Exam 2 Review elasticity profit graphs  perfect competition  monopoly elasticity profit graphs  perfect competition  monopoly

about acronyms MC, MU, TR, etc. do NOT need to memorize spelled out on exam  if in doubt, ask! MC, MU, TR, etc. do NOT need to memorize spelled out on exam  if in doubt, ask!

ElasticityElasticity 4 types  price elasticity of demand  price elasticity of supply  cross  income 4 types  price elasticity of demand  price elasticity of supply  cross  income

ElasticityElasticity measuring MAGNITUDE of change in Q due to change in price or income

price elasticity of demand  how much does Qd change when P changes?  < 0 price elasticity of supply  how much does Qs change when P changes?  > 0 price elasticity of demand  how much does Qd change when P changes?  < 0 price elasticity of supply  how much does Qs change when P changes?  > 0

cross elasticity  how much does Qd change when P of related good changes?  < 0 for compliments  > 0 for substitutes income elasticity  how much does Qd change when income changes?  > 0 for normal goods  < 0 for inferior goods cross elasticity  how much does Qd change when P of related good changes?  < 0 for compliments  > 0 for substitutes income elasticity  how much does Qd change when income changes?  > 0 for normal goods  < 0 for inferior goods

exampleexample elasticity of demand = -3  demand is ELASTIC  demand curve is relatively flat  a 1% increase in P cause a 3% decrease in Qd elasticity of demand = -3  demand is ELASTIC  demand curve is relatively flat  a 1% increase in P cause a 3% decrease in Qd

P Q D D inelastic elastic

ProfitProfit Accounting profit  TR – explicit costs Economic profit  TR – (explicit + implicit costs)  smaller than accounting profit Accounting profit  TR – explicit costs Economic profit  TR – (explicit + implicit costs)  smaller than accounting profit

normal profit  economic profit of zero  resources earn their opportunity cost  just enough to “make it worthwhile” in long run normal profit  economic profit of zero  resources earn their opportunity cost  just enough to “make it worthwhile” in long run

Graphs of market & firm perfect competition monopoly be able to  select profit maximizing P & Q  identify consumer surplus  identify economic profit/loss perfect competition monopoly be able to  select profit maximizing P & Q  identify consumer surplus  identify economic profit/loss

perfect competition market supply & demand determine price  all firms, all buyers firm takes P, chooses Q  where P = MR = MC P, Q, ATC  economic profit/loss in SR market supply & demand determine price  all firms, all buyers firm takes P, chooses Q  where P = MR = MC P, Q, ATC  economic profit/loss in SR

P Q D S $ P Q MC 10 ATC $2 economic profit D = MR = P $5 ($5-$2)(10) = $30 MarketFirm

Perfect competition in LR normal profit  zero economic profit why?  entry/exit will shift S until market price gives firms normal profit normal profit  zero economic profit why?  entry/exit will shift S until market price gives firms normal profit

P Q D S $ P Q MC 10 ATC $2 D = MR = P $5 MarketFirm Economic profit leads to entry,S increases, P falls until normal profit S’ D’ $2

monopolymonopoly firm supply IS market supply firm fills market demand firm sets P, Q  Q where MR = MC  P determined by the demand curve  P > MR firm supply IS market supply firm fills market demand firm sets P, Q  Q where MR = MC  P determined by the demand curve  P > MR

monopolymonopoly P, MR Q D Qm Pm consumer surplus economic profit deadweight loss MC = ATC MR

P, MR Q D Qm Pm MC = ATC MR P, MR Q D Qc Pc MC = ATC monopoly perfect competition consumer surplus

MonopolyPerfect Competition price makerprice taker P > MC, P > MRP = MR = MC lower pricehigher price lower outputhigher output lower consumer surplushigher consumer surplus LR economic profit possible LR normal profit deadweight loss