Micro Economics

Revision Assignment

Submitted By:-Mobeen Ahmed

SR II S

What is Economic Problem? (4)Ans.Economic problem is the problem that we face because our wants are endless and we don’t have the sufficient to satisfy our needs. Economic problem is the problem that tells us the best use of the limited or scare resources.

Define:-Merit Goods:-These are goods or services provided by the government to the people. Merit goods provide services which it is argued should apply universally to everyone in a particular situation. Eg health and education ,street lights and roads etc.

Public Goods:-a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.eg lighthouses and defence.

Consumer Goods:-Goods which are bought the consumer for personal use rather buying from a manufacturer to make other goods eg mobile phones food and clothes.

4 Factors of Production:-Land:-One of four basic categories of resources, or factors of production. This category includes the natural resources used to produce goods and services, including land itself.

Labor:-Labor is the services and efforts of humans that are used for production. While labor is commonly thought of as those who work in factories, it includes all human efforts (except entrepreneurship), such as those provided by clerical workers, technicians, professionals, managers, and even company presidents.

Capital:-Capital is the amount which is invested for business .Capital is just like blood, without blood our body is dead and without capital our business is dead. All over capital plays a very important role in life.

Advantages (1) & Disadvantages (2):-Market Economy:-

1. There is competition in the market. Quality of goods is improved, prices are low. There is a low concept of monopoly. There is perfect Competition

2. No interference by the government. Produce harmful goods. Low quality items are produced.

Mixed Economy:-1. Check and control of government. Stable prices of the goods. There is low fluctuation between

demand and supply. Low shortage of supply in the market. High quality goods are produced.2. Weak administration and produce low quality goods. Non technical staff++. No check and

balance. No perfect competition

Planned Economy:-

1. All items are produced with the instruction of the government. Government provides incentives and commodities provide their people. All people work for the government and all income is included in the revenue of government. Less production of harmful goods. Public sector increase their efficiency in the field of production

2. People are not allowed to work freely. Government instructions are obsctles in the way of production. People are living a boring life. People demand for goods are not completed.

Sole Trader:-1. The owner of a sole trader business has total control. The business is easy and cheap to start up.

As a sole trader is alone he keeps all the income and profits to himself. The business affairs are private no one can know about his earnings.

2. Sole trader business is an unlimited liability business. As it’s a small business the bank cannot give him loans. He cannot buy in bulk. If the business fails he has to pay from his own pocket and sell his personal assets.

Private limited Company:-1. Shares can be sold to a larger no. of people. All shareholders have limited liability. Effective form

of management compared to partnerships sole traders. The company is a separate legal identity from the state.

2. The shares cannot be sold or transferred without an agreement of the other shareholder. The accounts of the company are less secret for either a sole trader or a partnership. The company cannot offer its shares to general public.

Public limited Company:-1. This form of business still offers limited liability to all the shareholders. This is an opportunity of

making large sums of money and investing them in the business. There is no restriction of buying and selling shares. A public limited company has a high status and is properly managed.

2. The legal formalities of such a company are quite complicated. Some companies grow so large that they are difficult to manage. There are many rules which protect the interest of the share holders

Cooperatives:-1. All members have one vote no matter how many shares they own. All members help run the

business and the profits are shared among all of them. The decision of the business is also shared.

2. Sometimes it causes conflicts between the members. There are longer decision making processes. Participation of a member is required for success. Less incentive is to invest in the business.

Multinationals:-1. Its train’s local workers will sophisticated techniques that upgrade the overall economy of the

host country. It increases the growth of the host country by introducing new investments and causes competition in the local market that helps the local customer.

2. Multinationals may harm the local market because of the competitive over local firms. They may misuse the environment; they may create uncertainty as they can pressurize the host government.

Division of Labor:-

1. Workers are trained in one task and specialize in this- this increases efficiency and output. Less time is wasted moving from one workbench to another.. Production is faster and thus more products are produced.

2. Workers can become doing the same job- efficiency might fall. If one worker is absent and no one else can do the job, production might be stopped.. This will ultimately affect the rate of production and will affect the economy of the company.

Specialization:-1. You become a very well respected individual in that field;

2. You can earn a lot of money in that specialization;3. You may be well sought after for your knowledge;4. You may be able to choose the work you do, especially if you are sponsored;5. You may even make some ground breaking discovery and become famous.

2. 1. You are only thought of associated with that specialization;2. You may only be needed for short periods of time and then released;3. You may find it difficult to find work because you are considered expensive;4. You may only think in that specialization on not in general terms;5. You may find it difficult to break into other fields and other disciplines, and not considered adaptable or a generalist.

Monopoly:-1. 1. Monopoly avoids duplication and hence wastage of resources.

2. A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers.3. Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly.4. Monopolies may use price discrimination which benefits the economically weaker sections of the society.5. Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition.6. Source of revenue for the government- the government gets revenue in form of taxation from monopoly firms.

2. 1. Poor level of service.2. No consumer sovereignty. A monopoly market is best known for consumer exploitation. There are indeed no competing products and as a result the consumer gets a raw deal in terms of quantity, quality and pricing.3. Consumers may be charged high prices for low quality of goods and services.4. Lack of competition may lead to low quality and out dated goods and services.

Define:-Fixed Cost:-It’s the cost which does not change with the no. of outputs

Variable Cost:-A periodic cost that varies in step with the output or the sales revenue of a company.Variable costs include raw material, energy usage, labor, distribution costs, etc. Companies with high variable costs are significantly different from those with high fixed costs.

Total Cost:-The sum of all of the production costs divided by the number of units that are produced.

Total Revenue:-Total sales revenue and other revenue for a particular period.

Draw fixed variable, total cost and total revenue:-

Factors affecting demand and Supply:-Supply chain managers should have a clear understanding of the different factors that can influence supply and demand. Managers should be able to capitalize on increased demand and look for cost savings and opportunities provided by increased supply. Failing to understand supply and demand will make it difficult to anticipate and manage supply shortages and may increase the negative impact of a reduction in demand.Supply can be negatively affected by factors totally outside of the control of organizations further down the supply chain. For example, a factory that supplies raw materials to a manufacturing plant is badly damaged in a fire and is unable to operate for two weeks. The manufacturing firm that relies totally on their supplier has no contingency plan in place and as a result, they have to close for two weeks. As a manager at a retail store, you run out of products to sell, are unable to replenish your inventory and your sales are badly affected.This example highlights the risks of total reliance on a single supplier. Ideally, managers should aim to source products from more than one supplier to reduce their risk, or alternatively, they should have an agreement with a backup supplier in case of emergencies.There are also factors that can negatively affect the demand for an organizations products and services. An example of this would be a downturn in economic conditions. Customers have less money to spend, resulting in them purchasing less and impacting on demand for products and services. As supply chains become more global, variable economic conditions continue to have a greater impact on the effective management of supply chain. It can often be difficult to address factors resulting in reduced demand; however, you can use marketing, competitive pricing and product diversification to maximize your profit making potential during difficult times.Demand can be impacted by either independent or dependent factors. Independent demand is the demand for a primary product, for example a car. Dependant demand is the demand for a secondary product related to the primary product, for example car tyres. The demand for the secondary product is dependent on the demand for the primary product.During periods of increased demand, it is vital that managers are able to work towards maximizing the profit earning potential of their organization. Demand may be increased due to favorable economic conditions, seasonal changes or emerging and popular trends. Positive changes in supply can be caused by new suppliers entering the market, beneficial environmental factors or even through changes in government policy. An increase in supply should provide managers with an opportunity to reduce costs through new agreements and seek opportunities with new suppliers

Wage rate determination point:-

Explaination The equilibrium wage rate in the industry is set by the meeting point of the industry supply and industry demand curves.In a competitive market firms are wage takers because if they set lower wages workers would not accept the wage.Therefore they have to set the equilibrium wage we.Because firms are wages takers the supply curve of labor is perfectly elastic therefore AC = MCThe firm will maximize profits by employing at Q1 where MRP of Labor = MC of Labor Comparing Wage of Lawyers and McDonalds workersLawyers get higher pay for 2 reasonsSupply is inelastic because of the qualifications requiredMRP of lawyers is high. If they are successful they can make firms a lot of revenue.McDonald’s workers however get lower pay because:Supply is elastic, because there are many 1000s of people who are suitable for working, qualifications are not really required

Factors affecting Borrowing, Saving & Consumption:-Borrowing:-For many people, buying real estate would not be possible without the help of a financial lending institution.Home loans are commonplace and are one of the most important considerations when buying property.As there are many different lenders with an abundance of financial products available, it is advisable to prepare yourself as best as possible to secure a competitive mortgage.It is important to remember that banks will analyze your application on different criteria if you are a sole applicant or part of a joint application.If applicable, they will also take into account how many dependents you have.Lenders will also refer to your income, credit card debt, personal debt and other financial criteria to determine your borrowing capacity.While it is possible to estimate how much you are able to borrow with the use of a mortgage calculator, decisions and rates are largely determined by your personal situation.A chat with your mortgage broker can help you implement the best strategy toward finding a suitable lender, as well as assist in the process of securing a loan that suits your needs.To get more detailed information on your situation, talk to a Loan Market mortgage broker today.

Saving:-

.

Factors affecting savingsInterest rates: Higher interest rates will encourage people to save more.

Availability of appropriate savings schemes: With more options to save money people will be attracted to save moreAdvertising of/knowledge about what is available at financial institutionsConfidence/trust in financial institutionsSize of real disposable income: Disposable income is the income left after paying taxes. Thus more money left in pockets will encourage people to save more.Rate of inflation: when inflation is high people have less money left with them to save because a major part of their disposable income will be spent to satisfy their needs and wants.Save for a future purchase: People might save with the motive to carry out a future purchase e.g. a housePrecautionary factors: People might be ‘saving for a rainy day’Tastes and preferences of consumers: It also depends on a individuals preference. Some people save more than others.Consumer confidence/expectations about future changes in the economy, e.g. risk of unemployment may lead to people saving moreConsumption:-Consumer behavior refers to the selection, purchase and consumption of goods and services for the satisfaction of their wants: Initially the consumer tries to find what commodities he would like to consume.Then he selects only those commodities that promise greater utility.Then consumer makes an estimate of the available money which he can spend.Lastly, the consumer analyzes the prevailing prices of commodities and takes the decision about the commodities he should consume.Meanwhile, there are various other factors influencing the purchases of consumer such as: SocialCulturalPersonalPsychological

What is meant by financial institution?Financial institution is an institution that deals with financial transaction. They provide:-Home LoansPersonal LoansHome and Contents InsuranceTerm DepositsPersonal Financial Planning Debt Management advice Banking & budgeting Insurance Credit Ratings Information on various: Inflation and money Emergency funds Retirement planning (how much it will cost you then and now) Financial Software Taxes Estate Planning Investing Purchasing Your affordability 

Internet banking Financial Indicators

Explain the role of:-Commercial Bank:-The main functions of commercial banks are accepting deposits from the public and advancing them loans.However, besides these functions there are many other functions which these banks perform. All these functions can be divided under the following heads:1. Accepting deposits2. Giving loans3. Overdraft4. Discounting of Bills of Exchange5. Investment of Funds6. Agency Functions7. Miscellaneous Functions1. Accepting Deposits:The most important function of commercial banks is to accept deposits from the public. Various sections of society, according to their needs and economic condition, deposit their savings with the banks.For example, fixed and low income group people deposit their savings in small amounts from the points of view of security, income and saving promotion. On the other hand, traders and businessmen deposit their savings in the banks for the convenience of payment.Therefore, keeping the needs and interests of various sections of society, banks formulate various deposit schemes. Generally, there ire three types of deposits which are as follows:(i) Current Deposits:The depositors of such deposits can withdraw and deposit money whenever they desire. Since banks have to keep the deposited amount of such accounts in cash always, they carry either no interest or very low rate of interest. These deposits are called as Demand Deposits because these can be demanded or withdrawn by the depositors at any time they want.Such deposit accounts are highly useful for traders and big business firms because they have to make payments and accept payments many times in a day.(ii) Fixed Deposits:These are the deposits which are deposited for a definite period of time. This period is generally not less than one year and, therefore, these are called as long term deposits. These deposits cannot be withdrawn before the expiry of the stipulated time and, therefore, these are also called as time deposits.These deposits generally carry a higher rate of interest because banks can use these deposits for a definite time without having the fear of being withdrawn.(iii) Saving Deposits:In such deposits, money upto a certain limit can be deposited and withdrawn once or twice in a week. On such deposits, the rate of interest is very less. As is evident from the name of such deposits their main objective is to mobilise small savings in the form of deposits. These deposits are generally done by salaried people and the people who have fixed and less income.2. Giving Loans:The second important function of commercial banks is to advance loans to its customers. Banks charge interest from the borrowers and this is the main source of their income.

Banks advance loans not only on the basis of the deposits of the public rather they also advance loans on the basis of depositing the money in the accounts of borrowers. In other words, they create loans out of deposits and deposits out of loans. This is called as credit creation by commercial banks.Modern banks give mostly secured loans for productive purposes. In other words, at the time of advancing loans, they demand proper security or collateral. Generally, the value of security or collateral is equal to the amount of loan. This is done mainly with a view to recover the loan money by selling the security in the event of non-refund of the loan.At limes, banks give loan on the basis of personal security also. Therefore, such loans are called as unsecured loan. Banks generally give following types of loans and advances:(i) Cash Credit:In this type of credit scheme, banks advance loans to its customers on the basis of bonds, inventories and other approved securities. Under this scheme, banks enter into an agreement with its customers to which money can be withdrawn many times during a year. Under this set up banks open accounts of their customers and deposit the loan money. With this type of loan, credit is created.(iii) Demand loans:These are such loans that can be recalled on demand by the banks. The entire loan amount is paid in lump sum by crediting it to the loan account of the borrower, and thus entire loan becomes chargeable to interest with immediate effect.(iv) Short-term loan:These loans may be given as personal loans, loans to finance working capital or as priority sector advances. These are made against some security and entire loan amount is transferred to the loan account of the borrower.3. Over-Draft:Banks advance loans to its customer’s upto a certain amount through over-drafts, if there are no deposits in the current account. For this banks demand a security from the customers and charge very high rate of interest.4. Discounting of Bills of Exchange:This is the most prevalent and important method of advancing loans to the traders for short-term purposes. Under this system, banks advance loans to the traders and business firms by discounting their bills. In this way, businessmen get loans on the basis of their bills of exchange before the time of their maturity.5. Investment of Funds:The banks invest their surplus funds in three types of securities—Government securities, other approved securities and other securities. Government securities include both, central and state governments, such as treasury bills, national savings certificate etc.Other securities include securities of state associated bodies like electricity boards, housing boards, debentures of Land Development Banks units of UTI, shares of Regional Rural banks etc.6. Agency Functions:Banks function in the form of agents and representatives of their customers. Customers give their consent for performing such functions. The important functions of these types are as follows:(i) Banks collect cheques, drafts, bills of exchange and dividends of the shares for their customers.(ii) Banks make payment for their clients and at times accept the bills of exchange: of their customers for which payment is made at the fixed time.(iii) Banks pay insurance premium of their customers. Besides this, they also deposit loan installments, income-tax, interest etc. as per directions.(iv) Banks purchase and sell securities, shares and debentures on behalf of their customers.(v) Banks arrange to send money from one place to another for the convenience of their customers.7. Miscellaneous Functions:

Besides the functions mentioned above, banks perform many other functions of general utility which are as follows:(i) Banks make arrangement of lockers for the safe custody of valuable assets of their customers such as gold, silver, legal documents etc.(ii) Banks give reference for their customers.(iii) Banks collect necessary and useful statistics relating to trade and industry.(iv) For facilitating foreign trade, banks undertake to sell and purchase foreign exchange.(v) Banks advise their clients relating to investment decisions as specialist(vi) Bank does the under-writing of shares and debentures also.(vii) Banks issue letters of credit.(viii) During natural calamities, banks are highly useful in mobilizing funds and donations.(ix) Banks provide loans for consumer durables like Car, Air-conditioner, and Fridge etc.

Central Bank:-The central bank is nowadays primarily an agency for monetary policy. It usually also has important financial stability functions, and those become more prominent during times of financial turmoil. The structure of those roles, the responsibilities given, and the range of other functions allocated vary between countries. The main issues are as follows:What degree of independent authority does the central bank have to design policy, make policy decisions, and implement those decisions? This question also relates to the degree of influence over exchange rate policy and the setting of objectives for both monetary and exchange rate policies. What degree of responsibility does the central bank have for financial stability? Does it have the instruments commensurate with that responsibility? What tasks are given to the central bank with respect to the regulation of financial activity and supervision of financial institutions? How well do those roles fit with others? How are objectives set?How does the central bank go about ensuring the efficiency and robustness of the various infrastructure systems that support payment and settlement? How does ownership and operation of such systems sit with the oversight, supervision and regulation of private providers?What other functions fit well with the core monetary policy and financial stability tasks? What are the relevant criteria? Do they differ between mature and emerging financial market environments?

Stock Exchange:-

Role of Stock Exchanges are varied and highly important in the development of economy of a country. They measure and control the growth of a country.

Stock markets are the places, where exactly you do your business. Your stock trading transactions are executed at the stock exchanges through your broker, unless you have a membership with that exchange, which enable you to trade directly.

Stock exchange apart from being hub of primary and secondary market, they have very important role to play in the economy of the country. Some of them are listed below.

Raising capital for businesses

Exchanges help companies to capitalize by selling shares to the investing public. Mobilizing savings for investment

They help public to mobilize their savings to invest in high yielding economic sectors, which results in higher yield, both to the individual and to the national economy.

Facilitating company growth

They help companies to expand and grow by acquisition or fusion. Profit sharing

They help both casual and professional stock investors, to get their share in the wealth of profitable businesses.

Corporate governance

Stock exchanges impose stringent rules to get listed in them. So listed public companies have better management records than privately held companies.

Creating investment opportunities for small investors

Small investors can also participate in the growth of large companies, by buying a small number of shares.

Government capital raising for development projects

They help government to raise fund for developmental activities through the issue of bonds. An investor who buys them will be lending money to the government, which is more secure, and sometimes enjoys tax benefits also.

Barometer of the economy

They maintain the stock indexes which are the indicators of the general trend in the economy .They also regulate the stock price fluctuations.

Bull Bear Stocks:-A common story is that the terms ‘Bull market’ and ‘Bear market’ are derived from the way those animals attack. Bulls are supposed to be aggressive and attacking while bears would wait for the prey to come down.Another story is that long back, bear trappers would first trade in the market and fix a price for bear skins, which they actually din’t own. Once the price is fixed , they would go hunting for bear skins. So eventually even if the prices go down, they will still be able to sell if for a high price. This term eventually was used to describe short sellers and speculators who sell what they do not own and buy it when the price comes down and makes money in the process.However, it was Thomas Mortimer,in his book called ‘Every Man His Own Broker’ (1775) who first officially used the terms Bulls and bears to describe investors according to their behavior.BULL MARKETSWhen can you say it’s a bull market? When the prices of stocks moves up rapidly cracking previous highs , you may assume that it’s a bull market.If there are many bullish days in a row you can consider that as a ‘bull market run’. Technically a bull market is a rise in value of the market by at least 20%.BEAR MARKETSA bear market is the opposite of a bull market. When the prices of stocks moves crashes rapidly cracking previous lows , you may assume that it’s a bear market. Generally markets must fall by more than 20% to confirm that it’ a bear market.STAGSThis is another category of market participant. The stags are not interested in a bull run or a bear run. Their aim is to buy and sell the shares in very short intervals and make a profit from the fluctuation. It’s a daily tussle for stags in the stock market.

MARKET TIMINGThe basic idea behind stock market investment is simple- Buy low, sell high and makes money. So to make money, you buy stocks in a bear market when stock prices are low and sell stocks in a bull market when stock prices are high.However, knowing the exact time when a bear market would start or when a bull market run would come is not possible. Just when you thought the markets would go up, it may surprise you by trading low. Your strategy should be to pick up shares in the bear market and sell it when there’s a bull market run.

Characteristics of Monopoly:-The four key characteristics of monopoly are: (1) a single firm selling all output in a market, (2) a unique product, (3) restrictions on entry into and exit out of the industry, and more often than not (4) specialized information about production techniques unavailable to other potential producers.These four characteristics mean that a monopoly has extensive (boarding on complete) market control. Monopoly controls the selling side of the market. If anyone seeks to acquire the production sold by the monopoly, then they must buy from the monopoly. This means that the demand curve facing the monopoly is the market demand curve. They are one and the same.The characteristics of monopoly are in direct contrast to those of perfect competition. A perfectly competitive industry has a large number of relatively small firms, each producing identical products. Firms can freely move into and out of the industry and share the same information about prices and production techniques.A monopolized industry, however, tends to fall far short of each perfectly competitive characteristic. There is one firm, not a lot of small firms. There is only one firm in the market because there are no close substitutes, let alone identical products produced by other firms. A monopoly often owes its monopoly status to the fact that other potential producers are prevented from entering the market. No freedom of entry here. Neither is there perfect information. A monopoly firm often has specialized information, such as patents or copyrights, that are not available to other potential producers.Single SupplierThe essence of a monopoly is a market controlled by a single seller. The "mono" part of monopoly means single. This "mono" term is also the source of such words as monarch--a single ruler; monochrome--a single color; monk--a solitary religious figure; monocle--an eyeglass for one eye; and monolith--a single large stone. The "poly" part of monopoly means to sell. So the word itself, monopoly, means a single seller.The single seller, of course, is a direct contrast to perfect competition, which has a large number of sellers. In fact, perfect competition could be renamed multipoly or manypoly, to contrast it with monopoly. The most important aspect of being a single seller is that the monopoly seller IS the market. The market demand for a good IS the demand for the output produced by the monopoly. This makes monopoly a price maker, rather than a price taker.A hypothetical example that can be used to illustrate the features of a monopoly is Feet-First Pharmaceutical. This firm owns the patent to Amblathan-Plus, the only cure for the deadly (but hypothetical) foot ailment known as amblathanitis. As the only producer of Amblathan-Plus, Feet-First Pharmaceutical is a monopoly with extensive market control. The market demand for Amblathan-Plus is THE demand for Amblathan-Plus sold by Feet-First Pharmaceutical.Unique ProductTo be the only seller of a product, however, a monopoly must have a unique product. Phil the zucchini grower is the only producer of Phil's zucchinis. The problem for Phil, however, is that gadzillions of other firms sell zucchinis that are indistinguishable from those sold by Phil.

Amblathan-Plus, in contrast, is a unique product. There are no close substitutes. Feet-First Pharmaceutical holds the exclusive patent on Amblathan-Plus. No other firm has the legal authority to produced Amblathan-Plus. And even if they had the legal authority, the secret formula for producing Amblathan-Plus is sealed away in an airtight vault deep inside the fortified Feet-First Pharmaceutical headquarters.Of course, other medications exist that might alleviate some of the symptoms of amblathanitis. One ointment temporarily reduces the swelling. Another powder relieves the redness. But nothing else exists to cure amblathanitis completely. A few highly imperfect substitutes exists. But there are no close substitutes for Amblathan-Plus. Feet-First Pharmaceutical has a monopoly because it is the ONLY seller of a UNIQUE product.Barriers to Entry and ExitA monopoly is generally assured of being the ONLY firm in a market because of assorted barriers to entry. Some of the key barriers to entry are: (1) government license or franchise, (2) resource ownership, (3) patents and copyrights, (4) high start-up cost, and (5) decreasingaverage total cost.Feet-First Pharmaceutical has a few these barriers working in its favor. It has, for example, an exclusive patent on Amblathan-Plus. The government has decreed that Feet-First Pharmaceutical, and only Feet-First Pharmaceutical, has the legal authority to produce and sell Amblathan-Plus.Moreover, the secret ingredient used to produce Amblathan-Plus is obtained from a rare, genetically enhanced, eucalyptus tree grown only on a Brazilian plantation owned by Feet-First Pharmaceutical. Even if another firm knew how to produce Amblathan and had the legal authority to do so, they would lack access to this essential ingredient.A monopoly might also face barriers to exiting a market. If government deems that the product provided by the monopoly is essential for well-being of the public, then the monopoly might be prevented from leaving the market. Feet-First Pharmaceutical, for example, cannot simply cease the production of Amblathan-Plus. It is essential to the health and welfare of the public.This barrier to exit is most often applied to public utilities, such as electricity companies, natural gas distribution companies, local telephone companies, and garbage collection companies. These are often deemed essential services that cannot be discontinued without permission from a government regulation authority.Specialized InformationMonopoly is commonly characterized by control of information or production technology not available to others. This specialized information often comes in the form of legally-established patents, copyrights, or trademarks. While these create legal barriers to entry they also indicate that information is not perfectly shared by all. The AT&T telephone monopoly of the late 1800s and early 1900s was largely due to the telephone patent. Pharmaceutical companies, like the hypothetical Feet-First Pharmaceutical, regularly monopolize the market for a specific drug by virtue of a patent.In addition, a monopoly firm might know something or have a piece of information that is not available to others. This "something" may or may not be patented or copyrighted. It could be a secret recipe or formula. Perhaps it is a unique method of production.

Features of Perfect Competition:-1. Perfectly Competitive Market Characteristics of a perfectly competitive market/industry:Numerous buyers and sellers Homogeneous products Consumers have perfect information about prices All firms, incumbent and potential entrants alike, have equal access to resources

Implications of these characteristics:Price-taking firm Law of one price Free entry

2. Profit-Maximization by a Price-taking firm(1) Economic profit vs. accounting profit

Accounting profit = revenue – accounting cost

Economic profit = revenue – total opportunity cost

(2) The profit-maximization problem

Max Profit = TR(Q) – TC(Q)

Marginal revenue: MR = For a price-taking firm, marginal revenue is equal to market price, MR = P.

For a price-taking firm, at a profit-maximizing quantity of output, two conditions

must hold:

· P = MC

· MC is increasing

Logic: When P < MC, the firm can reduce its output by one unit and its profit will go up by MC – P; When P > MC, the firm can increase its output by one unit and its profit will go up by P – MC.

3. Short-run Market Supply

(1) Short-run costs

STC (Q) = TFC + TVC(Q)

(2) How does a change in output price affect the firm’s choice of its output?

· A profit-maximizing firm, if producing positive level of output, should choose Q where P = SMC and SMC is upward-sloping.

· A profit-maximizing firm should produce nothing if P < minimum AVC.

Thus the short-run supply curve of a firm consists of two parts: the portion of the SMC curve that lies above the AVC curve when P > minimum AVC, plus the part of the vertical axis between the origin and the minimum AVC. .

(3) Short-run market supply curve is the horizontal sum of the individual firm supply curves.

(4) Short-run market equilibrium: putting supply and demand together

4. Long-run Market Equilibrium

(1) Adjusting (short-run) fixed inputs: change plant size

(2) The Firm’s long-run supply curve

(3) Long-run perfectly competitive equilibrium satisfies three conditions:

· profit is maximized, so both plant size and output level are optimal

· economic profit is zero

· Quantity demanded equals quantity supplied at the market price

(4) The long-run market supply curve

(5) Industry cost structure and long-run market supply

· Constant cost industry: changes in industry output do not affect input prices

· Increasing cost industry: expansions of industry output cause increases in some input prices

· Decreasing cost industry: increases in industry output cause decreases in some input prices

5. Economic Rent

Economic rent of an input = A – B

Where A = maximum amount a firm in the industry is willing to pay for the input

B = opportunity cost of the input outside the industry, i.e., return the input owner

gets in the best alternative use outside the industry.

6. Producer Surplus of a price-taking firm

Producer surplus is the area between the supply curve and the market price

· Producer surplus for an individual firm

· Producer surplus for the market with fixed number of firms (short run)

· Producer surplus for the market with free entry (long run)

Economic Profit, Producer Surplus, and Economic RentSource(s):. Perfectly Competitive Market

Characteristics of a perfectly competitive market/industry:

Numerous buyers and sellers Homogeneous products Consumers have perfect information about prices All firms, incumbent and potential entrants alike, have equal access to resources

Implications of these characteristics:

Price-taking firm Law of one price Free entry

2. Profit-Maximization by a Price-taking firm

(1) Economic profit vs. accounting profit

Accounting profit = revenue – accounting cost

Economic profit = revenue – total opportunity cost

(2) The profit-maximization problem

Max Profit = TR(Q) – TC(Q)

Marginal revenue: MR = For a price-taking firm, marginal revenue is equal to market price, MR = P.

For a price-taking firm, at a profit-maximizing quantity of output, two conditions

must hold:

· P = MC

· MC is increasing

Logic: When P < MC, the firm can reduce its output by one unit and its profit will go up by MC – P; When P > MC, the firm can increase its output by one unit and its profit will go up by P – MC.

3. Short-run Market Supply

(1) Short-run costs

STC (Q) = TFC + TVC(Q)

(2) How does a change in output price affect the firm’s choice of its output?

· A profit-maximizing firm, if producing positive level of output, should choose Q where P = SMC and SMC is upward-sloping.

· A profit-maximizing firm should produce nothing if P < minimum AVC.

Thus the short-run supply curve of a firm consists of two parts: the portion of the SMC curve that lies above the AVC curve when P > minimum AVC, plus the part of the vertical axis between the origin and the minimum AVC. .

(3) Short-run market supply curve is the horizontal sum of the individual firm supply curves.

(4) Short-run market equilibrium: putting supply and demand together

4. Long-run Market Equilibrium

(1) Adjusting (short-run) fixed inputs: change plant size

(2) The Firm’s long-run supply curve

(3) Long-run perfectly competitive equilibrium satisfies three conditions:

· profit is maximized, so both plant size and output level are optimal

· economic profit is zero

· Quantity demanded equals quantity supplied at the market price

(4) The long-run market supply curve

(5) Industry cost structure and long-run market supply

· Constant cost industry: changes in industry output do not affect input prices

· Increasing cost industry: expansions of industry output cause increases in some input prices

· Decreasing cost industry: increases in industry output cause decreases in some input prices

5. Economic Rent

Economic rent of an input = A – B

Where A = maximum amount a firm in the industry is willing to pay for the input

B = opportunity cost of the input outside the industry, i.e., return the input owner

gets in the best alternative use outside the industry.6. Producer Surplus of a price-taking firm

Producer surplus is the area between the supply curve and the market price

· Producer surplus for an individual firm· Producer surplus for the market with fixed number of firms (short run)· Producer surplus for the market with free entry (long run)Economic Profit, Producer Surplus, and Economic Rent

DEMAND & SUPPLY GRAPHS (ALL)