shutdown rules o TR TC Not losing money so produce o TR TC TR VC produce in the short run exit in long run o TR VC shutdown in the short run exit in the long run still not producing Returns to Scale o Increasing returns to scale o LRATC is falling as the scale of operation increases o Constant returns to scale o Decreasing returns to scale o LRATC are constant as the scale of operation increases o LRATC are increasing as the scale of operation increases Monopoly o A monopoly occurs when only one firm is supplying goods to the entire market o Why Barriers to entry o What creates barriers to entry 1 Returns to scale 2 Geography 3 Legal Provisions 4 Anti Competitive behavior o The marginal cost curve of a monopoly is the same as the market supply curve Monopolists choose qm where MR MC then choose price they will charge Pm at the height o The monopoly supplies to all consumers Who do monopoly s maximize profit o Choosing the quantity where MR MC What price do they charge o Monopoly s charge the maximum price consumers will pay o Height of the demand curve of the demand curve MR of a monopolist o Marginal revenue decreases as quantity increases o Producing more lowers total revenue SR and LR produce shutdown exit o TR TC produce in both short run and long run o TR TC TR VC produce in the short run and exit in the long run o TR VC shutdown in the short run and exit in the long run Market Power Market power allows firms to practice price discrimination o People that want the good more pay more because they have higher willingness to pay or more inelastic demand Types of Price Discrimination First Degree charge different prices to different consumers Second Degree charging different prices for different amounts of the good bundling Third Degree charging different prices to different groups Two part Tariff fixed fee up front Monopolistic Competition characteristics 1 Several to many firms 2 Free entry and exit 3 Similar but not identical products How do firms in monopolistic competition behave in the short run Like monopolies How do they decide q MR MC How do they choose price Height of the demand curve at quantity where MR MC How is monopolistic competition different from monopoly Hint time period long run What kind of long run profits do firms in monopolistic competition experience zero
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