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EVERYTHING ECON - Mutual Benefit Add each participants...

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Mutual Benefit - Add each participant’s marginal benefit to see if purchase is efficient - Tax for efficiency o Criteria for a tax being effective Efficient: if it pays for the good Equitable: if person who values product more pays more o [Income(A) x Tax] + [Income(B) x Tax] = MC o Equality Are all parties better off than before? Is the tax progressive or regressive? Divide Cost of Product by number of participants and see if this is less than the MB of each participant Does SMC = SMB? - Be aware of the word proportional Perfect Competition - Always a horizontal MR - Many buyers and sellers - No barriers to entry and exit - Full information - No profits in the long run - Firms are price takers - If MR > AVC , stay in the market - To find P and Q, set MC = MR - Productively efficient Minimum of ATC (lowest cost) - Allocatively efficient MC = MB (optimal quantity at cheapest price) Monopolistic Competition - MR is twice as steep as demand (always beneath it) - Firms are price setters - Large number of firms - Differentiated Product* (Papa Johns) - Produce Q where MR = MC, go up to demand for price - There is mark up and excess capacity in the long run - Entry of firms drive down the market price o Shifts supply inward - Profits = 0 in the long run (ATC tangent to demand and intersects MC at min) - Excess capacity refers to Quantity : Markup refers to Price Monopoly - Product is differentiated - Barriers to entry and exit - Firms are price setters - MR always lies below demand - A fall in Price creates increase in Total Revenue
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- Monopolies produce DWL (Do not produce where MC = MB) o Produces a lower quantity at a higher price than the market equilibrium - Price discrimination eliminates DWL o With Price discrimination, NO CONSUMER SURPLUS o Producer surplus (with constant MC) = area above the price and below demand o Demand = MB = MR - Natural Monopoly o MC = AVC (This is a constant, straight line) o Always decreasing ATC curve (Large initial fixed costs) o Gov should subsidize gap between where MB = MC and ATC o Total Welfare minimized when firms produces at P = MC, but subsidizing the firm for potential losses o Total surplus is trapezoid above MC Monopsony - Only one buyer (usually of employment) - MCL lies above the supply curve (twice as steep) o Use MCL to find Q of labor o Use supply curve to find wage rate -
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