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# V517

question
Average Fixed Cost (AFC)
AFC=TFC/Q
question
Average Variable Cost (AVC)
AVC=TVC/Q or AVC=w/AP or AVC=ATC-AFC
question
Average Total Cost (ATC)
ATC=TC/Q or ATC=AVC+AFC
question
Short-Run Marginal Cost (SMC)
SMC=ΔTVC/ΔQ or SMC=ΔTC/ΔQ or SMC=w/MP
question
Total Cost (TC)
TC=TVC+TFC
question
Quantity (Q)
Q=AP x L or Simply Output or Total Product
question
Average Product (AP)
AP=Q/L (# of units)
question
Marginal Product (MP)
MP=ΔQ/ΔL (change in units)
question
Lerner Index
Lerner Index = (P-MC)/P

A ratio that measure the proportionate amount by which price exceeds marginal cost.
question
Profit Maximization: Firms in Monopoly and Monopolistic Competition Markets
MR=MC
question
Total Revenue (TR)
TR = P x Q
question
Price Elasticity of Demand (E)
E = %ΔQ/%ΔP = (ΔQ/ΔP) x P/Q

E = take absolute value; E will always be a negative number.

Elastic = Number is > 1
Inelastic = Number is < 1
Unitary Elastic = 1

Measures how consumers respond to a change in price. If the percentage change of price is less than the percentage change in quantity demanded, a good's price elasticity of demand is said to be elastic.
question
Cross-Price Elasticity
A measure of the responsiveness of quantity demanded to changes in the price of a related good, when all other variables in the general demand function remain constant.

Cross-price elasticity is positive when two goods are substitutes and negative when they are complements.
If the number is small it indicates that changes in price of one good doesn't have a great deal of effect on the other.
question
Uniform Pricing
Charging the same price for every unit of the product. This creates consumer surplus for every unit sold (except the last). The existence of any consumer surplus indicates underpricing (which creates loss of revenue and profit).
question
Capturing Consumer Surplus
Devising pricing schemes to transform consumer surplus into economic profit. Price discrimination techniques are used to capture as much consumer surplus as possible.
question
Price Discrimination
Charging different prices for the same product for the purpose of capturing consumer surplus.

OBJECTIVE: Charge different prices for the same good or service to capture as much consumer surplus as possible, turning it into economic profit for the firm.

Pa/MCa does not equal Pb/MCb (the ratio between price and marginal cost is different when price discrimination exists)
question
Laws of Price Discrimination
1) EXACTLY the same product must have different prices.

2) ALL costs must be the same for the two products.
question
Consumer arbitrage
When low-price buyers resell a product to buyers in high-price market, which establishes a single, uniform price. (kills price discrimination)

Good and services that cannot be easily traded or transferred are more likely to experience price discrimination - such as medical services...
question
Conditions for Price Discrimination
1) A firm has to possess some market power.

2) Firm must be able to, in a cost-effective manner, to identify and separate submarkets. (to prevent resale)

3) Demand functions for the individual consumers or groups of consumers must differ. Thus, price elasticities must differ.
question
First-Degree Price Discrimination
Every unit is sold for the maximum price each consumer is willing to pay, which allows the firm to capture the entire consumer surplus (this almost never happens). Also regarded as 'perfect'.

-Closest example: Auction houses. (highest bidder)
-Attempted perfect price discrimination: ticket scalpers, automobile salespeople

**Requires a great deal of information about the buyers. If completely perfect, they have complete info.
question
Second-Degree Price Discrimination
When a firm offers lower prices for a larger quantities and lets buyers self-select the price they pay by choosing how much to buy (reduces the average price as the amount purchased increases - takes advantage of falling marginal valuation).

**Only works with items that consumers will buy multiple units of during a given time.

**Seller has no prior information about the buyer prior to the sale.

**Both types of consumers - those who will buy a little and those who will buy a lot - are offered the same price schedule. But, those who buy a lot will get better deal (paint example).
question
Two-Part Pricing (2nd Degree Price Discrimination)
A pricing plan that creates average prices that decline with the amount purchased by a consumer.

EXAMPLE: Golf course - people pay a membership fee and then play a lower green fee, but can play as much as they want. The amount they pay for each round of golf depends on how many rounds they play.
question
Two-Part Pricing: More Than One Group.
593
question
Declining Block Pricing
Offers quantity discounts over successive discrete blocks of quantities purchased. The more a consumer buys, the lower the price gets with each level or block of purchasing...
question
Third-Degree Price Discrimination
Can be applied when firms are able to both identify and separate two or more groups or submarkets of consumers. Each group or submarket is charged a different price for EXACTLY the same product (but all buyers in these submarkets are charged the SAME price). Thus, unlike perfect price discrimination, not all of the consumer surplus is captured by the seller. And, sellers do not rely on self-selection to create different prices as in 2nd degree.

EX: Movie theaters that charge diff prices for kids and adults; pharmacies that give seniors lower prices; computer firms that give students discount on PCs.
question
Maximizing Revenue in 2 Markets (3rd Degree)
Equal-Marginal-Revenue Principle:

A manager who wishes to maximize the total revenue from selling a given amount of output in two separate markets (a and b) should allocate sales between the two markets so that:

MRa=MRb

and the given amount of output is sold.

**Thus, a seller will continue to allocate more units to one market from another (likely, to the one that has greater MR) until their marginal revenues are equal and all of their output is allocated.
question
Maximizing TR in 2 Markets (3rd Degree)
A manager who price discriminates in 2 separate markets, A and B, will maximize total revenue for a given level of output by charging the lower price in the more elastic market and the higher price in the less elastic market.
question
Strong Barrier to Entry
A condition that makes it difficult for new firms to enter a market in which economic profits are being earned. Barriers to entry hinder the introduction of new, substitute products and protect the profits of firms already in the market.
question
Barriers of Entry
Economies of Scale, Government created barriers, essential input barriers, brand loyalties, consumer lock-in, network externalities, sunk costs as a general barrier to entry.
question
Monopoly: Profit Maximization
A monopolist chooses the point on the market demand curve that maximizes profit. If marginal revenue exceeds marginal cost, a profit maximizing monopolist increases output. If marginal revenue is less than marginal cost, the monopolist does not produce these additional units.
question
Monopoly: Demand and Marginal Revenue
The market demand curve is the demand curve for the monopolist. Because the monopolist must lower price in order to sell additional units of output, marginal revenue is less than price for all but the first unit sold. When marginal revenue is positive (negative), demand is elastic (inelastic). For a linear market demand, the monopolist's marginal revenue is also linear, with the same vertical intercept as demand as demand, and is TWICE as steep.
question
Monopoly: Short-Run Equilibrium
A monopolist (and Perfect Competitors) attain maximum profit by producing and selling the rate of output for which the positive difference between total revenue and total cost is greatest; or it attains a minimum loss by producing the rate
question
Monopoly / Monopolistic Competition: Short Run
Output = MR = SMC

Price is given by demand curve after finding optimal output.

If P < AVC or if TR < TVC -- firm will shut down.
question
Monopoly : Long Run
Output = MR = LMC

If Price < LAC, the firm will exit the industry.

Optimal plant size is where the short-run average cost curve is tangent to LAC at the profit-maximizing output level.
question
Monopolistic Competition : Long-Run
At equilibrium output: P=LAC=MR=LMC

Demand curve is tangent to the LAC curve (thus it is higher than Minimum LAC)
question
Average Profit
(P-ATC)Q/Q
question
Profit Margin
P-ATC
question
Break Even Points
P=ATC=SMC (Profits are ZERO)
question
Perfect Competition - Short Run
Output: P=MR=SMC

as long as TR > or = to TVC and P > or = to AVC

Short Run Supply Curve: Portion of MC above min AVC
question
Perfect Competition - Long Run
Profit Maximizing Equilibrium - P=LMC

P=LMC=SMC=ATC=LAC (in equilibrium at min LAC)

0 economic profit.
question
Profit
Profit = (P x Q) - (ATC x Q)

Profit = (P-ATC)Q
1 of 41
question
Average Fixed Cost (AFC)
AFC=TFC/Q
question
Average Variable Cost (AVC)
AVC=TVC/Q or AVC=w/AP or AVC=ATC-AFC
question
Average Total Cost (ATC)
ATC=TC/Q or ATC=AVC+AFC
question
Short-Run Marginal Cost (SMC)
SMC=ΔTVC/ΔQ or SMC=ΔTC/ΔQ or SMC=w/MP
question
Total Cost (TC)
TC=TVC+TFC
question
Quantity (Q)
Q=AP x L or Simply Output or Total Product
question
Average Product (AP)
AP=Q/L (# of units)
question
Marginal Product (MP)
MP=ΔQ/ΔL (change in units)
question
Lerner Index
Lerner Index = (P-MC)/P

A ratio that measure the proportionate amount by which price exceeds marginal cost.
question
Profit Maximization: Firms in Monopoly and Monopolistic Competition Markets
MR=MC
question
Total Revenue (TR)
TR = P x Q
question
Price Elasticity of Demand (E)
E = %ΔQ/%ΔP = (ΔQ/ΔP) x P/Q

E = take absolute value; E will always be a negative number.

Elastic = Number is > 1
Inelastic = Number is < 1
Unitary Elastic = 1

Measures how consumers respond to a change in price. If the percentage change of price is less than the percentage change in quantity demanded, a good's price elasticity of demand is said to be elastic.
question
Cross-Price Elasticity
A measure of the responsiveness of quantity demanded to changes in the price of a related good, when all other variables in the general demand function remain constant.

Cross-price elasticity is positive when two goods are substitutes and negative when they are complements.
If the number is small it indicates that changes in price of one good doesn't have a great deal of effect on the other.
question
Uniform Pricing
Charging the same price for every unit of the product. This creates consumer surplus for every unit sold (except the last). The existence of any consumer surplus indicates underpricing (which creates loss of revenue and profit).
question
Capturing Consumer Surplus
Devising pricing schemes to transform consumer surplus into economic profit. Price discrimination techniques are used to capture as much consumer surplus as possible.
question
Price Discrimination
Charging different prices for the same product for the purpose of capturing consumer surplus.

OBJECTIVE: Charge different prices for the same good or service to capture as much consumer surplus as possible, turning it into economic profit for the firm.

Pa/MCa does not equal Pb/MCb (the ratio between price and marginal cost is different when price discrimination exists)
question
Laws of Price Discrimination
1) EXACTLY the same product must have different prices.

2) ALL costs must be the same for the two products.
question
Consumer arbitrage
When low-price buyers resell a product to buyers in high-price market, which establishes a single, uniform price. (kills price discrimination)

Good and services that cannot be easily traded or transferred are more likely to experience price discrimination - such as medical services...
question
Conditions for Price Discrimination
1) A firm has to possess some market power.

2) Firm must be able to, in a cost-effective manner, to identify and separate submarkets. (to prevent resale)

3) Demand functions for the individual consumers or groups of consumers must differ. Thus, price elasticities must differ.
question
First-Degree Price Discrimination
Every unit is sold for the maximum price each consumer is willing to pay, which allows the firm to capture the entire consumer surplus (this almost never happens). Also regarded as 'perfect'.

-Closest example: Auction houses. (highest bidder)
-Attempted perfect price discrimination: ticket scalpers, automobile salespeople

**Requires a great deal of information about the buyers. If completely perfect, they have complete info.
question
Second-Degree Price Discrimination
When a firm offers lower prices for a larger quantities and lets buyers self-select the price they pay by choosing how much to buy (reduces the average price as the amount purchased increases - takes advantage of falling marginal valuation).

**Only works with items that consumers will buy multiple units of during a given time.

**Seller has no prior information about the buyer prior to the sale.

**Both types of consumers - those who will buy a little and those who will buy a lot - are offered the same price schedule. But, those who buy a lot will get better deal (paint example).
question
Two-Part Pricing (2nd Degree Price Discrimination)
A pricing plan that creates average prices that decline with the amount purchased by a consumer.

EXAMPLE: Golf course - people pay a membership fee and then play a lower green fee, but can play as much as they want. The amount they pay for each round of golf depends on how many rounds they play.
question
Two-Part Pricing: More Than One Group.
593
question
Declining Block Pricing
Offers quantity discounts over successive discrete blocks of quantities purchased. The more a consumer buys, the lower the price gets with each level or block of purchasing...
question
Third-Degree Price Discrimination
Can be applied when firms are able to both identify and separate two or more groups or submarkets of consumers. Each group or submarket is charged a different price for EXACTLY the same product (but all buyers in these submarkets are charged the SAME price). Thus, unlike perfect price discrimination, not all of the consumer surplus is captured by the seller. And, sellers do not rely on self-selection to create different prices as in 2nd degree.

EX: Movie theaters that charge diff prices for kids and adults; pharmacies that give seniors lower prices; computer firms that give students discount on PCs.
question
Maximizing Revenue in 2 Markets (3rd Degree)
Equal-Marginal-Revenue Principle:

A manager who wishes to maximize the total revenue from selling a given amount of output in two separate markets (a and b) should allocate sales between the two markets so that:

MRa=MRb

and the given amount of output is sold.

**Thus, a seller will continue to allocate more units to one market from another (likely, to the one that has greater MR) until their marginal revenues are equal and all of their output is allocated.
question
Maximizing TR in 2 Markets (3rd Degree)
A manager who price discriminates in 2 separate markets, A and B, will maximize total revenue for a given level of output by charging the lower price in the more elastic market and the higher price in the less elastic market.
question
Strong Barrier to Entry
A condition that makes it difficult for new firms to enter a market in which economic profits are being earned. Barriers to entry hinder the introduction of new, substitute products and protect the profits of firms already in the market.
question
Barriers of Entry
Economies of Scale, Government created barriers, essential input barriers, brand loyalties, consumer lock-in, network externalities, sunk costs as a general barrier to entry.
question
Monopoly: Profit Maximization
A monopolist chooses the point on the market demand curve that maximizes profit. If marginal revenue exceeds marginal cost, a profit maximizing monopolist increases output. If marginal revenue is less than marginal cost, the monopolist does not produce these additional units.
question
Monopoly: Demand and Marginal Revenue
The market demand curve is the demand curve for the monopolist. Because the monopolist must lower price in order to sell additional units of output, marginal revenue is less than price for all but the first unit sold. When marginal revenue is positive (negative), demand is elastic (inelastic). For a linear market demand, the monopolist's marginal revenue is also linear, with the same vertical intercept as demand as demand, and is TWICE as steep.
question
Monopoly: Short-Run Equilibrium
A monopolist (and Perfect Competitors) attain maximum profit by producing and selling the rate of output for which the positive difference between total revenue and total cost is greatest; or it attains a minimum loss by producing the rate
question
Monopoly / Monopolistic Competition: Short Run
Output = MR = SMC

Price is given by demand curve after finding optimal output.

If P < AVC or if TR < TVC -- firm will shut down.
question
Monopoly : Long Run
Output = MR = LMC

If Price < LAC, the firm will exit the industry.

Optimal plant size is where the short-run average cost curve is tangent to LAC at the profit-maximizing output level.
question
Monopolistic Competition : Long-Run
At equilibrium output: P=LAC=MR=LMC

Demand curve is tangent to the LAC curve (thus it is higher than Minimum LAC)
question
Average Profit
(P-ATC)Q/Q
question
Profit Margin
P-ATC
question
Break Even Points
P=ATC=SMC (Profits are ZERO)
question
Perfect Competition - Short Run
Output: P=MR=SMC

as long as TR > or = to TVC and P > or = to AVC

Short Run Supply Curve: Portion of MC above min AVC
question
Perfect Competition - Long Run
Profit Maximizing Equilibrium - P=LMC

P=LMC=SMC=ATC=LAC (in equilibrium at min LAC)

0 economic profit.
question
Profit
Profit = (P x Q) - (ATC x Q)

Profit = (P-ATC)Q

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