CHAPTER 6

-Price Ceiling → maximum (QS < QD aka a shortage thus upward pressure), binding if below equilibrium
-Price Floor → minimum (QS > QD aka a surplus thus downward pressure), binding if above equilibrium
-Tax on sellers → supply curve shifts upwards/right, tax on buyers → demand curve shifts left/down
- **Tax burden falls more heavily on the side of that market that is less elastic**

CHAPTER 7
-Willingness to pay → maximum amount a buyer will pay
-Consumer surplus = willingness to pay-price = area below demand curve above the price
-Willingness to sell → mimimum amount a seller will sell at (must exceed cost of producing)
-Producer surplus = the amount a seller is paid - the seller’s cost (above supply curve below
price)
-Marginal buyer/seller → next person who leaves the market if the price raises/drops, respectively
-Total surplus = value to buyers - cost to sellers = area between supply and demand curves
-Efficency is maximization of total surplus, achieved at the market equilibrium quantity (laissez-faire),
also good being consumed by buyers who value it the most
- Productive efficiency: producing the output that minimizes cost
- Economic: maximizing total surplus
-Equality: whether the various buyers and sellers have similar levels of economic well-being
-Market failure: things like market power and externalities (Eg pollution), inability of some unregulated
markets to allocatee resources efficiently

CHAPTER 8
-Tax revenue = T x Q
-Deadweight Loss → the fall in total surplus that results from
a market distortion, such as a tax
-The losses to buyers and sellers from a tax exceed the
revenue raised by the government
-Deadweight loss is larger when the supply curve is
more elastic, TR larger when less elastic
-If you double the size of a tax, the deadweight loss
rises by a factor of 4
-Laffer Curve: eventually, an increase in T causes tax revenue
to decrease, bc Q will fall so much

CHAPTER 13
-Total revenue → the amount a firm receives for the sale of its
output
-Profit = total revenue - total cost
-Economic profit = total revenue - total costs
-Accounting profit = total revenue - total explicit cost
-Production function → the relationship between the quantity of inputs used to make a good and the
quantity of output of that good (gets flatter as production rises bc of diminishing MP)
-Marginal product: the increase in output that arises
from an additional unit of input
-Diminishing marginal product: the MP of an input
declines as the quantity of the input increases
-Total cost curve → relationship between Q produced (x axis) and total costs (y axis) (gets steeper bc
of DMP)

SHAPES OF COST CURVES:

-Rising Marginal costs as Q increases (bc of DMP)
-U shaped ATC (bc VC U shaped, but FC decreases bc spreads out)
-Minimum of ATC at bottom of U = efficient
-Relationship between marginal cost and ATC
-MC < ATC, ATC is decreasing, MC > ATC, ATC is increasing (think GPA MC=next grease
ATC=GPA)
-MC curve crosses ATC at its minimum
CURVES IN LONG RUN:
-firms have greater flexibility in the long run, decisions more fixed in short run
-Economics of scale: long-run ATC falls as the quantity of output increases (specialization)
-Diseconomies of scale: long-run ATC rises as the Q of output increases (coordination problems)
- Explains why long-run average-total-cost curves are often U-shaped
- Economies of scale, constant returns to scale then diseconomics of scale as firm grows
-Firms can change scale of production in long run, all inputs become variable in the long-run (even fixed)
-Graphing LRTC → point w # of factories corresponding with lowest TCs

CHAPTER 14
-Competitive Market Characteristics: many buyers and sellers, homogenous products, little/no transaction
costs, perfect information, no barriers to entry/exit, firms do not have market powers (price takers),
horizontal demand curve, zero economic profit in long run (bc of entering and exiting), no ability to
manipulate economic profit in LR
- Price does not depend on quantity produced
- **AR = P and MR = P, thus AR =MR***
- AR is how much a firm receives for typical unit sold, MR is change in TR from each extra unit
-Profit maximization in competitive markets: at MR=MC
- MR > MC firms should increase output, MR < MC firms decrease output
- MC curve is competitive firm’s supply curve (short run MC curve above AVC curve)
- MR = AR curves are same as demand curve
SHUT DOWNS:
-temporary shut downs still pay fixed cost (sunk costs), but saved varible costs of maxing products
- shut down if TR < VC (ie TR/Q < VC/Q or bc TR/Q = AR = P and VC/Q = AVC) if **P <AVC**
EXIT AND ENTER
- Exit if TR < TC, thus if P < ATC (ie when some firms are losing money some will exit)
- Enter if TR > TC, thus if P > ATC (ie when some firms are making profits others will enter)
PROFIT = (P - ATC) x Q
COMPETITIVE MARKETS IN LONG RUN:
- At the end of process of entry and exit, firms that remain in the market must make zero economic profit
- bc eventually P = ATC
- still stay in business bc accounting profit is positive, and revenue compensates for opportunity
costs
- In LR equilibrium, firms must operate at efficient scale (lowest ATC)
- Even with shifts in demand curve that increase supply in short run, incentivizes new entry and price will
go back down again (even though Q produced and sold will rise)
- ***Long-run market supply curve is horizontal***
- LR supply curve might slope upward because resources are limited
- Price in the market reflects the ATC of the marginal firm, thus firms with lower costs earn positive
profit

CHAPTER 15
- Monopoly characteristics: single firm/seller, firm sells product with no close substitutes, imperfect
information, high transaction costs, high barriers to entry/exit, firm have market power (price setter),
downward sloping demand curve, higher prices and higher profits
- Market power: caused by (legal/naturual) barriers to entry or natural monopoly (firm that can supply
output to entire market at a lower cost than many firms could; has economies of scale over the relevant
range of output, firm faces high fixed costs and low marginal costs)
- Monopoly demand curve: downward sloping = AR, but MR is under the demand curve, thus P > MR
- Doesn’t have a supply curve
- Maximize profit at MR = MC, but MR ≠ P
- highest price firms can charge at QMAX is on the demand curve where MR = MC
- Profit = (P - ATC) x Q, If P > ATC monopoly earns a profit
REVENUE:
- The output effect: more output is sold, so Q is higher, which increases TR
- The price effect: the price falls, so P is lower, which decreases total revenue
- No price effect in competitive markets
- Thus, monopolies marginal-revenue curve lies below demand curve (can be negative)
CONDITIONS (Same as competitive market):
- P > ATC (produce)
- P = ATC (produce)
- AVC < P < ATC (produce)
- AVC = P < ATC (indifferrent)
- P < AVC < ATC (shut down)
IN LONG RUN: firm is able to maintain a profit in the long run, but might need to change scale of
production
- Equity in monopoly: not achieved
- process equity: no, because imperfect information and high barriers to entry
- end results equity: no, because firms do not reach zero economic profit
-Efficiency in monopoly: No because deadweight loss
- Economic: no because P > MC ⇒ QM ≮ QC ⇒ DWL > 0
 - output too low, price too high (contrived scarcity)
- Productive: no, usually not producing at minimum of ATC or LAC
POLICY
- Anti-trust laws that make firms more competitive [eg sherman (outlaws monopolies/trusts) and clayton (
prevents unfair methods of competition) acts]
- Regulation (on price or quantity)
- Can’t set price at marginal cost, because MC < ATC, and monopoly will face loss
- Public ownership
- If they do a bad job, losers are customers and tax payers
- Do nothing (if cost of doing something exceeds benefit
PRICE DISCRIMINATION: Business practice of charging different prices to different customers (or
groups of customers) for the same product (eg movie tickets0
- Need market power and knowledge of willingness to pay to do this
- Perfect price discrimination: charging a different price of each unit sold
- Can raise economic welfare by eliminating inefficiency inherent in monopoly price
- Always raises the monopoly’s profit (though can raise, lower of leave total surplus)