Game Theory and Discount Rates
Game Theory: The study of strategic interactions among two or more economics
Strategic Decision: An action made based on the anticipation of others actions.
Simultaneous Game: A game in wh
The industry structure between perfect competition and monopoly is known as
Oligopoly: A market structure characterized by competition among a small
number of firms.
Percent Discounted Value
The Rule of 72
Rule-of-thumb for approximating how long it will take for a balance growing at
any constant interest rate to double.
Divide 72 by the per-period interest rate.
The quotient will be the approximate nu
Oligopoly with Identical Goods: Collusion and Cartels
o Firms make identical products.
o Industry firms agree to coordinate their quantity and pricing decision, and
no firm deviates from the agreement even if b
o Industry firms sell differentiated products that consumers do not view as
o Other firms choices affect a firms residual demand curve, but the firm
The Deadweight Loss of Market Power
The dead weight loss of market power is completely lost. No transfer occurs.
o Base is the difference between the firms output with market power and its
output under perfect competition
Social Surplus and Characteristics of P.C. Firms
A firms Short-Run Supply Curve in a Perfectly Competitive Market
Only the portion of the marginal cost curve above the minimum average variable
cost will be on the firms supply curve.
Oligopoly with Identical Goods: Cournot Competition
o Firms sell identical products.
o Firms compete by choosing a quantity to produce.
o All goods sell for the same price the market price, which is determi
Profit Maximization with Market Power
Step 1: Derive the marginal revenue curve from the demand curve.
This is a linear inverse demand curve in the form . The marginal revenue curve
for this type of demand curve is . Hence, for this demand
Because a firm faces a downward sloping demand curve, it can only sell more of
its good by decreasing its price.
Because firms with market power recognize the relationship between output and
Deriving Cost Curves
Cost Curve: The mathematical relationship between a firms production costs and
Fixed Cost Curve
o Fixed cost does not vary with output, so it is constant and the fixe cost
curve is horizontal.
Identifying Minimum Cost: Combining Isoquants and Isocost Lines
A firms goal is to produce a desired quantity of output at the minimum possible
Total cost of inputs, .
Summary of a firms cost-minimization problem: Chos
Net Present Value
Net Present Value
Net Present Value: The use of the present discounted value to evaluate the
expected long-term return on an investment.
We can incorporate costs and benefits into a single present discounted value fairly
Total Revenue, Total Cost, and Profit Maximization
Key aspects: Marginal Cost and Marginal Revenue
Marginal Revenue: The additional revenue from selling one additional unit of
In a perfectly competitive market,
Market Structures and Perfect Competition in the Short Run
Perfect Competition: A market with many firms producing identical products and
no barriers to entry.
Market Structure: The competitive environment in which firm
Costs That Matter for Decision Making: Opportunity Costs
Accounting Cost: The direct cost of operating a business, including costs for raw
materials, wages paid to workers, rent paid for office or retail space, and the li
Production in the Long Run
In the long run, firms can change not only their labor inputs but also their capital.
First benefit, in the long run, a firm might be able to lessen the sting of
diminishing marginal product. If
The Basics of Production
The Basics of Production
Production: The process by which a person, company, government, or non-profit
agency uses inputs to create a good or service for which others are willing to pay.
Final Good: A good that is
Substitutes and Compliments (Isoquants)
How curved an isoquant is shows how easily firms can substitute one input for
another in production.
o For isoquants that are almost straight, a firm can replace a unit of one
In this production function;
is a mathematical function that describes how capital, , and labor, , are
combined to produce the output, .
Cobb-Douglas production function:
Short Run: The time perio