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Economics Lecture Eight (view source)

Revision as of 01:42, October 18, 2009

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review material
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{{Economics_Lectures}}
 
{{Economics_Lectures}}
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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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<move some of the remaining material to next class?>
    
<add section about Intellectual Property, including trademarks and copyright; they are monopolies>
 
<add section about Intellectual Property, including trademarks and copyright; they are monopolies>
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<Hunt Brothers trying to corner silver market>
 
<Hunt Brothers trying to corner silver market>
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Eighth Lecture – Monopoly
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Instructor, Andy Schlafly
   
 
 
==Introduction==
 
==Introduction==
Aschlafly
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