Change in Quantity

Average Quantity

Change in Price

Average Price

Inelastic product

less than one

Elastic Product

Greater than one

Total Revenue

Price X Quantity

Marginal Cost

Change in Total Cost

Change in Output

Average Variable Cost

Variable Cost

Output

Average Total Cost

Total Cost

Quantity

A monopoly wants to produce where...

MR = MC

 A perfectly competitive firm produces where

P = MC

MR always decreases by

twice the decrease in P

Marginal Product

Change in Output

Change in # inputs

Marginal Revenue

Change in Total Revenue

Change in Output

Marginal Revenue Product

Change in Total Revenue

Change in #inputs

in wages, MRP sets

the upper limit/ maximum

Monopsony:

Single employer with many suppliers of labor

A monopsony will hire...

as long as MRP is greater than MC

Effect of monopsony on labor market (2):

1. Lower wages

2. Fewer hired

George Akerloff

"Lemons"

Asymmetric Information makes a market break down

Asymmetric information:

One party knows something the other doesn't

Adverse Selection

One party takes advantage of hidden information, bad products and consumers more likely to be selected

Risk Pooling

Insurance companies force everyone to buy insurance to share costs

Joseph Stiglitz

Screening

Underinformed party finds a way to get informed party to reveal information

Mike Spence

Signaling

Informed party conveys the information

Moral Hazard

Hidden action/behavior after entered into transaction

Principal-Agent Problem

Principal wants agent to do something on their behalf: do they?

Shirking

When agent doesn't do what principal wants

Principal-agent solution:

Align incentives/interests

Efficiency Wages

Pay employees higher than the market wage

ie Henry Ford

Regulate a monopoly by...

Price = Average Total Cost

Law of One Price

identical products should sell for same price everywhere

IF AND ONLY IF

trancsaction costs are zero

Arbitrage

buying and reselling same product

leads to equilibrium

Price Discrimination

Charging different price for same thing with same production costs

*works because different market elasticities

Price Discrimination Requires:

(3)

1. Firm possesses Market Power

2. Customers have different willingness to pay and the firm knows this

3. Firm must be able to segregate customers into groups and prevent reselling

First Degree Price Discrimination

charge each customer exactly what willing to pay

Second Degree Price Discrimination

Price per unit changes depending on how many units bought

Third degree Price Discrimination

Consumers split into groups

Monopolist practicing 3rd Degree will

choose output in each market where MR = MC

Two-Part Tariff

Consumer pays initial charge for right to buy related good at new price

Income distribution now of top 1%

24% income, 40% wealth