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ECON 2106 Principles of Microeconomics Study Guide Outline Chapter 7: Production and Cost Accounting (Explicit) costs vs. Economic (Implicit) costs Law of diminishing Marginal Returns SR vs. LR o Fixed and variable costs Cost curves o MC o AVC o ATC LRATC o Economies of scale o Diseconomies of scale o Constant returns to scale Chapter 8: Profit-maximization Calculate profit: π = TR - TC Accounting π vs. Economic π Goal of firm Demand and cost constraints How to choose profit-maximizing output o TR TC approach: Calc π=TRTC at each output level and compare o MR MC approach: Choose q where MR=MC Shut-down rule o TR < TVC Shut down Chapter 9: Perfect Competition (Supplemental handouts available) Characteristics Goal of perfectly competitive firm How to choose output Shut-down rule o P < AVC Shut down SR vs. LR o SR: # firms is fixed o LR: # can change o EQM in SR o EQM in LR Profit/Loss and entry/exit Different cost industries
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### Transcript of jfolk.gcsu.edu Study Guide Exam 2 (330pm).docx · Web viewProfit-maximization Calculate profit: π...

ECON 2106 Principles of MicroeconomicsStudy Guide Outline

Chapter 7: Production and Cost Accounting (Explicit) costs vs. Economic (Implicit) costs Law of diminishing Marginal Returns SR vs. LR

o Fixed and variable costs Cost curves

o MCo AVCo ATC

LRATCo Economies of scaleo Diseconomies of scaleo Constant returns to scale

Chapter 8: Profit-maximization Calculate profit: π = TR - TC Accounting π vs. Economic π Goal of firm Demand and cost constraints How to choose profit-maximizing output

o TR TC approach: Calc π=TR−TC at each output level and compare o MR MC approach: Choose q where MR=MC

Shut-down ruleo TR < TVC Shut down

Chapter 9: Perfect Competition (Supplemental handouts available) Characteristics Goal of perfectly competitive firm How to choose output Shut-down rule

o P < AVC Shut down SR vs. LR

o SR: # firms is fixedo LR: # can changeo EQM in SRo EQM in LR

Profit/Loss and entry/exit Different cost industries

Chapter 10: Monopoly (Supplemental handouts available) Characteristics Barriers to entry

o Naturalo Legalo Network Externalities

Goal of monopolistic firm How to choose output SR vs. LR Monopoly vs. Perfect Competition

o Generally PM>P* and QM<Q* Government involvement

o Regulationo Rent-seeking behavior

Price Discriminationo Conditionso Perfect Price Discriminationo Choosing Multiple Priceso In Everyday Life

Chapter 14: Economic Efficiency Economic efficiency Pareto improvements Efficient quantity Measuring market gains (Consumer and Producer Surplus) Inefficient markets and Deadweight Loss

o Price ceiling & Price flooro Significant market power (i.e. monopoly)o Excise taxes

Chapter 15: Government’s Role in Economic Efficiency Market Failures and solutions

o Monopoly Anti-trust Law Regulation (natural monopoly)

Marginal Cost Pricing Average Cost Pricing

o Externalities Positive Externality

Marginal Social Benefit Subsidy

Negative Externality Marginal Social Cost Pigovian Tax Tradable Pollution Permits

Coase Theorem Private market can solve externality problem if side payments can be

Chapter 15: Government’s Role in Economic Efficiency (cont) Market Failures and solutions (cont)

o Public Goods Characteristics

Nonrival Non-excludable

Free-rider Problem Government Provision Tragedy of the Commons (overuse of common resources)

o Asymmetric Information Adverse selection (quality)

A good reputation can help Moral Hazard (future behavior)

Higher rates for riskier behavior Principal-Agent Problem

Incentives for agent to act in accordance with principal’s wisheso Government Policies

Sometimes policies can be the cause of economic inefficiency