1. Shut down
    • short run decision
    • temporary decision
    • christmas stores closing during summer
    • R<VC
    • P<AVC
    • FC doesnt matter
  2. Exit
    • long run decision
    • ex. gm closing plants
    • assume the price here is the LR price
    • exit if r-fc-vc<0
  3. Entry barriers
    • restriction of entry by new firms:
    • 1) ownership of key resource such as diamond mind
    • 2) government created monopolies-legal restriction to entry by new firms such as patents or copyrights or government contracts
    • 3) Natural monopolies: is a industry where it is more efficient to have one seller than more than one
  4. Natural Monopoly
    • often the case when an industry has very high fixed costs but has very low VC (or MC)
    • ATC=TC/Q=(FC+VC)/Q ---> 0=FC/Q=AFC
  5. Monopolist Demand Curve
    • downward sloping
    • if a monopolist chooses a high price, it sells at a much smaller quantity (a monopolist can choose p or q but never both)

  6. Marginal Revenue (MR)
    • unlike a perfectly competitive firm, a monopolists mr is always less than price
    • when a monopolist wants to increase quantity from 1 to 2 price has to be lower
  7. Monopolistic Competition
    • MOC- a market with a large # of firms, each firm has a slightly differentiated product and there is also free entry and exit
    • Like a perfect competition- large # of firms and free entry and exit
    • Unlike PC- differentiated market
    • Main Feature: a firm faces a downward sloped demand curve which is part of the entire market demand curve for that product
    • Demand curve is elastic because if the price gets too high consumers will switch brands
    • SR- an existing moc firm acts exactly like a monopolist over its market share
    • LR- no change in the # of firms (entry barriers)---->as new firms enter demand curve shifts left till profit=0
  8. Oligopoly Competition
    • a market with a few firms and entry is restricted
    • Concept Ratio (CR) ---> the market share of 4 largest firms in an industry (80%)
    • Product could be same or different---> raw materials such as steel, oil
    • Unlike any other market, oligopolies decisions have large impacts on other firms because # of firms is very limited
  9. Interactions of Oligopolies
    • cooperation-existing firms can "cooperate" or "collude'---->reduce total output, raise price, increase all firms profits
    • Self Interest-every firm wants to cheat or defect, most collusions are ineffective because of self interest
  10. Equilibrium: Nash Equilibrium
    a set of actions/strategies that comes to a stable point if each participant is doing the best it can given what competitors are doing
  11. Externailty
    • a process or activity which causes an uncompensated impact on the welfare of the citizens due to actions of an economic agent
    • Problem with externality: whenever there is externalities involved in an activity (because of the fact there is no compensation) a free market leads to overproduction/overconsumption or underproduction/underconsumption
  12. positive externality
    vaccinations, education, research and development

    PE works through the willingness to pay or the value curve (demand curve)

    Social value of vaccinations = private value + lower probability of spreading desease

    Increase of a positive externality, a free market left alone tends to underproduce (solution: free vaccinations)
  13. negative externality
    crime, pollution, loud roommates music

    Works through supply curve

    • EX- a factory in NRV which emits green house gasses--->social cost>private cost
    • In this case of a NE, left alone over produces

    Regulate emmisions, tax the activity
  14. Solutions of Externalities
    Private- moral codes, lobby groups (NE), mergers/intergration businesses (PE)

    • Public Solutions (government)
    • command & rule policies----> outright bans on toxic waste, technological requirement on companies
    • market based policies----> the problem with c&r policies is that they involve
  15. equations
    • VC=TC-FC
    • MC=TC/Q
    • Marginal Revenue = (Change in total revenue) divided by (Change in sales)
Card Set