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

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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 often lead to market failure because it is difficult to exclude non-payers, resulting in the free rider problem and underprovision by private markets.
Efficient provision of a public good occurs where marginal social benefit (MSB) equals marginal social cost (MSC).
To find the market demand for a public good, individual marginal benefit curves are added vertically.

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 using resources owned by the firm (e.g., owner's time, capital).
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 the variable input.
Average Product (AP): Total product divided by the quantity of the variable input.

Diminishing Marginal Product

As more units of a variable input are added to fixed inputs, marginal product eventually falls (Law of Diminishing Returns).
MP intersects AP at the maximum point of AP.

Cost Measures and Formulas

Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC)
Average Fixed Cost (AFC) =
Average Variable Cost (AVC) =
Average Total Cost (ATC) =
Marginal Cost (MC): The increase in total cost from producing one more unit of output:
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 determines price; individual firms cannot influence it.

Revenue and Profit Maximization

For a perfectly competitive firm: Demand = Average Revenue (AR) = Marginal Revenue (MR) = Price (P).
The firm chooses output where MR = MC. Since P = MR, the profit-maximizing rule is P = MC.
Economic Profit =

Short-Run Outcomes

Firms may earn profits, break even, or incur losses.
Break-even Point: (economic profit is zero).
Shutdown Condition: In the short run, produce if ; shut down if .
If , the firm operates at a loss but covers variable cost and part of fixed cost.

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: A single firm produces a good or service with no close substitutes; significant barriers to entry exist.
The monopolist faces a downward-sloping demand curve; MR lies below demand.
For a linear demand curve, MR has the same price intercept as demand but is steeper.

Profit Maximization

The monopolist chooses output where MR = MC, then charges the price on the demand curve at that quantity.
Compared to perfect competition, monopoly produces a lower quantity 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 than multiple firms due to persistent economies of scale.
Regulated Marginal Cost Pricing: Regulator sets (allocatively efficient, but may require subsidy if ).
Average Cost Pricing: Regulator sets (firm covers all costs, but price is above MC and output is below efficient level).
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:
Graphically, profit is the rectangle with height and width .
A monopoly can earn profits or losses in the short run.
Shutdown Condition: In the short run, operate if ; shut down if .
If losses persist in the long run, the monopolist cannot remain in business indefinitely.
Because monopoly price exceeds marginal cost, monopoly creates deadweight loss relative 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

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