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Econ1210 Non-Cheat Cheat Sheet! (Finals)

ECON1210 cheatsheet

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Justin Tai
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91 views8 pages

Econ1210 Non-Cheat Cheat Sheet! (Finals)

ECON1210 cheatsheet

Uploaded by

Justin Tai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PRICE CEILINGS PRICE FLOORS

- Shortages (short-term) - Surpluses (short-term)


- Reduction of product quality - Wasteful increase in quality
- Wasteful lines / bribery - Lost gains from trade
- Lost gains from trade - Misallocation of resources
- Misallocation of resources

NEGATIVE EXTERNALITIES / POSITIVE EXTERNALITIES /


EXTERNAL COSTS -> TAX EXTERNAL BENEFITS -> SUBSIDY

WITHOUT TAX WITH TAX

SET​: ​Tax​ = level of external cost | Number of ​tradable allowances​ = equal to efficient quantity

Coase Theorem​: If ​property rights are fully assigned​ and if people can ​negotiate costlessly
with one another, will always arrive at efficient solutions to problems caused by externalities
Nonexcludable​: people who don’t pay ​CANNOT​ be easily ​prevented from using good
Nonrival​: one person’s use of good does ​NOT​ ​reduce ability of another to use same good

Clarke-Groves mechanism​: whether to produce public good depends on individuals’ WTP, but
how much one has to pay does not depend on how much he reports

Tragedy of the commons​: tendency for any unowned and nonexcludable good to be overused
and under-maintained (for common resources)
- Make decision ​individually​ -> produce if gain > cost
- S​ocially optimal​ outcome -> find MB using ∆TB (differentiate!) -> produce if MB > MC
- Solve with permits/tax, clearly defined property rights, regulation

Firm’s shut-down condition

- Produce Q* if Profit (Q = Q*) ≥ Profit (Q = 0) or TR(Q) – TVC(Q) ≥ 0


- Produce at ​P = MR = MC
- Note that AVC < AC, so produce if P > AC; inconclusive if P < AC
- Produce 0 if Profit (Q = Q*) < Profit (Q = 0) or if P < AVC(Q*) -> shut down
- MC curve​ should pass through ​minimum of AC and AVC

When to Enter and Exit industry


- Enter profitable industries (P > AC) -> increase supply
- Exit unprofitable industries (P < AC) -> shrink supply
- Note that at intermediate point (P = AC), profits = 0 so no entry/exit
Constant cost industries​ -> price quickly driven down to average cost of production

- No change in MC and AC
- Additional demand has no impact on price of input
- ∆Supply from larger # of firms (short-run entry) with same cost structure
Increasing cost industries​ -> additional demand will cause price of input to rise

- New firms will come in -> increase demand for inputs -> price of inputs increases -> MC
and AC shift up
Decreasing​ ​cost industries​ -> industry clusters help reduce costs as production increases

In long run, all competitive firms earn ​zero economic profit


Profit Maximization for Monopolies

1. MR = MC​ (MR > MC if not perfectly divisible)-> determine production ​quantity


- For straight line demand curve, MR curve is ​straight line that begins at same
y-intercept as demand curve but with twice the slope
- If demand = P = a – bQ, then MR = a – 2bQ
2. Use this quantity on ​demand curve​ to find ​price
3. Profit​ = (P – AC) * Q

Markup​: PRICE – MC in terms of MC (eg. if P = 40 and MC = 10 -> markup = 300%)


- More inelastic demand -> more monopoly raises price above MC

Deadweight loss of monopoly


Price regulation​ successful if set price at/above average cost -> monopoly continues to

produce

Sources of Market Power


Source of Market Power Example

Patents GlaxoSmith Kline’s Patent on Combivir

Laws Preventing Entry Indonesian Clove Monopoly, Algerian Wheat Monopoly,


US Post Office

Economies of Scale Subways, Cable TV, Electricity Transmissions, Major


Highways

Hard to Duplicate Inputs Oil, Diamonds, Rolex Watches

Innovation (continue to Apple’s iPod, Mathematica Software, eBay


innovate; one patent after
another)

Exclusive rights of Boat serving river (earlier example)


resources/inputs(?)
- Price corresponding to same Q* depends on demand -> no stable P-Q relationship that
describes supply

Perfect Price Discrimination

- Profit of firm

No Price Discrimination

- Profit of firm
- Consumer surplus
- Note that CS = 0 for perfect price discrimination
Others
- For price discrimination
- Horizontal summation to see combined market
- When PD is banned, must compare combined market and all individual markets
to find maximum profit
- If individual market allows greater profit, may abandon other markets
- First degree​ PD -> perfect price discrimination / personal pricing
- Second​ ​degree​ PD -> non-linear pricing/quantity discounts/ bundling/ quality
differentiation/ versioning (consumers self-select group)
- Third degree​ PD -> market segmentation
- Arbitrage must be impossible or not worth it
- Profit = Total Revenue – Total Cost = TR – TVC – TFC
- Producer Surplus = TR – TVC
- Marginal cost is in terms of total output (Q), not labour
- MC intersects with lowest point of both AVC and AC
- ∆Productivity -> likely affect AVC, MC, ATC
- ∆Fixed cost -> AFC, ATC
- Want to minimize average total cost
- Long-run ATC is envelope of all minimum points of various short-run ATC curves
- MR of monopolist is differentiated TR

- NOT ABOUT MAXIMIZING REVENUE, BUT ABOUT MAXIMIZING PROFIT


- MR of perfectly competitive firm is straight horizontal line
- Competitive firm’s short-run supply curve is the section of MC curve that is above AVC

- Marginal product of labour = ∆output / ∆labour unit


- Marginal cost = ∆cost / ∆output
- Average variable cost = variable cost / total output
- Add all MC up to point and divide by output?
- Average fixed cost = fixed cost / total output
- Average total cost = total cost / total output

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