Economics: Key Concepts of Supply and Demand
Key Concepts in Economics: Supply and Demand
Ceteris Paribus:
When changing one variable in a function (e.g., demand for some product), we assume everything else is held constant.
Demand:
The relationship between the price of a certain good or service and the quantity of that good or service someone is willing and able to buy.
Demand Curve:
A graphic representation of the relationship between price and quantity demanded of a certain good or service, with price on the vertical axis and quantity on the
Read MoreEssential Principles of Microeconomics and Macroeconomics
Macroeconomics vs. Microeconomics
Macroeconomics examines the behavior of the whole economy, while Microeconomics focuses on individual consumers and firms.
Fundamental Economic Questions: WHAT-HOW-WHO?
Adam Smith introduced the concept of the “invisible hand” in markets. Market failures can arise from government intervention, among other reasons.
Profit = Revenue – Cost
Efficiency vs. Equity
- Efficiency is concerned with the optimal production and allocation of resources, given existing factors of production.
Monopolistic Competition: Features & Differentiation
Monopolistic Competition: Features and Differentiation
As the term suggests, monopolistic competition is a market structure that combines characteristics of both monopoly and perfect competition. Because each company offers a slightly different product, it is, in a way, a monopoly: it faces a downward-sloping demand curve and possesses some market power, i.e., a certain ability to set the price of its product. However, unlike a pure monopoly, a firm in monopolistic competition faces competition:
Read MoreMicroeconomics: Key Concepts and Formulas
Key Concepts in Microeconomics
Monopolistic Competition, Oligopoly/Game Theory, Externalities, and Public Goods and Common Pool Resources
Monopolistic Competition:
- Monopoly: Price maker (downward sloping demand curve), creates deadweight loss (DWL), but customers get variety. Scale isn’t efficient (doesn’t minimize average fixed cost (AFC) in the long run (LR)).
- Perfect Competition: Many firms, only earn profit in the short run (SR). In the LR, profit = 0 (due to barriers to entry, competitors are quick
Perfect Competition: Profit, Loss, and Shutdown Analysis
Perfect Competition
1) Super Normal Profit
A perfectly competitive firm is in equilibrium at point E, where MR = MC and MC cuts MR from below. OQE is the equilibrium output. OP is the equilibrium price, which is equal to EQE, and CQE is the average cost. As price is greater than average cost, the firm is earning Super Normal Profit (SNP), which is equal to the rectangular area PBCE.
2) Normal Profit
Normal Profit (NP) is the minimum amount of profit a producer must earn to stay in the same business.
Read MoreUnderstanding Monopolies: Causes, Profit Maximization, and Inefficiency
What Causes Monopolies?
- A legal fiat (e.g., US Postal Service)
- A patent with legal power (e.g., a new drug)
- Sole ownership of a resource (e.g., toll highway)
- Formation of a cartel (e.g., OPEC)
- Large economies of scale, where AVC decreases as y increases (e.g., local utility companies)
- Legal monopoly power, with certification such as a doctor or professor.
Profit Maximization for Monopolies
If a monopoly wants to maximize profits:
ProfitM = p(y) · y – c(y)
Max ProfitM = d(p(y).y)/dy – dc(y)/dy = 0 à d(
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