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Exam 2 Review. elasticity profit graphs perfect competition monopoly. about acronyms. MC, MU, TR, etc. do NOT need to memorize spelled out on exam if in doubt, ask!. Elasticity. 4 types price elasticity of demand price elasticity of supply cross income. Elasticity.

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exam 2 review
Exam 2 Review
  • elasticity
  • profit
  • graphs
    • perfect competition
    • monopoly
about acronyms
about acronyms
  • MC, MU, TR, etc.
  • do NOT need to memorize
  • spelled out on exam
    • if in doubt, ask!
elasticity
Elasticity
  • 4 types
    • price elasticity of demand
    • price elasticity of supply
    • cross
    • income
elasticity1
Elasticity
  • measuring MAGNITUDE of change in Q due to change in price or income
slide5
price elasticity of demand
    • how much does Qd change when P changes?
    • < 0
  • price elasticity of supply
    • how much does Qs change when P changes?
    • > 0
slide6
cross elasticity
    • how much does Qd change when P of related good changes?
    • < 0 for compliments
    • > 0 for substitutes
  • income elasticity
    • how much does Qd change when income changes?
    • > 0 for normal goods
    • < 0 for inferior goods
example
example
  • elasticity of demand = -3
    • demand is ELASTIC
    • demand curve is relatively flat
    • a 1% increase in P cause a 3% decrease in Qd
slide8

inelastic

P

elastic

D

D

Q

profit
Profit
  • Accounting profit
    • TR – explicit costs
  • Economic profit
    • TR – (explicit + implicit costs)
    • smaller than accounting profit
slide10
normal profit
    • economic profit of zero
    • resources earn their opportunity cost
    • just enough to “make it worthwhile” in long run
graphs of market firm
Graphs of market & firm
  • perfect competition
  • monopoly
  • be able to
    • select profit maximizing P & Q
    • identify consumer surplus
    • identify economic profit/loss
perfect competition
perfect competition
  • market supply & demand determine price
    • all firms, all buyers
  • firm takes P, chooses Q
    • where P = MR = MC
  • P, Q, ATC
    • economic profit/loss in SR
slide13

economic

profit

P

P

MC

S

ATC

$5

D = MR = P

$5

D

$2

Q

Q

10

1000

Market

Firm

($5-$2)(10) = $30

perfect competition in lr
Perfect competition in LR
  • normal profit
    • zero economic profit
  • why?
    • entry/exit will shift S until market price gives firms normal profit
slide15

P

P

MC

S’

S

ATC

$5

D = MR = P

$2

$5

D’

D

$2

Q

Q

10

1000

Market

Firm

Economic profit leads to entry,

S increases, P falls

until normal profit

monopoly
monopoly
  • firm supply IS market supply
  • firm fills market demand
  • firm sets P, Q
    • Q where MR = MC
    • P determined by the demand curve
    • P > MR
monopoly1

consumer

surplus

P, MR

Pm

deadweight

loss

MC = ATC

D

MR

Q

economic

profit

Qm

monopoly
slide18

consumer

surplus

P, MR

P, MR

Pm

MC = ATC

D

D

MR

Q

Q

Qm

Qc

MC = ATC

Pc

perfect

competition

monopoly

slide19

Monopoly Perfect Competition

price maker

price taker

P > MC, P > MR

P = MR = MC

higher price

lower price

lower output

higher output

LR economic profit

possible

LR normal profit

lower consumer surplus

higher consumer surplus

deadweight loss