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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
made without cost
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
