Economic profit Total Revenue Total Cost includes explicit costs Accounting profit Total Revenue Explicit Costs Economic profit is always greater than accounting profit Unit costs cost per individual good or service 1 Marginal Costs Cost of producing one more unit MC change in Total Costs change in Total Output Q 2 Average Variable Costs On average how much goes into each unit AVC Variable Costs Total Output 3 Average Fixed Costs AFC Fixed Costs Total Output 4 Average Total Costs ATC Total Cost Total Output Economies of scale as we get bigger average unit cost goes down i e things are cheaper in bundles We categorize industries by 1 Number of firms 2 Similarity of good services i e homogenous identical unique differentiated 3 The ease firms can enter industry i e barriers to entry Market Structure If economic profit 0 the firm is making more than opportunity costs Signal for others to join industry If economic profit 0 the firm is not covering opportunity costs Signal to leave industry If economic profit 0 normal profit there is no incentive to join or leave Perfect Competition Price taker the firm takes the market price and has no power to change it Demand curve is horizontal perfectly elastic Marginal Revenue MR change in Total Revenue change in Quantity Profit Total Revenue TR Total Cost TC Profit per unit TR TC Q Price ATC If Price P ATC the firm has a loss firms will leave the industry If Price P ATC the firm profits and more firms will enter the industry If Price P ATC economic profit 0 firms won t enter or leave When a firm has a loss it must decide whether to shut down or operate at a loss in the short run Loss is not sustainable in the long run To make decision compare Price and AVC Monopolistic Competition In monopolistic competition a firm can lower the price and increase Qd or raise the price and decrease Qd Downward sloping demand curve Marginal revenue curve is below the demand curve and downward sloping Government can block entry Copyright right to produce and sell books films music for lifetime 70 years Patent exclusive rights to a new product or technology for 20 years Public franchise government designates a firm as the only legal provider of a good or service known as natural monopolies Public enterprise government provides service usually public goods Main barriers 1 Government blocks entry of more than 1 firm 2 One firm has key control of the key resource s to produce a good 3 There are important network externalities in supplying a good or service Network externalities situation where the usefulness of a good or service increases as the number of consumers increase 4 Economies of scale are so large that a firm has a natural monopoly Natural monopoly one firm can supply an entire market cheaper the two or more firms due to economies of scale Mergers trade off between market power and efficiency Horizontal merger Vertical merger Michelin Tires merger between firms in the same industry ex GM and Ford merger between firms at different stages of production ex GM and 3 Merger Guidelines 1 Market definition ex is Whole Foods in Organic Grocery of Grocery Store market 2 Market concentration the higher it is the likelier a merger will increase market power Herfindahl Hirschman Index HHI o Below 1 500 markets not concentrated mergers not challenged o 1 500 2 500 markets moderately concentrated mergers that raise HHI by less than 100 points are probably not challenged more than 100 will be challenged o Above 2 500 markets highly concentrated mergers will be challenged 3 Merger standards