Marginal Cost
total utility when an extra unit of output is consumed
When would you stop eating?
when your marginal utility derived from eating another serving is zero
utility maximizing rule
to maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility
Substitution Effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
Elastic Demand
A situation in which consumer demand is sensitive to changes in price
A good that takes up a very large percentage of the consumer's budget will tend to have
an elastic demand
As people have more time to adjust to a price change
both supply and demand become more elastic
Price Elasticity of Demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
Perfectly Inelastic Supply
I
Perfectly Elastic Supply
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Costs that vary with the level of output are divided by output
Average Variable Cost
Downward sloping portion of long-run average total cost curve
Economics of Scale
Total Revenue - total econ cost = 0
earning the normal profit rate
Implicit Costs
Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
The sum of the explicit and implicit costs incurred in the production process is called
total cost
Becomes smaller and smaller as the firm expands output
Average Fixed Cost
As output rises, marginal product eventually diminishes and
marginal costs increases
Profit Maximizing occurs at
MC=ATC
The three basic legal forms of business enterprise are
proprietorship, partnerships, and corporations
Marginal Revenue Curve in price-taker market is
constant at the market price of the product
MR exceeds MC then price-takers should
expand output
Highly profitable in summer so in winter they should
continue operating as long as they can cover variable cost
Neither price takers nor competitive price searchers will be able to earn long-run economic profit because
competition will force prices down to the level of per-unit production cost
If a firm is making zero economic profit, it
is doing as well as typical firms in other markets.
To be compietive then companies should
chose where marginal cost of production = the market price
A profit maximizing price searcher will expand output to the point where
MC = MR
Price Discrimination Strategy
increase total revenue by charging higher prices to those with the most elastic demand for the product and lower prices to those with the most elastic products
Competitive Price-searcher Market
many firms with some control over price, and some product differentiation
Competitive Price Searcher in Long Run
MR = MC < price
A price-discriminating firm charges the lowest price to the group that
has the most elastic demand
Elastic
refers to a market for a product or service that is price sensitive; that is, relatively small changes in price will generate fairly large changes in the quantity demanded
Inelastic
describes demand that is not very sensitive to price changes
Entrepreneur
Entrepreneur discovery is an important source of economic growth and higher living standards
Positive Econ Profit
When ATC is lower than MR
Creative Destruction
the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies
Top Ten Mistakes Entrepreneurs Make
1) Multiply big numbers by 1 percent.
2) Scale too fast.
3) Focus on partnerships.
Solution: Focus on sales.
4) Focus on the pitch.
Solution: Focus on the prototype.
5) Use too many slide
6) Proceed Serially
7) Retain Control
8)Use Patents For Defensibly
Barrier to Entry (or Exit)
anything that restricts or prevents the free flow of resources into or out of an industry
Five Characteristics of a Successful Market
Private Property
Volunteer Exchange
Incentives
Stable Prices
Climate of Trust
When a natural monopoly exists in a given industry, the per-unit costs of production will be
lowest when a single firm generates the entire output of the industry
Why are monopolists MR less than the sales price?
to sell more units, the monopolist must reduce price on all units sold
Best Example of a public good
national defense
Nonexchangeable
Characteristic of a public good: if the good is available to one actor to consume, then other actors cannot be prevented from consuming it as well.
Public Choice Theory
suggests politicians will be most likely to favor redistribution of income from unorganized taxpayers to well-organized interest groups
Major difference between market and collective action through government is
in the market sector there is generally a one-to-one link between payment and consumption; this link is often absent in the government sector
Politicitians tend to favor projects with
short run benefits and long run costs
Logrolling
vote trading among legislators
Pork-barrel Legislation
legislation that bundles together a number of projects, each benefiting local interests at the expense of general taxpayers
Rent seeking is
counterproductive b/c it takes resources away from the creation away from creation of wealth in the private sector
Crony Capitalism is present when
businesses either implicitly or explicitly provide political decision-makers with contributions and other forms of political support in "exchange" for government favors that will improve their profitability.