5
Negative Chapter cross-price elasticity means the goods are compliments
Positive cross-price elasticity means the goods are substitutes
Elastic Demand price elasticity > 1
Inelastic Demand price elasticity < 1
Unit Elastic Demand price elasticity = 1
As you move up and to the left on the demand curve, elasticity becomes larger
As you move down and to the right on the demand curve, elasticity becomes smaller
Consumer and Producer Surplus operates in a block-like fashion, when quantity rises or
falls, the change in surplus derived from the change in quantity sold belongs to the firms
that entered/exited the market.
In the long run, the marginal firm will earn zero economic profit
Perfect price discrimination charging everyone at their highest individual willingness
to pay; this maximizes profit for the monopoly and eliminates deadweight loss.
When a monopoly increases the amount it sells, it has two effects on TR (P*Q):
Chapter 7
Chapter 14
Chapter 15
o
Output effect more output sold, so Q is higher.
o
Price effect price falls, so P is lower.
For monopolies: when price effect > output effect, MR is negative; when output effect >
price effect, MR is positive.
Resale price maintenance selling a product to retailers and requiring the retailers to
charge a specific price for the product.
Monopolistically competitive markets have profit-maximizing points equal to that of
monopolies
Chapter 16
Chapter 17
Product-variety externality because consumers get some consumer surplus form the
introduction of a new product, entry of new firms conveys a positive externality on
consumers.
Business-stealing externality because existing firms lose customers and profits from
the entry of a new competitor, entry of a new firm imposes a negative externality on
existing firms.
In a monopolistically competitive market, exiting firms raise demand and entering firms
lower demand.
In a monopolistically competitive market, average revenue (AR) = price (P)
Differentiated products = incentive for firms to advertise
A firms willingness to advertise signals to a customer that the firm has quality products.
Advertising critics argue that it manipulates the buyer and decreases competition by the
leading the buyer to believe the products are more different than they actually are.
Advertising proponents argue that it makes buyers more informed and increases
competition by offering a greater variety of products and prices.
Reducing a customers price sensitivity reduces competition and social welfare.
2 major differences between monopolistically competitive and perfectly competitive
markets
o
Excess capacity
o
Markup over marginal cost
Excess capacity a firm is producing less than the optimal quantity
Positive statements describe the world as it is.
Normative statements describe the world as it should be.
Luxury goods have higher elasticity than normal goods.
Marginal seller the seller who would leave the market if the price were any lower
Marginal buyer the buyer who would leave the market if the price were any higher
For inferior goods, income elasticity of demand is negative
Exam 1
Exam 2
For normal goods, income elasticity of demand is positive
To internalize a negative externality, the government taxes the producer to reduce the
output to the socially desirable quantity.
To internalize a positive externality, the government subsidizes the producer in order to
raise output to the socially desirable quantity.
Coase Theorem if private parties can bargain without cost over the allocation of
resources, they can solve the problem of externalities on their own.
Cost-benefit analysis compares the costs and benefits to society of providing a public
good.
Externalities cause the market to be inefficient.
REMEMBER PUT TO QUANTITY ON TOP!
Firms tend to be more responsive to price changes over long periods of time than over
short periods of time (as relating to the elasticity of supply)
Between monopolistically competitive markets and perfectly competitive markets:
Exam 3
o
Excess capacity applies only to monopolistically competitive markets.
o
Zero economic profit applies to both markets.
o
Markup over marginal cost applies only to monopolistically competitive markets
o
Product-variety externalities and business-stealing externalities apply only to
monopolistically competitive markets.
Average Revenue (AR) = Price (P) for competitive, monopolistically competitive, and
monopolistic firms.
When a monopoly sells an additional unit of output, its revenue increases by an amount
less than the price; this is not true for perfectly competitive firms.
TOTAL REVENUE DOES NOT SUBTRACT COSTS!
If one party has a dominant strategy, a Nash Equilibrium will be achieved.
The socially efficient level of production occurs where the MC curve intersects the
demand curve, not the MR curve.
When a firm operates with excess capacity, additional production would lower the ATC.
Chapter 18
A firms demand for a factor of production is derived from its decision to supply a good
in another market.
Production function the relationship between the quantity of inputs used in production
and the quantity of outputs from production.
Marginal product of labor the increase in the amount of output from one additional
unit of labor.
Value of marginal product the marginal product of a given input multiplied by the
market price of the output (also called the marginal revenue product).
A competitive, profit-maximizing firm hires workers up to the point where the value of
the marginal product of labor = wage.
For a competitive, profit-maximizing firm, the value of marginal product = the labor
demand curve.
What causes the labor-demand curve to shift
o
o
Technological change
o
Change in the output price
Change in the supply of other inputs
What causes the labor-supply curve to shift
o
Change in tastes
o
Changes in alternative opportunities
o
Immigration
An inputs rental price must equal the value of its marginal product
Compensating differentials difference in wages that arises from nonmonetary
characteristics of different jobs.
Chapter 19
o
o
Night shifts pay more than day shifts
Coal miners are paid more than other workers with the same level of education
Human capital the accumulation of investments in people, such as education and onthe-job training.
Signaling theory firms use educational attainment as a way of sorting between highability and low-ability workers; education itself does not lead to more productive
workers.
Superstar phenomenon takes place when
o
Every customer wants to enjoy the good supplied by the best producer
o
The good is produced with a technology that allows the best producer to supply every
customer at a low cost
Efficiency wages higher wages increase a workers productivity
Nondiscriminatory firms have lower costs than discriminatory firms and consequently
tend to replace discriminatory firms in the market.
Questions for the Teacher
1) Why would a technological advance in the ice cream industry increase consumer surplus?
2) See Below:
Consider the following information about baseball production at Bob's Baseball Factory:
Worker Marginal Product
1
3
2
5
3
8
4
10
5
7
6
4
7
2
Bob pays all his workers the same wage and labor is his only variable cost. From this information
we can conclude that Bob's average variable cost decreases
a. as output rises from 0 to 10, but rises after that.
b. as output rises from 0 to 26, but rises after that.
c. as output rises from 0 to 33, but increases after that.
d. continually as output rises.