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| | Tenth Lecture – Review and Externalities | | Tenth Lecture – Review and Externalities |
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| − | Instructor, Andy Schlafly | + | Instructor, Andy Schlafly |
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| − | ==Review==
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| − | Let’s pause for a moment and divide economics into three categories: Introductory, Intermediate and Honors:
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| − | ===Introductory===
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| − | microeconomics (the study of individual “micro” market decisions, companies, consumers)
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| − | P (price) & Q (quantity or output)
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| − | graphing supply and demand curves (with P on y-axis, and Q on x-axis)
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| − | supply meets demand: this defines the market price and quantity in a free, competitive market
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| − | scarcity: wants exceed free availability. Scarcity is what makes economics meaningful.
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| − | opportunity cost
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| − | transaction cost
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| − | rational economic action
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| − | utility
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| − | net benefits
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| − | equilibrium
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| − | firm = company = supplier = seller
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| − | marginal benefit of a firm’s output decision for producing one more Q: marginal benefit is P (price it is sold at)
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| − | monopoly
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| − | price discrimination
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| − | Law of Demand: when price goes up, then demand goes down. YOU MUST USE THIS LAW.
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| − | supply side
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| − | demand side
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| − | ===Intermediate===
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| − | substitutes
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| − | complements
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| − | fixed costs (FC) (these are costs that do not vary with a company’s output. E.g., rent payments)
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| − | variable costs (VC) (costs that do vary directly with output. E.g., fuel, labor)
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| − | average total cost (ATC) (this is all the costs divided by the quantity of output Q)
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| − | average variable costs (AVC) (total variable costs divided by the quantity of output Q)
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| − | total costs (TC = TVC + TFC)
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| − | elastic demand
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| − | inelastic demand
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| − | price elasticity of demand (percent change in quantity demanded divided by percent change in price, dropping the negative sign)
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| − | marginal cost (MC = change in total cost (TC) due to producing one more unit of output Q)
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| − | (note: total fixed costs (TFC) do not change as more is produced, thus MC = change in TVC due to one more output Q)
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| − | marginal revenue (MR)
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| − | short run (period when only some inputs are increased in order to increase output; e.g. overtime)
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| − | long run (period when any and all inputs are increased to increase output; e.g., build new stadium)
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| − | alternative definition of the “long run”: enough time to adjust all inputs in order to produce a given Q at the lowest possible cost
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| − | variable inputs (inputs that are increased to produce more Q in the short run)
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| − | fixed inputs (inputs that cannot be increased in the short run to produce more Q)
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| − | returns to scale (increasing, decreasing or constant? Look at whether output Q increases for increase in input I)
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| − | income effect
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| − | substitution effect
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| − | inferior good (a good that sees a decrease in demand when income increases, and vice-versa)
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| − | marginal product (increase in output due to additional input: Q = sum MP)
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| − | barriers to entry
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| − | oligopoly
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| − | law of diminishing marginal return
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| − | perfect competition (know the conditions for it)
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| − | economic point at which firms sell their goods (where MR=MC)
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| − | accounting profit (total revenue minus explicit cost)
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| − | economic profit (total revenue minus both explicit and implicit costs)
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| − | natural monopoly (a company that has increasing economies of scale, such that long-run average costs of production decrease, like power companies or railroads)
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| − | In a perfectly competitive market ...
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| − | :the increase in profit from an additional Q = P - MC
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| − | :the firm increases Q only if P > MC
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| − | :the optimal level of Q is where P = MC
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| − | :the company stays in business in the short run at level Q only if P equals or exceeds AVC
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| − | :otherwise the company changes Q until it equals or exceeds AVC
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| − | :if no such Q exists then the company is better off shutting down
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| − | In a natural monopoly, there is falling ATC and MC, so ATC > MC.
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| − | A monopoly shuts down in the short run if when MR = MC, AVC > P.
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| − | A monopoly shuts down in the long run if when MR = MC, ATC > P.
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| − | ===Honors===
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| − | monopolistic competition
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| − | perfectly contestable markets
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| − | cartels
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| − | monopsony (a “buyer’s monopoly” – i.e., only one buyer)
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| − | cross-elasticity of demand (percent change in demand for good X divided by percent change in price for good Y)
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| − | income elasticity of demand (percent change in demand for good X divided by percent change in income)
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| − | consumer surplus (savings by consumers who would pay more than the market price for a good)
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| − | social cost (P-MC summed over the Q not produced due to a monopoly)
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| − | indifference curve
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| − | law of equiproportional marginal benefit
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| − | condition for reducing production (MC>MR)
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| − | condition for shutting down (P<AVC in short run or P<ATC in long run)
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| − | kinked demand curve model for oligopoly
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| − | dominant demand curve model for oligopoly
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| − | ===Equations===
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| − | :At Q = 0, TC = TFC
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| − | :At Q = 1, MC = TVC
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| − | :At all Q > 0, AVC = TVC / Q
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| − | :At all Q > 0, AFC = TFC / Q
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| − | :At all Q, ATC = AVC + AFC
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| − | :MC = W / MP (where W is wage per unit of labor, and labor is the only input)
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| − | :TVC = sum of MC
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| − | :AVC = W / AP when labor is the only input and W is the wage or cost of the labor
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| − | :TFC = Q x AFC
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| − | :TVC = Q x AVC
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| − | :TC = Q x ATC
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| − | :long run average costs (LRAC) are never more than short run average costs (SRAC) for a given Q. Why? See the alternative definition of “long run” in “Medium” list above
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| − | :LRAC = P x (I / Q), where I is input and Q is output and P is price of the input
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| | ==Externalities== | | ==Externalities== |