Principles of Microeconomics: Chapters 6, 10, 11, 14, 15 & 16 Summary
Chapter 10: Public Goods, Common Resources, and Merit Goods
Common Resources
Common resources are rival but not excludable. People tend to use common resources excessively. Governments try to limit their use.
Merit Goods
Merit goods are provided by the public sector but are either over or under consumed.
Chapter 11: Externalities
When one party’s actions affect another, it’s called an externality.
Negative Externalities
Negative externalities cause the socially optimal quantity in a market to be less than the equilibrium quantity.
Positive Externalities
Positive externalities cause the socially optimal quantity in a market to be greater than the equilibrium quantity.
Private Solutions to Externalities
Those affected by externalities can sometimes solve the problem privately. The Coase Theorem states that if people can bargain without cost, they can always reach an agreement where resources are efficiently allocated.
Government Intervention
When private solutions fail, government intervention takes place. The government can regulate behavior or internalize the externality by using Pigovian taxes or by issuing pollution permits. Government intervention to correct market failure might be subject to its own failures.
Chapter 6: Firms and Production
Profit Maximization
The goal of firms is to maximize profit, which equals total revenue minus total cost. When analyzing firm behavior, it is important to include all the opportunity costs of production. Some opportunity costs are explicit, while others are implicit.
Competitive Firms
A competitive firm is a price taker; its revenue is proportional to the amount of output it produces. The price of a good equals both the firm’s average revenue and its marginal revenue. To maximize profit, a firm chooses the quantity of output such that marginal revenue (MR) equals marginal cost (MC). This is also the quantity at which price equals marginal cost. Therefore, the firm’s MC curve is its supply curve.
Long-Run Equilibrium
In a market with free entry and exit, profits are driven to zero in the long run, and all firms produce at the efficient scale.
Short-Run and Long-Run Effects of Demand Changes
Changes in demand have different effects over different time horizons. In the long run, the number of firms adjusts to drive the market back to the zero-profit equilibrium. In the short run, when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if the price of the good is less than average variable cost. When the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost.
Production Function and Costs
- A firm’s costs reflect its production process.
- A typical firm’s production function gets flatter as the quantity of input increases, displaying the property of diminishing marginal product.
- A firm’s total costs are divided between fixed and variable costs.
- Average total cost (ATC) equals total cost divided by the quantity of output.
- Marginal cost is the amount by which total cost would rise if output were increased by one unit.
- Marginal cost always rises with the quantity of output.
- Average cost first falls as output increases and then rises. The average total cost curve is U-shaped.
- The marginal cost curve crosses the average total cost curve at the minimum of ATC.
- A firm’s costs often depend on the time horizon being considered. In particular, many costs are fixed in the short run but variable in the long run.
Chapter 14: Monopoly
Characteristics of Monopoly
A monopoly is an extreme example of imperfect competition. A monopoly is a firm that is the sole seller in its market. A monopoly has barriers to entry. It faces a downward-sloping demand curve for its product. A monopoly’s marginal revenue is always below the price of its good.
Profit Maximization
Like a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal. Unlike a competitive firm, its price exceeds its marginal revenue, so its price exceeds marginal cost.
Inefficiency of Monopoly
A monopoly’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. A monopoly causes deadweight losses similar to the deadweight losses caused by taxes.
Price Discrimination
can raise economic welfare and reduce deadweight losses/ policy makers can respond to the inefficencies of monopoly behaiviour with antitrust laws, regulation pf prices, or by turning the monopoly into a government run enterprise/ if the market faliure is deemed small policy makers may decide to do nothing at all CHAPTER 15 a monopolystic competitive market is characterased by 3 atributes: many firms different products and free entry/ the equilibrium in a monopolistically competitive market differs from perfect competition in that each firm has exess capacity and each firm charges a price above marginal cost/ monopolistic competition does not hae all the desirebless properties of perfect competition/mark up of price over mc causes deadweight loss/ the product differentiation inherent in monopolistic competition leads to the use of advertising and brand names/firms are influenced by the thread of new entrants into a market/ competitive advantages are advantages firms camn gain over another whcich are both distinctive and defensable CHAPTER 16 oligopolistic maximize their total profits by firming a cartel and acting like a monopolist/ if oligopolist make decisions about production levels individually, the result is a greater quantity and a low price than under the monopoly outcome/ the prisoners dilema shows that selfinterest can provent poeple from maintaining cooperation, even when cooperation is in their mutual self interest/the logic of the prisioners dilema applies in many situations, including oligopolies/ oligopolies can play both cooperative and non cooperative games/ in long term it pays to cooperate/ oligopolies can compete on the price or on the quantity they supply/ policy makers use competition laws to provent oligopolies from engaging in behavour that reduces competition