MAE101 Economics

If domestic price is higher than world price and for e.g. Australia allows free trade then the domestic price must fall to Pworld. As a result, domestic producers cut production but lower price induces consumers to buy more. This gap is mad up by imports.

New CS now not only to Equilibrium price, but triangle goes till Pworld and intersection with demand curve

There are always winners and loosers from trade but the gains to winners exceed losses to loosers --> Gains from trade

A tariff (t) is a tax charged per unit of imports

Compared to free trade scenario, it raises the price of imports to PW + t

As a result, domestic price also increases

Following a tariff, the domestic price rises, domestic producers supply more but domestic consumers demand less. Therefore, import falls

Demand and supply diagramm with a horizontal line for price without tariff and after one above for price with tariff.

-Increases variety of goods

-Cost advantages from access to larger markets

-Discipline of increased competition

-Access t advanced technology

-Reduces poverty in developing countries

Total revenue is the total amount (in $) a firm receives for the sale of its output.

Total cost is the total amount (in $) a firm pays to purchase the inputs into production.

Profit is the firm’s total revenue minus its total cost. --> TR - TC (explicit and implicit cost)

Explicit costs are input costs that require a direct outlay of money by the firm. --> direct payment required

Implicit costs are input costs that do not require an outlay of money by the firm. --> not direct ouotlay required

The addition to output that arises from an additional unit of that input.

Can also diminish: total output might go up but the additional individual output diminish

Fixed costs are those costs that do not vary with the quantity of output produced.

Variable costs are those costs that do vary with the quantity of output produced.

Total cost = Total fixed cost + Total variable cost

Dividing costs by the quantity of output

ATC = AFC + AVC

increase in total cost that arises from an extra unit of production.

MC = Change in total cost / change in quantity

MC curve rises with the amount of output produced and

The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

bottom of the U-shaped ATC curve occurs at the quantity that minimises average total cost.

curve of long run always the lowest part of short run curve

Economies of scale refer to the property whereby long-run average total cost falls as the quantity of output increases.

Diseconomies of scale refer to the property whereby long-run average total cost rises as the quantity of output increases.

Constant returns to scale refers to the property whereby long-run average total cost stays the same as the quantity of output changes.

Marginal revennue = marginal cost --> economic profit maximised

if MR > MC --> firm should increase output to increase profit

if MR < MC --> firm should decrease output to increase profit

Many buyers and sellers

good offered the same --> homogenous

Free entry and exit of market --> no barriers to entry

buyers and sellers are price takers

e.g. Forex (foreign exchange market), the most perfectly competitive market

change in total revenue from an additional unit sold.

MR = change of TR/ change of Q

P = MR = MC (horizontal line at price)

(review: firm maximises profit by producing the quantity at which marginal cost equals marginal revenue!)

MC = supply curve

profit: ATC curve below MR (price) and MC (at profit maximisation point)

loss: ATC curve above MR (price) and MC (at profit maximisation point)

shutdown point: MR = MC = AVC (short run decision)

a firm shuts down if P < AVC

exit: long run decision by a firm to leave the market

a firm exits if P < ATC

sole seller of product --> only one seller

no close substitutes

no free entry and exit --> barriers to entry

price maker

downward-sloping demand curve (whereas competitive firm has a horizontal one)

owns key resource

exclusive production right from government (also due to patent andd copyright laws)

production costs much lower than others --> natural monopoly (economies of scale over relevant range of output)

Intersection of MR and MC determines the quantity and then the demand curve above that intersectino shows the monopoly price

P > MR = MC (whereas competition P = MR = MC)

economic profit as long as P > ATC

Monopoly produces less than the socially efficient quantity of output, therefore deadweigh loss occurs.

many sellers

product differentiation (similar products but not identical)

free entry and exit (no restriction, firms enter and exit until economic profit is zero)

downward-sloping demand curve

higher average costs

charge price above marginal cost

zero long run profits

In the long run there is zero economic profit, therefore the ATC curve must intersect the demand curve at the price.(because of free entry economic profits are competed away)

In the short run either economic profit or loss, if ATC above demand -> loss, otherwise profit

higher average cost in the long run for monopolistic competition

price > marginal cost (an extra unit sold means more profit for the monopolistically competitive firm) --> markup

product variety increases (more firms with slightly different products)

business stealing --> existing firms loose customers and profits from the entry of a new competitor

Critical perspective:

- manipulation of peoples taste

- misleading of customers by implying that products are more different than they truly are

Favourable perspective

- providing information to consumers

- increase in competition (due to greater variety)

- willingness to spend money can be a signal to consumers about the quality of products

few firms

similar products

interdependent firms (voneinander abhängig) --> need to consider competitors strategies

Conflict between individual self-interest and collective well-being.
 

Collusion: Agreement among firms in a market about qauntities to produce or prices to charge

Cartel: group of firms acting in unison --> try to control prices and output level

but competition laws often prohibit explicit agreements as a matter of public policy

1. Institution that involves the exchange of goods and services

2. Situation where the market fails to achieve an effiecient outcome or where the outcome is deemed to be socially undesirable

A study that compares the costs and benefits to society of providing a public good

- expense against the gain --> measuring costs and benefits (mostly of public goods)

Third parties have to carry costs of economic transactions and are not compensated --> spillovers

An uncompensated cost born by a third party --> lead to oversupply

i.e.

- greenhouse effect

- pollution

- road congestion

An uncompensated benefit born by a third party --> lead to undersupply

i.e.

- education

- health and personal hygiene

- common language

- concerts