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Instructor, Andy Schlafly
Instructor, Andy Schlafly
==Review==
Let’s pause for a moment and divide economics into three categories: Introductory, Intermediate and Honors:
Let’s pause for a moment and divide economics into three categories: Introductory, Intermediate and Honors:
===Introductory===
microeconomics (the study of individual “micro” market decisions, companies, consumers)
microeconomics (the study of individual “micro” market decisions, companies, consumers)
P (price) & Q (quantity or output)
graphing supply and demand curves (with P on y-axis, and Q on x-axis)
supply meets demand: this defines the market price and quantity in a free, competitive market
scarcity: wants exceed free availability. Scarcity is what makes economics meaningful.
opportunity cost
transaction cost
rational economic action
utility
net benefits
equilibrium
firm = company = supplier = seller
marginal benefit of a firm’s output decision for producing one more Q: marginal benefit is P (price it is sold at)
monopoly
price discrimination
Law of Demand: when price goes up, then demand goes down. YOU MUST USE THIS LAW.
supply side
demand side
===Intermediate===
substitutes
substitutes
complements
fixed costs (FC) (these are costs that do not vary with a company’s output. E.g., rent payments)
variable costs (VC) (costs that do vary directly with output. E.g., fuel, labor)
average total cost (ATC) (this is all the costs divided by the quantity of output Q)
average variable costs (AVC) (total variable costs divided by the quantity of output Q)
total costs (TC = TVC + TFC)
elastic demand
inelastic demand
price elasticity of demand (percent change in quantity demanded divided by percent change in price, dropping the negative sign)
marginal cost (MC = change in total cost (TC) due to producing one more unit of output Q)
(note: total fixed costs (TFC) do not change as more is produced, thus MC = change in TVC due to one more output Q)
marginal revenue (MR)
short run (period when only some inputs are increased in order to increase output; e.g. overtime)
long run (period when any and all inputs are increased to increase output; e.g., build new stadium)
alternative definition of the “long run”: enough time to adjust all inputs in order to produce a given Q at the lowest possible cost
variable inputs (inputs that are increased to produce more Q in the short run)
fixed inputs (inputs that cannot be increased in the short run to produce more Q)
returns to scale (increasing, decreasing or constant? Look at whether output Q increases for increase in input I)
income effect
substitution effect
inferior good (a good that sees a decrease in demand when income increases, and vice-versa)
marginal product (increase in output due to additional input: Q = sum MP)
barriers to entry
oligopoly
law of diminishing marginal return
perfect competition (know the conditions for it)
economic point at which firms sell their goods (where MR=MC)
accounting profit (total revenue minus explicit cost)
economic profit (total revenue minus both explicit and implicit costs)
natural monopoly (a company that has increasing economies of scale, such that long-run average costs of production decrease, like power companies or railroads)
In a perfectly competitive market ...
:the increase in profit from an additional Q = P - MC
:the increase in profit from an additional Q = P - MC
:the firm increases Q only if P > MC
:the firm increases Q only if P > MC
:otherwise the company changes Q until it equals or exceeds AVC
:otherwise the company changes Q until it equals or exceeds AVC
:if no such Q exists then the company is better off shutting down
:if no such Q exists then the company is better off shutting down
In a natural monopoly, there is falling ATC and MC, so ATC > MC.
A monopoly shuts down in the short run if when MR = MC, AVC > P.
A monopoly shuts down in the long run if when MR = MC, ATC > P.
===Honors===
monopolistic competition
perfectly contestable markets
cartels
monopsony (a “buyer’s monopoly” – i.e., only one buyer)
cross-elasticity of demand (percent change in demand for good X divided by percent change in price for good Y)
income elasticity of demand (percent change in demand for good X divided by percent change in income)
consumer surplus (savings by consumers who would pay more than the market price for a good)
social cost (P-MC summed over the Q not produced due to a monopoly)
indifference curve
law of equiproportional marginal benefit
condition for reducing production (MC>MR)
condition for shutting down (P<AVC in short run or P<ATC in long run)
kinked demand curve model for oligopoly
dominant demand curve model for oligopoly
===Equations===
:At Q = 0, TC = TFC
:At Q = 0, TC = TFC
:At Q = 1, MC = TVC
:At Q = 1, MC = TVC
==Externalities==
“Externalities” are benefits or costs that are external to the seller and buyer of a good or service, for which no compensation is made. That may puzzle you at first. A company produces a good at its expense, and sells to a buyer who pays for it. The buyer bore the cost and received the benefit of the good itself. The seller bore the cost of producing the good, and received the payment for selling it. What else could be going on here?
“Externalities” are benefits or costs that are external to the seller and buyer of a good or service, for which no compensation is made. That may puzzle you at first. A company produces a good at its expense, and sells to a buyer who pays for it. The buyer bore the cost and received the benefit of the good itself. The seller bore the cost of producing the good, and received the payment for selling it. What else could be going on here?
==Antitrust Laws==
The response of government to externalities and to the very different problem of monopolies is regulation. Regulate the polluters; police the trading of music over the internet; and break up the monopolies like Standard Oil, AT&T, and perhaps Microsoft (which barely avoided a break-up by the skin of its teeth!).
The response of government to externalities and to the very different problem of monopolies is regulation. Regulate the polluters; police the trading of music over the internet; and break up the monopolies like Standard Oil, AT&T, and perhaps Microsoft (which barely avoided a break-up by the skin of its teeth!).
==ASSIGNMENT==
Make a list of the concepts at your level in the list at the beginning of this lecture. Divide your list into two categories: concepts you understand, and concepts you do not understand. Try to shorten the list of concepts you do not understand by reviewing the lectures. Then hand in your final (shortened) lists next week.
Make a list of the concepts at your level in the list at the beginning of this lecture. Divide your list into two categories: concepts you understand, and concepts you do not understand. Try to shorten the list of concepts you do not understand by reviewing the lectures. Then hand in your final (shortened) lists next week.