Microeconomics

Chapter 22-The Costs of Production

    Chapter 22 begins our discussion of the firm.  We need to remember the economic resources discussed earlier in the course.  In order to determine our economic profits we must subtract our economic costs from our total revenue.  Remember that accounting costs DO NOT EQUAL economics costs, and accounting profits DO NOT EQUAL accounting profits.  Also remember the distinction between the short and long run.  The key to this part of the course is the understanding of the difference between the total, marginal and average product and how this relates to production costs.  In the short run, total costs can be viewed as either fixed or variable costs.  We can also make the distinction between Average Total Cost (ATC), Average Fixed Cost (AFC), and Average Variable Cost (AVC).  The concept of Marginal cost is critical to the study of Microeconomics.  Our focus in class is going to be on the graphs and how total, marginal and average products relate to their corresponding costs.  In the long run, there are no fixed costs as the firm can make all necessary resource adjustments.  Because of this in the long run we can discuss returns to scale.

Chapter 23 Pure Competition

    Over the next three chapters we will discuss the four basic market models. (Pure Competition, Monopoly, Monopolistic Competition, and Oligopoly)  Chapter 23 discusses perfect competition.  The hardest part for student to realize is that regardless of elasticity of demand for the market, the firm faces a perfectly elastic demand curve.  Thus, although the total revenue curve continues to rise the marginal revenue curve is perfectly horizontal at the market price.  As we discussed earlier, the goal of the firm is not to maximize revenue but to maximize profits.  We can do this graphically by either looking at total revenue and total cost curves or looking at marginal revenue and marginal cost curves.  Throughout the rest of the course our focus will be on the marginal revenue and marginal cost curves.  In the short run, the firms supply curve is the portion of the marginal cost curve that is above the average variable cost curve.  Note that this does not guarantee a profit.  In the long run, firms will enter and leave the market depending upon economic profits and losses.    From an economic standpoint perfect competition is very efficient.  We can discuss productive efficiency (P= Minimum ATC) and Allocative efficiency (P=MC)  in both cases perfect competition is efficient.  

Chapter 24 Monopoly

    The reason for a monopoly to exist is some barrier to entry.  These barriers to entry could be simply economies of scale or due to patents etc.  Even though a firm is a monopoly, it faces a downward sloping demand curve.  Because of this monopolists face a marginal revenue curve that is different than under perfect competition.  A monopolies marginal revenue curve is always less than the firms demand curve and steeper.  Remember that since we have only one firm, the firm and industries demand curve are one and the same.  Profit maximization requires MR=MC just like perfect competition.  Note however, there is no supply curve for the monopolist.  Since the monopolist is a price maker they determine how to much to produce by determining where MR=MC and then determine where the demand curve is and set the price accordingly.  We do not have the productive and allocative efficiency that is present with pure competition. 

Chapter 25 Monopolistic Competition and Oligopoly

    Monopolistic competition and oligopoly fall between the two extremes of monopoly and pure competition.  The main characteristic of monopolistic competition is that there are many producers with differentiated products.  The demand curve faced by the monopolistically competitive firm is generally relatively elastic. And the marginal revenue curve is downward sloping like in the case of the monopoly.   In the long run, firms in the industry will make only a normal profit.  These industries are characterized by neither productive or allocative efficiency.  Oligopoly is characterized by relatively few competitors.  Generally, these competitors are mutually dependant.  We measure the degree of concentration in oligopoly by looking at either the concentration ratio or the Herfindahl Index.  Calculation of these are located in the text.  Unlike all of the other market models there is not one model of oligopoly behavior.  In general, due to the mutual interdependence economists explain the behavior of oligopolies in terms of the kinked-demand curve, collusive behavior and game theory, and price leadership.  Generally, we believe neither productive or allocative efficiency is achieved in this market structure.