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(
Read MoreUnderstanding Elasticity and Its Economic Impact
Understanding Elasticity in Economics
1. Many economic questions depend on the size of consumer or producer responses to changes in prices or other variables. Elasticity is a general measure of responsiveness that can be used to answer such questions.
Price Elasticity of Demand
2. The price elasticity of demand—the percent change in the quantity demanded divided by the percent change in the price (dropping the minus sign)—is a measure of the responsiveness of the quantity demanded to changes in
Key Economic Terms and Definitions
Basic Economic Principles
Absolute Advantage: The ability to produce a good using fewer inputs than another producer.
Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer.
Exports: Goods produced domestically and sold abroad.
Imports: Goods produced abroad and sold domestically.
Opportunity Cost: Whatever must be given up to obtain some item.
General Economic Concepts
Business Cycle: Fluctuations in economic activity, such as employment and production.
Economics:
Labor Economics: Supply, Demand, and Market Equilibrium
Labor Economics
Lecture 1 (Ch1)
Labor Supply
Definitions of Unemployment and Other Statistics
In the Current Population Survey, people aged 16 and greater are classified into the following three categories:
- Employed: In the reference week, the person must work at least one hour with pay, or work at least 15 hours in a non-paid job (family farm, etc.).
- Unemployed: The person is on temporary layoff from a job, or has no job but is actively seeking a job.
- Out of the labor force: Neither employed nor unemployed.
Economics Key Concepts: Opportunity, Demand, and Elasticity
Key Economic Concepts
Opportunity Cost
Opportunity Cost – Value of the next best alternative (ratio of goods where the cost is the second good in the denominator).
Absolute Advantage
Absolute Advantage – Can produce more with fewer resources or in the same time.
Comparative Advantage
Comparative Advantage – Lower opportunity cost for a good.
Maximum Willingness to Trade
- Write a country’s ratio with the desired item in the denominator.
- Multiply by the amount of the desired product.
Minimum Willingness to Give
- Dimensional