Note from PE videos - some note from the economic video given by Mr. Lo PDF

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Summary

I. Types of Profit: - Profit = Revenue – Cost (time + money) o Accounting profit = Revenue – Explicit cost o Economic profit = Revenue – (Explicit cost + Implicit cost) - Explicit cost: chi phí rõ ràng, chi phí hi n rõ = accounting costệ - Opportunity cost = time + energy + the foregone income + mon...

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Types of Profit: Profit = Revenue – Cost (time + money) o Accounting profit = Revenue – Explicit cost o Economic profit = Revenue – (Explicit cost + Implicit cost) Explicit cost: chi phí rõ ràng, chi phí hi ện rõ = accounting cost Opportunity cost = time + energy + the foregone income + money could have earned by doing something else Maximizing Profit and the Shut Down Rule: Maximizing Profit Rule: Keep producing as long as the additional revenue from selling additional unit is greater additional cost of producing that unit (= Loss Minimizing rule) o MR = MC

Total Revenue

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Total Cost

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Profit

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“Normal Profit” is when there is no economic profit (total revenue = total cost)

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Shut Down Rule: A firm should shut down if the price falls below the minimum AVC

AFC -

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Total Fixed Cost

A firm’s short-run supply curve: The marginal cost curve above minimum AVC

Perfect Competition 1. Characteristic of Perfect Competition: o Many small firms o Low barriers to entry and exit o Identical products o Firms are price takers

Marginal Revenue = Demand = Average Revenue = Price (perfectly elastic) 2. Long-run equilibrium:

3. Perfect competitive firms are extremely efficient: a. Allocative efficiency: The firm is producing the amount society wants, where the price equals the marginal cost. b. Productive efficiency: The firm is producing at the lowest possible

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Monopoly: 1. Characteristic of Monopoly: o High barriers to entry (other firms can’t enter) o Unique good, no close substitutes o Firms are price makers o Can’t price discriminate

cost, where the ATC is minimized.

2. Monopoly graph:

o o o

Marginal revenue is less than the demand curve MC and ATC is exactly the same as in perfect competition MR=MC: the firm produce where MR =MC, charge the price where people willing to pay.

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Profit maximizing quantity: Q1 (MR=MC) Profit maximizing price: P2 (charge price people willing to pay) Total revenue: P2-A.-Q1-Q0 Consumer surplus: P1-A-P2 Revenue maximizing quantity (MR=0; total revenue is max): Q2

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Socially optimal quantity = allocative efficiency: Q3 (MC hit D curve) Socially optimal consumer surplus: P1-C-P4 Quantity with no economic profit: Q4 (total revenue = total cost) If there is a per unit tax: 1. New quantity (MR=MC): QT 2. New price: PT  Quantity goes down, Price goes up. Lump sum tax: onetime tax that affects fixed costs, MC wouldn’t change, price and quantity stay the same...