As a price taker, maximizing profit requires maximizing quantity π = profit = total revenue - total cost TR = P x QTotal Cost = TC(Q) = function of QTotal cost includes the opportunity costof all resources used TC = Fixed Cost (FC) + Variable Cost (VC)Explicit cost(things that must be paid for)Implicit cost (things that do not require)Cost = opportunity, best alternative use of resources Economic Profit = π = profit = TR - TC-Intends to explain movement of resources from one part of the economy to another Accounting Profit = TR - Explicit Cost-Complies with tax law Long run - time period of sufficient Marginal Cost = (∆TC) ÷ (∆Q) -Slope of the Total Cost Function (derivative)Fixed cost is the y intercept since it does not change no matter how much you do or do not produceAverage Cost = TC ÷ QMarginal cost is the cost for the specific last unit Average cost is the average cost of all units produced Total revenue (TR) = P x QMarginal Revenue = MR = (∆TR) ÷ (∆Q)
MC < AC then AC fall MC > AC then AC rise Economic Profit is based on AC Individual firm supply curve is MC above minimum AC Short run market supply curve is the horizontal sum of individual firm supply curve Sum of supply is the sum of Q of each firmShort Run supply is horizontal sum of MC's of incumbent firms Long Run supply allows for entry or exit of firms Entry or exit of Firms in Long Run is determined by Economic Profit πIf π > 0, new firms enterIf π < 0, incumbent firms exit If π = 0, Long run equilibrium, no net entry or exit Profit = producer surplus - total cost Long run supply curve is perfectly elastic since price does not change regardless of production quantity given that the input cost does not change LONG RUN SUPPLY CURVE ALLOWS ENTRY AND EXIT*Long run supply curve is upward slope elastic when cost increases (increasing cost industry)Long run supply curve is downward slope elastic when cost decreases (decreasing cost industry)Maximum Revenue when P = MC
Chapter 12Invisible Hand property 1 - if firms are maximizing profit and equating P = MC, then overall costs are minimized Shift from higher MC to lower MC saves When MC of two firms equal, the overall costs are minimizedP = MC1= MC2= … = MCNInvisible Hand property 2 - Balance of industries, π = 0 -Resources (capital, labor) will move in and out until π = 0 (elimination principle)-Joseph Schumpeter, Capital, Socialism and DemocracyoCreative Destruction Creative destruction implies turnover of firms driving economic profit to 0
Chapter 13 - Monopoly
Chapter 14 - Price discrimination Bundling - requires goods to be bought along with other goods Typing - when one good requires another good to be bought from the same company Price discrimination means charging more than one price for the same product Perfect price discrimination - each consumer is charged their maximum willingness to pay
Chapter 15 - Cartels, Oligopolies, and monopolistic competitionCartel - attempts to move a market from competitive to what would occur if it were controlled by a single monopoly.