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15 views5 pages

Untitled Document

Uploaded by

kathugy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Costs

●​ Average Fixed Cost (AFC)


○​ AFC= FC / Q
●​ Average Variable Cost (AVC)
○​ AVC= VC / Q​
●​ Average Total Cost (ATC)
●​ ATC= TC / Q =AFC+AVC

Marginal Cost (MC)

●​ Cost of producing 1 more unit


●​ MC= ΔTC / ΔQ

Revenue

●​ Total Revenue (TR)


○​ TR= Price×Quantity
●​ Marginal Revenue (MR)
○​ MR= ΔTR / ΔQ
●​ In perfect competition, MR = P = MC

Profit & Costs

●​ Costs: Explicit (Require out of money) and Implicit (opportunity cost)


●​ Profit: Accounting ( TR - total explicit cost), Economic (TR - TC = TR - Explicit+Implicit)
●​ MPL = ΔQ / ΔL
●​ MC = ΔTC / ΔQ
●​ ATC = TC/Q = AFC + AVC
○​ When MC < ATC, ATC fall
○​ When MC > ATC, ATC rises
○​ When MC = ATC, ATC min
●​ MAX Profit: TR - TC

Cost Graphs

●​ MC cuts ATC and AVC at their minimum points


●​ AFC always decreases
●​ ATC and AVC get closer as output increases
●​ MC is U-shaped due to law of diminishing marginal returns

Long Run Cost:

●​ Economies of Scale: ATC↓ as Q↑


●​ Constant Returns to Scale: ATC stays the same
●​ Diseconomies of Scale: ATC↑ as Q↑

Perfect Competition

●​ MR = AR = P
●​ Free Exit and Enter
●​ Profit max at MR = MC = Pmax
●​ TR = P x Q
●​ AR = TR / Q
●​ MR = ΔTR / ΔQ
●​ In short run: can earn profit/loss
●​ In long run: zero economic profit (normal profit)

Maximize Profit

●​ If MR > MC, increase Q


●​ If MR < MC, Decrease Q
●​ MR = MC, Max Profit
●​ MC = Supply Curve above AVC
●​ Profit = (Price - ATC) x Q
●​ Total Loss = (P2 - P1) x Q

Profit/Loss Graph Areas

●​ Profit: ATC below P, TR > TC → rectangle between P and ATC


●​ Loss: ATC above P, TR < TC → rectangle between ATC and P
●​ Shutdown if P < AVC

●​ Shutdown: Short run


○​ If TR < VC or P < AVC
○​ If P > AVC, produce Q where P = MC
○​ Sunk Cost (FC), ignored
●​ Exit: Long run
○​ If TR < TC
○​ If Existing firms earns: New firms enter, supply shift right, Price falls, reduce profit
○​ If Existing firms loss: Some firm exit, supply shift left, Price rise, reduce loss
■​ Remaining firms zero economic profit: P = MC = ATC, P = min ATC
●​ Enter if TR > TC or P > AVC

4. Oligopoly
●​ Few large firms dominate.
●​ Interdependence – firms consider rivals’ actions.
●​ Barriers to entry are high.

Concept Formula

Total Revenue (TR) P×Q

Marginal Revenue (MR) ΔTR / ΔQ

Total Cost (TC) FC + VC

Marginal Cost (MC) ΔTC / ΔQ

Profit TR - TC

Profit Max Rule MR = MC

Allocative Efficiency P = MC

Productive Efficiency ATC min

Natural Monopoly:
Feature Description

💸 Huge Fixed Costs Cost of setting up is $$$ (e.g. power lines, pipes)

📉 Low Marginal Cost After setup, adding customers is cheap

📈 ATC keeps falling Average Total Cost decreases over a wide range of output

❌ Not Productively Doesn’t produce where ATC is minimized (bc one firm rules)
Efficient

❌ Not Allocatively Price > MC (underproduces compared to socially optimal)


Efficient

1. Monopoly

●​ Price Maker – must lower the price to sell more.

Graph: Gaining vs losing

●​
●​ Profit max: MR = MC
●​ Price: go up to D curve at Q*
●​ Inefficient (not allocatively efficient or productively efficient)

2. Price Discrimination (Monopoly)


●​ Charges different prices to different consumers based on willingness to pay.

Types:

●​ Perfect Price Discrimination: No DWL, all CS becomes profit: P=MR,


●​ No Consumer Surplus
●​ Group Price Discrimination: Different groups (e.g. student discounts).

3. Monopolistic Competition

●​ Many sellers, differentiated products, low barriers to entry.


●​ Price makers, but not as much power as monopolies.
●​ Use advertising, brand loyalty.

Graph:

●​ Short run: Profit/loss like monopoly.​

●​ Long run: Entry/exit leads to zero economic profit.​

○​ Still not efficient (P > MC, excess capacity).

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