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Marginal Revenue
Change in total revenue from producing one more unit
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Calculate Marginal Revenue
The difference in Total Revenue from one unit to the next
MR = Price only in perfect competition
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Calculate Marginal cost
The difference in Total Cost from one unit to the next
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Calculate Average Total Cost
Total Cost / Quantity
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Calculate Economic Profit
Total Revenue - Total Cost
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Graph the demand schedule, marginal cost curve, and marginal revenue curve
- Demand = marginal revenue = price
- this is shown by a perfectly elastic demand curve (horizontal line)
- marginal cost curve is shown by a decreasing line that starts to curve and increase (looks like a checkmark)
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Determine the profit maximizing level of output
- This can be found where MC = MR
- Whatever the Quantiy and Price is at that point.
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What is the short-run decision rule for finding the profit maximizing level of ouput?
Firms produce where MR = MC
- if MR < MC firms will not produce
- If MR > MC firms will produce
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Rate of Return on Investment
Net Revenue / Investment
- Below Average = negative E.P.
- National Average = zero E.P.
- Above Average = positive E.P.
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If given a market price what should the firm produce, why, what is the Economic Profit
- Price (given)
- Quantity (MC = P)
- P vs ATC
- negative E.P. , Price < ATC
- zero E.P. , Price = ATC
- positive E.P. , Price > ATC
EP = Price = ATC
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Assume that in a competitive industry, P > ATC. How much Economic Profit is being earned by a typical firm in this industry
MC - ATC = Eononomic Porfit
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Explain why entry will occur in this industry. (p > atc)
entry of new firms attracted to positive E.P, and above average rate of return on investment
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In the long-run, what will happen to the industry supply curve, price, and economic profit earned?
- supply increase
- price decrease
- E.P. decrease
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What is the long-run competitive equilibrium condition?
Zero Economic Profit ( MC = ATC)
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Monopoly
- Industry consist of a single firm selling a product for which there are few substitutes
- firm = industry
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Give an example of how "Industry Boundaries" (geographic area and definition of the product) make it difficult to define monopoly.
- Area = town (only one available in area) monoply
- Product = cable tv (narrow)
- Area = usa (plenty available) not a monoply
- Product = tv or entertainment (broader)
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Define "Barriers to Entry".
Obstacles that prevent a new firm from entering a profitable industry.
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What are five major barriers to entry into an industry?
- Economies of scale (lower ATC)
- High start-up cost
- Government Licenses
- Patents
- Network effect-the value (usefulness) i get from a product if more people have the same product
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Why is MR less than the demand curve for the monopolist?
monopolist must lower price to all buyers in order to sell more units.
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Determine the profit maximizing level of output and price.(monopoly)
Q= where MC=MR
P= go up on the demand curve
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What is the principal limit to the ability of the monopoist to increase price?
The demand curve or what people are willing to pay.
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Price discrimination
Occurs whan a seller charges different prices to different (groups of) buyers for the exact same product
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What conditions are necessary for a firm to practice price discrimination?
- Seller must have market power
- Seller can distinguish between groups of buyers who have different demands
- Resale of product is difficult
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Explain some examples of ways sellers practice price discrimination.
- Time of day, day of week, season of year
- Age of buyer
- Location
- Temperature
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How does price discrimination benefit the seller?
- Existing buyers pay P(market pridce) or more increase total revenue
- Increase sales volume by creating a lowest demand group charge price below p(market price) to only that group.
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What is "peak load" pricing? Give an example of peak load pricing.
- Seller divides market into strong (peak-high price) demand time period and weak low price (off peak-low price) demand time period; creates incentive for customers to shift use of product from peak to off peak (smoothes demand)
- Example- volume of people who fly at different times of the day. You have peak & off peak time
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Monopolistic Competition
- Industry consist of a large number of small firms selling products that are similar but not identical (each firm has a small market share).
- ex. restaurant or retail shop
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Market Share
The percentage of industry sales volume produced by a single firm
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What is product differentiation?
ways to make your product distinguishable from or more appealing to customers than other similar products.
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What are some ways to perform product differentiation?
- service
- location
- physical differences
- subjective differences-image, ads
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