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ECON 2106 Principles of Microeconomics
Study Guide Outline
Chapter 7: Production and Cost
 Accounting (Explicit) costs vs. Economic (Implicit) costs
 Law of diminishing Marginal Returns
 SR vs. LR
o Fixed and variable costs
 Cost curves
o MC
o AVC
o ATC
 LRATC
o Economies of scale
o Diseconomies of scale
o Constant returns to scale
Chapter 8: Profit-maximization
 Calculate profit: π = TR - TC
 Accounting π vs. Economic π
 Goal of firm
 Demand and cost constraints
 How to choose profit-maximizing output
o TR TC approach: Calc 𝜋 = 𝑇𝑅 − 𝑇𝐶 at each output level and compare
o MR MC approach: Choose q where MR=MC
 Shut-down rule
o TR < TVC  Shut down
Chapter 9: Perfect Competition (Supplemental handouts available)
 Characteristics
 Goal of perfectly competitive firm
 How to choose output
 Shut-down rule
o P < AVC  Shut down
 SR vs. LR
o SR: # firms is fixed
o LR: # can change
o EQM in SR
o EQM in LR
 Profit/Loss and entry/exit
 Different cost industries
Chapter 10: Monopoly (Supplemental handouts available)
 Characteristics
 Barriers to entry
o Natural
o Legal
o Network Externalities
 Goal of monopolistic firm
 How to choose output
 SR vs. LR
 Monopoly vs. Perfect Competition
o Generally PM>P* and QM<Q*
 Government involvement
o Regulation
o Rent-seeking behavior
 Price Discrimination
o Conditions
o Perfect Price Discrimination
o Choosing Multiple Prices
o In Everyday Life
Chapter 14: Economic Efficiency
 Economic efficiency
 Pareto improvements
 Efficient quantity
 Measuring market gains (Consumer and Producer Surplus)
 Inefficient markets and Deadweight Loss
o Price ceiling & Price floor
o Significant market power (i.e. monopoly)
o Excise taxes
Chapter 15: Government’s Role in Economic Efficiency
 Market Failures and solutions
o Monopoly
 Anti-trust Law
 Regulation (natural monopoly)
 Marginal Cost Pricing
 Average Cost Pricing
o Externalities
 Positive Externality
 Marginal Social Benefit
 Subsidy
 Negative Externality
 Marginal Social Cost
 Pigovian Tax
 Tradable Pollution Permits
 Coase Theorem
 Private market can solve externality problem if side payments can be
made without cost
Chapter 15: Government’s Role in Economic Efficiency (cont)
 Market Failures and solutions (cont)
o Public Goods
 Characteristics
 Nonrival
 Non-excludable
 Free-rider Problem
 Government Provision
 Tragedy of the Commons (overuse of common resources)
o Asymmetric Information
 Adverse selection (quality)
 A good reputation can help
 Moral Hazard (future behavior)
 Higher rates for riskier behavior
 Principal-Agent Problem
 Incentives for agent to act in accordance with principal’s wishes
o Government Policies
 Sometimes policies can be the cause of economic inefficiency