Untitled Quiz

Monopoly Profit Maximization

• Pharmaceutical patents provide monopoly power for 20 years.

Advertising Impact

• Effective advertising can increase demand, shifting the demand curve parallelly outward.
• Advertising can also make demand less price-sensitive.
• The price is represented using the formula P = a - bq

Network Effect

• Period 1 sees a quantity (q1)
• Period 2 quantity (q2) relies on q1, building an installed based

Two-Sided Platforms

• These have cross-platform network effects.
• Side A's value to consumers rises with more users on Side B.
• Side A (na) and Side B (nb)

Perfect Competition Explained

• No single buyer or seller influences the market price; everyone is a price taker.
• Sellers can sell as much as they want at the market price
• Sellers cannot raise prices without losing customers to competitors
• There is no need for sellers to lower prices as they can sell their existing quantity at market price

Key Features of Perfect Competition

• Numerous small buyers and sellers prevent any single entity from manipulating prices.
• There are over 300,000 corn farmers in the U.S.
• All firms sell identical products like Granny Smith apples, so buyers don't prefer one firm over another as products are seen as the same.
• Buyers know all prices and product information,
• If a seller overcharges, customers will go elsewhere.
• Low transaction costs facilitate easy trade between buyers and sellers.
• Free entry and exit allow firms to enter when profits are high and exit when prices drop.
• Example include Chicago Mercantile Exchange (trades wheat and other goods)

Imperfect Markets

• Competitive markets can still exist even if not all conditions are perfect.
• Cities limiting stores or charging fees, prices tend to remain competitive with sufficient buyers and sellers.
• Knowledgeable locals prevent overcharging, even if tourists are uninformed.
• Markets with price-taking firms can be deemed as Competitive

Short-Run Competition

• Buildings and machines are fixed in the short run.
• New firms cannot enter, and existing firms cannot fully exit due to fixed costs.
• Firms may operate even at a loss in the short run.
• Supply behavior varies between the short and long run.

Competitive Firm Decisions

• Firms maximize profits by setting marginal cost (MC) equal to market price (p)
• In competitive firms, marginal revenue (MR) equals price, so MR = MC.
• Firms will only operate if it is better than not operating
• Otherwise, it shuts down temporarily.

Lime Manufacturing Example

• At a market price of $8, a firm maximizes profit at 284 units, where MC = $8.
• Output is expanded if MC is less than price.
• Output is reduced if MC exceeds the price.
• A firm's overall profit is the production multiplied by the average profit, which is price less average cost
• Yielding a value of $426 (1.5x284)

Impact of Tax on Competitive Firms

• If Manitoba taxes each ton of lime but the firm is unaffected, so the market price remains constant.
• The firm's costs would increase because of the tax, there will be considerations on how to respond

How Taxes Affect Firms

• Taxes raise the cost per unit
• Increasing both marginal cost (MC) and average cost (AC) curves shift upward.
• Firms reduce output due to the higher marginal cost intersecting the market price at a lower quantity.
• Profits decline as average costs are higher and output decreases.

Calculus for Profit Maximization After Tax

• Maximized profit requires setting the derivative of the profit function to zero.
• Market Price = Marginal Cost (after tax)
• Profit = pq - ​[C(q) + tq)​ where C(q) is the firms before tax cost and ​C is the after

Production Decisions

• In the short run, firms must decide whether to produce or shut down, with the firm producing if they can cover variable costs.
• The idea that firms shutdown if losing money is not true in the short run
• Producing continues only if Price ≥ Average Variable Cost (AVC)
• Covering the part of fixed costs reduces the overall loss of the short run
• If AVC = $5 and market price = $5.50 then keep producing
• Shutting down increases overall loss

Shutting Down

• Price < AVC means shut down
• The firm's revenue wouldn't cover variable costs

Decision Rule Summary

• Produce at Price = Marginal Cost (MC)
• Only produce if Price ≥ AVC and shut down otherwise.

Competitive Firm's Supply Curve

• Firms produce more as market prices rise due to increased profitability.
• Lime firms increase output as price rises with output rising each time
• Short-run supply curve aligns with the marginal cost curve.

Low Prices

• Firms shut down if the price is under the minimum of the AVC curve
• Firms will lose money producing with these conditions
• The short-run supply curve has its marginal cost curve above the minimum AVC
• Firms supply zero if any price is below the AVC

Market Supply Curve

• Short-run market shows how supply is for a competitive market at different prices
• Market supply is the sum of each firm's supply.
• Example is 5 firms each supplies 140 units at $6 so the total market production is 700
• There is no production if the market is below $5
• The market is the number of firms, and the firm's marginal cost above the AVC

Cost Differences

• Low cost firms begin production at lower prices then some
• High cost firms produce only when the rates are high enough
• It creates step-like curves, with few firms at lower prices

Short-Run Equilibrium

• Each firm in a short-run curve includes average cost which is a minimum of $5
• There is financial loss for costs at $5.
• Above their costs it makes a profit at a price of $7.
• Total market outputs are determined with equilibrium in $7

Shifts in Demand

• Firms produces as the price covers expenses with a shift drop to $5 in the demand curve occur
• There can be bigger losses in each firm, but there is no stopping as costs and wages are covered
• Market equilibrium happens when supply is equal to demand to where firms maximize profits, they remain in business while covering fixed costs

Long Run Competition

• Firms adjust resources and leave and enter the market
• Firms operate based on the difference of Revenue and Costs
• Production happens while Marginal Cost equals the price to maximize

Closing Down

• Shutting Down would happen when its is more expensive to keep operating vs the revenue

Firm Supply Curve

• Curve is marginal cost, in average cost.
• Firms pick plant sizes based on revenue.

Market Supply Curves

• All firms in the market enter it when its beneficial
• To earn a standard profit, the number of firms change in the market
• No restrictions exist to how many firms can enter, costs continue to stay consistent,
• Horizontal supply curve

Entry

• Market supply slopes on curve, and firm are limited in numbers due to restrictions

Long Run

• Rising costs for firms, with upwards slope
• Market requires reliant costs; with prices and slopes

Summary

• With the same firms supply curve turns Horizontal
• Supply curves slope, costs different

Long -Run equilibrium

​ Market Supply = Market Demand
      ​ Firms are Identical

Cost

  ​ Firms enter and leave
         ​ Expenses stay the same
         ​ Market stays stable, production is constant
                 ​ Every company is calculated for; Total Cost, Long Rule equilibrium Average.

Zero Profit

• Economic Profit is equal to zero, when firms are alike ​ Businesses just spend the expense indifferent between the exit.

Maximum Well-Being

• Competitive Markets, Retail, Agriculture construction market descriptions
• Ideal benchmark and efficient
• Free Markets= The highest outcomes for society.

Well-Being and Measuring

• Consumer surplus= what you pay and get
• The differences between the lowest and price in marketplace

Demand Curves

• Willingness for consumers and surpluses happen ​ Surplus shrinks and prices inflate from supply and taxes

Surplus and Production

• Firms benefit for producing an area of surplus
• Perfect competition comes in the highest favor, producers, consumers and the equilibrium

Curve Analysis

• Supply and cost change with profit

Change

• Total loss surplus from sellers and buyers

Intervention effects

• Intervene with Maximum prices and markets disrupt losing profit ​ Buyers want lower prices and higher volume, sellers don’t want to match volume cutting product efficiency’s

Effects

• Some Buyers gain, with surpluses while firms lose profits
• Total surplus goes a dead loss of potential gains in business