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AP MICROECONOMICS Graph SUMMARY Supply & Demand Price 2015 Monopolistic Competition Long Run Price S1 MC -------------- E1 ------------- P1 P D1 MR Q1 0 TIPSEN: shifts Demand & TINE-TP shifts Supply Price Floor: surplus of supply above mkt equilibrium Price Ceiling: shortage of supply below mkt equilibrium Floors & Ceilings both produce Deadweight Loss Market System Equilibrium P.C. M.C. Olig. MC = MR equal greater greater greater Yes Yes Yes Yes Economic Profit Long Run No No Yes Yes Shape of Demand Curve Flat Downward Downward downward Price relative to Marginal Revenue Equal Greater Greater Greater No No No Economic Profit Short Run Produce at minimum of ATC Long run— Deadweight loss (long run) Yes MC = MR Quantity produced Quantity Efficient scale Short Run: They can earn profit Long Run: Due to easy entry/exit—firms enter when profit exist. An Individual firms demand curve eventually shifts left and Equilibrium is where ATC is tangent to the Demand Curve. While economic Profit = 0 there is still deadweight loss as P > MC and excess capacity Monop MC = MR Price relative to MC (equal, greater or less than) Demand Qty T-Shirts Maximize Profit when: MC = _?_ ATC Oligopoly Equilibrium MC= MR Costs and Revenue B Monopoly price Average total cost A No Yes Yes Yes Every firm maximizes profit where MR = MC Only in perfect competition does P = MC , rest P > MC Allocative efficiency is when P = MC (no deadweight loss) Productive efficiency is production at minimum of ATC All market structures can earn profit in short run Perfect competition maximizes total welfare Other market structures produce deadweight loss P ≠ MC Marginal revenue 0 Q QMAX Quantity Q Similar to monopoly equilibrium. If oligopolies use “perfect” collusion, their equilibrium is identical Game Theory argues for the non-cooperative equilibrium Profit in short & long run, deadweight loss Monopoly Equilibrium Perfect Competition Long Run Price Demand Marginal cost (short run & Long run) Costs and Revenue MC ATC B Monopoly price P1 Average total cost A Demand Marginal cost 0 Quantity Individual firms are price takers (P = MR = AR) Demand Curve: flat & equal to MR curve (for 1-firm) Entire Market Demand Curve is still downward sloping Short run: can earn profit & allocatively efficient (P = MC) Long run: Economic profit = 0 No incentive to enter/exit Produce at efficient scale (min ATC) which is productive efficiency. Perfect entry/exit, homogeneous products ensures efficiency & self-regulation Marginal revenue 0 Q QMAX Q Quantity Monopolies earn economic profit in both the long & short run. Price > MC & restricted entry/exit prevent entry into the market despite high profit levels. DWL exists. Only by using “perfect” price discrimination can deadweight loss be completely eliminated as P = MC Elasticity & MR Curve Externalities MSC Price Unit Elastic Elastic range MC ) Inelastic Range Spillover Cost Optimum ----------------- ● P1 Equilibrium MC = MB D MB MR Demand curves have both elastic & inelastic ranges When MR = 0 , demand is unit elastic and total revenue is maximized. Firms operate in Elastic range. Only if MC = ZERO, then firms would produce at unit elasticity 0 Quantity QOPTIMUM QMARKET Efficient equilibrium is MB = MC unless there are spillover benefits or costs (which are not counted) DWL for society. Tax negative externality to fix Graph above: negative externality Since some social costs are not counted, MSC > MC Elasticity, Taxes & Deadweight Loss (c) Inelastic Demand FACTOR MARKET Price Supply Size of tax When demand is relatively inelastic, the deadweight loss of a tax is small. Demand Quantity 0 Taxes & Subsidies both create deadweight loss Taxes shift either S or D curve by size of tax (creates wedge) Size of DWL is related to elasticity of demand/supply. With inelastic curves, deadweight loss is small. (see graph) New taxes raise tax burden on both buyer & seller. All input (factor) markets (labor, capital, etc) find equilibrium when Demand = Supply. All firms become “wage/price takers” at the current market price for a factor. Competitive Factor Markets (1 firm) WAGE Tax incidence is not based on who the tax is levied on! More inelastic curve bears most of tax burden (tax incidence!) Supply A B QM E D MRPC QC Qty F Demand 0 MRPM C Price without tax = P1 Price sellers = PS receive --------------- Price buyers = PB pay MFC = Wage Rate w1 --------------- Price Q2 Quantity Q1 Consumer Surplus falls, Deadweight Loss = C + E Tax Revenue = B + D Lorenz Curve Since Individual firms are wage takers => they see a horizontal MFCL ----which means they can hire more workers without affecting wage rate. Market Power Firms (monopoly, oligopoly…) hire less inputs ( MRPM < MRPC) MRP = MPinput * MRoutput MFC = cost of input If hiring 2 factors use Least cost rule: MPL/PL = MPK/PK MONOPSONY MFCM Lorenz Curve A S Line of Perfect equality Wage ---------------- ------------- WC --------------------WM Shows distribution of income Gini-coefficient measures inequality and is a number between 0 and 1. Higher number means more inequality Should not have to draw on test but will have to interpret graph. ------------------ Lorenz Curve B DL = MRPL LM LC Qty-Labor Just know the bottom line: A monopsony is a firm that is a monopoly in the LABOR market. This will lead to a MFC curve above a market labor supply curve because to hire more workers => wages must rise for all workers End Result: higher less workers at lower wage rate
