Economics and Statistics

Definition of the term monopoly: A monopoly is a firm that is the only supplier of a unique good or service in a market. Monopoly markets have barriers to entry, which prevents other firms from entering the market and competing with the monopolistic firm. Since monopolies do not have to compete with other producers, they have a strong influence over the price and quantity in their markets, only limited by consumer's demand. Factors that cause monopoly power: Geography; a remote and isolated area might only have one grocery store. Because the store lacks competition, it is able to charge significantly higher price for its produce than stores that face competition. Government monopoly; when the government entirely provides a good or service. For example, a local government might decide to have a public trash collection service. Natural monopoly: it exists if and only if a firm experiences extreme economies of scale and is able to serve the market more cheaply than any other firm...

You are the owner of a firm with the following ATC, AVC, and MC: The firm is in a competitive market, and therefore is a price taker. You also know that the demand for this firm is perfectly elastic and is equal to $30. Solve for the optimum quantity, and find the firm's economic profit (if any). Will the firm be able to maintain its profit in the long-run? Explain. First, set MC=MR and solve for Q. We clearly see that the firm is able to maximized its profit when it produces 287.5 units. Since the MC curve is above the ATC curve at this point, the firm is earning an economic profit of about $2781.3. No, the firm will not be able to sustain this economic profit in the long-run. This profit will entice other firms to enter the market, causing a rightward shift in the supply curve, reducing the price until every firm makes a normal profit. Let's graph that: If a tax of $20 per units is imposed every firm in the market, the new demand for the firm is $34 (perfectly...

Perfect competition happens when both buyers and producers are price takers, meaning they have no (individual) influence over the price of a product. Conditions for perfect competition: Large number of producers such that no individual producer's production represents a significant part of the total output in the market. Producers must sell their products (no matter the quantity) at a market price that is outside of their control (price-taker). This means that for firm that is a price-taker, its demand is perfectly elastic (horizontal). Producers sell homogeneous goods, meaning that consumers do not care from which sellers they buy the goods from. Producers do not face barriers to entry or exit. Producers are able to enter or exit the market freely. Understanding economic graphs under perfect competition: The price (Pm) is determined in the market becomes the demand curve for an individual firm (remember the firm is price-taker). Then, if the demand is horizontal, it follows by the...

Assume that you are the owner of a small business that produces T-shirts. Your the total revenue for your business can be modeled by the following equation: and your total cost corresponds to this function: Find the point at which your firm maximizes its profit. Then, find how much profit the firm if able to earn at that point. Using the total cost and total revenue functions we can set up the profit function: Then, realize that if you want to find the maximum profit, take the derivative of the function and set it up equal to zero, and solve for Q. This is equivalent of taking the derivative of the total cost and total revenue functions and setting them equal to each other. In this problem, I chose the latter option as it was explained in the previous lessons. Notice that profit is often denoted by a capital pi.  We are assuming that the TR>TC for some positive value, you can check for yourself. However, if we did not know that, we would first take the first ...

Profit: total revenue minus total cost. Accounting profit: it exists when the total revenue is greater than the explicit costs of production. Explicit costs are payments made by the firms to others for factors of productions not owned by the firm.  For example, workers are not owned by the firm, and thus, their wages are part of the explicit costs. However, as you have seen, often in economics we include the variable r for rent for capital (machines) even if the machines are owned by the business owner(s). In this case the variable ' r ' would not be counted in as being part of the explicit cost. Economic profit: the amount of revenue is greater than both the explicit and implicit costs of production. One way to find the economic profit is to simply take the accounting profit and subtract the opportunity cost. The opportunity cost is the value of the resources owned by the business owner(s) that they chose to assign to a specific task instead of another. For example, using ou...