Microeconomics Study Notes: Public Goods, Production & Cost, Perfect Competition, and Monopoly

Public Choices, Public Goods, and Common Resources

Types of Goods: Rivalry and Excludability

Goods can be classified based on whether consumption by one person reduces availability for others (rivalry) and whether people can be prevented from using them (excludability).

• Private Goods: Rival and excludable (e.g., a sandwich).

• Club Goods: Non-rival and excludable (e.g., subscription TV).

• Common Resources: Rival and non-excludable (e.g., fish in the ocean).

• Public Goods: Non-rival and non-excludable (e.g., national defense).

Market Failure and Public Goods

• Public goods are underprovided by private markets due to the free rider problem: individuals can benefit without paying, making exclusion difficult.

• Efficient provision occurs where marginal social benefit (MSB) equals marginal social cost (MSC).

• For public goods, individual demand (marginal benefit) curves are added vertically to find the total willingness to pay at each quantity.

Common Resources and the Tragedy of the Commons

• Common resources tend to be overused because individuals ignore the external cost imposed on others.

• Tragedy of the Commons: Overuse or depletion of a common resource due to rivalry and non-excludability (e.g., overfishing).

Production and Cost

Types of Costs

• Explicit Costs: Out-of-pocket payments by the firm (e.g., wages, rent).

• Implicit Costs: Opportunity costs of resources owned by the firm (e.g., foregone salary of owner).

• Accounting Cost = Explicit Cost

• Economic Cost = Explicit Cost + Implicit Cost

Profit Concepts

• Accounting Profit = Total Revenue − Accounting Cost

• Economic Profit = Total Revenue − Economic Cost

Short Run vs. Long Run

• Short Run: At least one input is fixed.

• Long Run: All inputs are variable.

Product Measures

• Total Product (TP): Total output produced.

• Marginal Product (MP): Additional output from one more unit of variable input.

• Average Product (AP): Total product divided by quantity of variable input.

Key Relationships

• Diminishing Marginal Product: As more units of a variable input are added to fixed inputs, marginal product eventually falls.

• MP intersects AP at AP's maximum point.

Cost Measures and Formulas

• Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC)

• Average Fixed Cost (AFC) = TFC / Q

• Average Variable Cost (AVC) = TVC / Q

• Average Total Cost (ATC) = TC / Q = AFC + AVC

• Marginal Cost (MC): Increase in total cost from producing one more unit of output.

$\text{MC} = \frac{\Delta TC}{\Delta Q}$

• MC intersects AVC and ATC at their minimum points.

Long-Run Average Cost

• Reflects economies of scale at lower output levels (cost per unit falls as output increases).

• Reflects diseconomies of scale at higher output levels (cost per unit rises as output increases).

Perfect Competition

Market Structure and Firm Behavior

• Characteristics: Many firms, homogeneous product, free entry and exit, perfect information.

• Firms are price takers: The market sets the price; individual firms cannot influence it.

Revenue and Profit Maximization

• For a perfectly competitive firm: Demand = Average Revenue = Marginal Revenue = Price

• Profit-maximizing output is where MR = MC. In perfect competition, P = MR, so the rule is P = MC.

$\text{Economic Profit} = (P - ATC) \times Q$

Short-Run Outcomes

• Firms may earn profits, break even, or incur losses.

• Break-even Point: $P = ATC$ (zero economic profit).

• Shutdown Condition: In the short run, produce if $P \geq AVC$; shut down if $P < AVC$.

• If $AVC < P < ATC$, the firm operates at a loss but covers variable costs and part of fixed costs.

Long-Run Adjustment

• Free entry and exit drive economic profit to zero in the long run; surviving firms earn zero economic profit.

Monopoly

Market Structure and Firm Behavior

• Pure Monopoly: Single firm, no close substitutes, significant barriers to entry.

• Monopolist faces a downward-sloping demand curve; marginal revenue (MR) lies below demand.

• For a linear demand curve, MR has the same price intercept as demand but is steeper.

Profit Maximization and Pricing

• Monopolist chooses output where MR = MC, then charges the price on the demand curve at that quantity.

• Compared to perfect competition, monopoly produces less and charges a higher price.

Price Discrimination

• Charging different prices to different consumers for the same good, not based on cost differences.

• Increases profit if the firm can separate markets and prevent resale.

Natural Monopoly and Regulation

• Natural Monopoly: One firm can supply the entire market at lower cost due to persistent economies of scale.

• Regulated Marginal Cost Pricing: Regulator sets $P = MC$ (allocatively efficient, but may require subsidy if $MC < ATC$).

• Average Cost Pricing: Regulator sets $P = ATC$ (firm covers costs, earns zero profit, but price exceeds MC).

• Two-Part Tariff: Consumers pay a fixed fee plus a per-unit price, helping cover fixed costs while keeping per-unit price near MC.

Profit and Loss in Monopoly

• Economic Profit:

  $\text{Economic Profit} = (P^* - ATC^*) \times Q^*$

• Graphically, profit is the rectangle with height $(P^* - ATC^*)$ and width $Q^*$.

• Monopoly can earn profits or losses in the short run.

• Shutdown Condition: In the short run, operate if $P \geq AVC$; shut down if $P < AVC$.

• Persistent losses mean the monopolist cannot survive in the long run.

• Monopoly price exceeds marginal cost, creating deadweight loss compared to perfect competition.

Summary Table: Types of Goods

Type of Good	Rival?	Excludable?	Example
Private Good	Yes	Yes	Ice cream cone
Club Good	No	Yes	Subscription TV
Common Resource	Yes	No	Fish in the ocean
Public Good	No	No	National defense

Additional info: Where the original notes were brief, standard textbook definitions and examples were added for clarity and completeness.