EC 120 Final

Cheat

completed version 1.2 Sheet

M rk a et Failure
DWL > 0. When not allocatively
Monopolies/oligopolies/monopolistic competition all cause
failure. Non-rival or non-excludable goods always inefficient.

efficient, requires intervention Hiding asymmetric info in a transaction: Moral hazard hiding
to fix. Negative surplus can
exist on right of equilibrium.
afterwards (skydiving after buying insurance), adverse
selection hiding before (insider trading).

Optimization MUx MUy

Px = Py Markets are efficient when ΣMC = ΣMB for all affected people. Externalities are differences
between private (market forces) and societal (everyone else affected) costs or benefits.
Profit maximize: product (suppliers) / utility
(consumers). Optimize marginal per dollar.
Taxation Aim for equity and e ciency.
MCs ffi

MCp MCp Less elastic pays more tax. evenue = direct

Accounting profit = economic profit minus R
en and DWL = excess burden. The Laffer
economic costs, i.e., opp. costs incurred from neg pos MBs burdcurve between rates and revenues shows
not doing things. Specifically: cost of people’s diminishing direct burden.
time, cost of money’s time (interest/risk) MBp MBp Inequality measured by Lorenz curve between
Supply / Demand Intervention Government functions:
people and incom e

(area = ini coe cient).

S+→P- Q+ read as supply up → price down/quantity up monopolizing the use of force and G ffi

If marginal rate avg rate

Tax
S+ → P- Q+ S- → P+ Q-
≠ ,

protecting property rights. Broader social tax changes inequality.

D+ → P+ Q+ D- → P- Q- goals of reducing inequality, public Progressive M > A

S+ D+ → P? Q+ S- D- → P? Q-

xcess
provision, protection (paternalism), and
R R

Proportional M = A
S > D → P+ Q? D > S → P- Q? social responsibility with public provision,
R R


redistribution, regulation. Consider indirect egressive M A Direct

E
R R < R

Market is sum of individual curves. Individual costs of production, compliance, and W orst is p o ll tax
curves from indifference / budget curves.
,


rent-seeking (corruption).
a constant for everyone.
G ame heo y T r Floors bind above equilibrium, ceilings bind.
Quotas act like price floors.
20/20 25/5 30/30 25/5 30/30 25/5 Pre post
Surplus Binding
Price
/
progressive tax

lity
5/25 0/0 5/25 0/0 5/25 8/8

Percent of income
Lorenz curves

ua
eiling

eq
C
Deadweight

Deadweight
Eq: 0/0 (cheat) Eq: 30/30 (coop) Eq: 8/8, 30/30
D> S

me
conomic

η η
Surplus

Firms can cooperate (tacitly or explicitly) to Market

co
Loss

Loss
Black

e in
achieve the best outcome in cooperative

i
in
let
G
equilibria.

mp
E

Sometimes in non-cooperative games, one

Co
Binding
dominant strategy always finds the best Price Shortage
outcome. These tend to a ash equilibrium.
Floor
N
η ηS> D Percent of people
If (coop) > (mixed), there’s coop equilibrium.

ade a et
π π

If (cheat) > (mixed), cheat equilibrium.

π π Tr M rk s Terms of trade = exports ÷ imports. Changes to ToT = CPF

rotates. The law of one price says world price is constant except for shipping costs. Countries
CPFs/PPFs Opportunity cost = dA/dB.
engage in protectionism to promote diversification, protect interest groups (infant industries),
U nemployment moves point inwards, not PPF.
improve ToT, or just make more money. No trade = autarky.
Feasible inside PPF, efficient on PPF If domestic S > D, export diff.
 Tariffs / import quotas have same effect.
If domestic D > S, import. Consumers lose A+B+ +D. is revenue for Tarrif Quota
Linear PPF
C C /

Import tarrifs but D WL for quotas. A voluntary

Pw + t
Perfectly efficient P2 export restriction (VE ) is just another
R

resource re-allocation. q uota. o unt ervailing duti es are tarrifs A B D C

Pw
C
specifically for going no u to foreign
Bowed Out PPF subsidies. Dumping is flooding of foreign
Inefficient. Opportunity cost P1 market at low price.
Export
increases with production. Advantages: comparative (lower opp. cost) or absolute (lower absolute cost)
PPF Expands B B given some other resource. Specialization in producing goods with advs
Tech advancement, creates gains from trade, economies of scale, and learning by doing.

population increase. Comparative advantage can come from factor endowments (forests, oil, ...),
PPF Contracts X Y climate, human capital, acquired skill (learning by doing), etc.

R esource loss, A A When trade opens between countries, CPF rotates away from origin around
population decrease. X adv. in good A, Y adv. in good B advantage point (since the other good is imported from the second country)

This cheat sheet is brought to you by Pain and Agony╰(*°▽°*)╯CC-BY-SA James Ah Yong & Mahbod Moe Sabbaghi, 2020
Market Structures Dem
and
Monopoly Set price where MR = MC. Come
MC about naturally with utilities / manufacturing /
Perfect Competition Firms small wrt market, sell economies of scale / one firm supplies entire
infinite product at market price. This gives a
Pm CS industry, or created by government / IP rights /
horizontal/infinitely elastic firm demand curve (while market PS trade groups.

remains downwards sloping).

Surplus DWL
Products are homogenous. No big barriers to entry or exit. Pc Not allocatively efficient always productively
efficient. Governments try to fix by setting P = MC
MC Produce where MC = M R = P.
but causes losses and firms exit the industry. Or

MR
In the long run, since firms can D M R= MC set P = ATC but that is not allocatively efficient
P Profit e m and halts investment.

easily exit and enter, supply always and

ATC tends to the equilibrium price.
Two-part tarrifs = fixed price + marginal price.
LRS = min(LRATC), exit if P < LRS
P Profit ← Recall profit = Q×(P-ATC).

AVC Market is allocatively and ATC

Any change in quantity produced
Q*
productiely efficient. MC creates price and output effects:
total revenue goes up when
Monopolistic Competition Monopolies on a output > price.

MR
differentiated product. Act like monopoly in short run, PC in MR=MC
long run since firms can enter/exit until zero profit. Price Discrimination
Leads to long run equilibrium with everyone at demand so entire areawith
Monopolies/oligopolies optimize perfect price discrimination by selling to
LRATC P = LRATC tangent to demand
between D and ATC is profit.

P Always produce under “efficient” Usually impossible (except for airlines etc.) so bucket customers with imperfect
scale (i.e. excess capacity). price d iscrimination - more elastic demand gets lower price. Allowing movement
LRD Differentiation (through adverts) between buckets is hurdle pricing so more marginal utility = effort = discount.
MC
profits. Cannot know efficiency ut
decreases elasticity, increasing Poll ion Total pollution = size of economy (GDP) × energy use ×
pollution from energy. If small, estimate composition of
because of differentiation MCa percentages with addition.

MR

Q Efficient Oligopoly/Cartel
P ermits MCb
Direct control usually inefficient because firms have diff
A costs. Mostly useful for 100% removal of specific
Monopoly in short term, perfect competition in long term.
buys pollutant. Let market forces do the hard work instead.

Balance between firm production and market quantity. Add tangible cost to pollution: direct taxes (know P,
Explicit collusion is illegal, usually termed cartels. Cartels B unknown Q) on units or distribute permits (unknown P,
must prevent new entrants and restrict output. Implicit or sells know Q) for sale. Graph as P/Q of abatement (reduction).

tacit collusion is not. Usually 4-firm concentration > 40%. Quota

With fixed number of permits, firms trade until price of
ast c t
El i i y η = (ΔQ /Q) Inelastic ( η < 1)

means responsive

permit = MC of abatement for all firms.
Max revenue
Ela nue

(ΔP/P)
(re

of demand

Elastic
Unit

to quantity, elastic (η > 1) to price.

occurs at MR = 0,
sti s +
ve

Unit
c
)

η=0 Elastic Unit elastic gives maximum revenue / but that is the unit
η=∞ total expen d iture, so moving closer to elastic point, so
η=1 that point (e.g. inelastic + raised price demand is elastic
Ine venu

or elastic + higher quantity) raises if MR > 0 and

(re
las es

revenue. Lines have parabolic elasticity inelastic


tic
-)

Unit Inelastic Elastic so one unit elastic “best” point. if MR < 0.

MR AR
r ss
C o -El i i y ast c t c
In om El i i y e ast c t Elastic Inelastic
0 1 0 1
η inferior goods necessities luxuries η
complements substitutes
Good X’s demand over good Y’s price
 normal goods
Complements are goods that are used together.
 Calculate the same but instead of price use income

Substitutes are goods that can replace each other.
 Inferior goods are those people buy less when rich

Same sign as term in demand equation. Necessities are staples that everyone needs
C n umer e avi: ur
o s B h o
Two effects when price goes down substitution (always up)

Making a Supply/Demand
I
Curve magine a curve of all points
income (depends on elasticity) Indifference q fi
with e ual bene t (utility or
(Isoquant) I Budget
( socost)
product) from two inputs :
Normal Inferior Map Line indifference or isoquant curves.

G ood G ood Draw the PPF-style line for ed fix

/
cost of goods inputs. This is
the budget or isocost line.

All goods can be I

nferior demand curve can slope up. q
The optimal iso uant Income effect changes
qisouantity by switching the
excludable (limited Giffen goods are super essentials. is tangent to the
by action) or rival Conspicuous consumption goods are budget line. As the quant line as real income
(limited by use). super lu ury goods. x budget line changes,
q
(purchasing power) goes up.

Non-Excludable Excludable different iso uants S ubstitution effect is the

P
ublic
Club

give different optimal

points, creating the
change of the the isocost line
q
Non-Rival

sliding down iso uant when

x
ex. health, empty highway.
 ex. toll roads, museums.
 demand and long-run
Pos e ternalities, typically MCs = 0 so P = 0, typically
provided by government. monopoly or government.
y
suppl curves.
relative costs change.
income
Common
rivate
P does not chance substitution
does not change
x T
ex. fishing, busy highway.

preferences,
/
ex. food.
 possibilities, so

Positive e ternalities, no
y
Rival

allocative eff. raged of Most goods markets. slope of isocost area under isocost
Consider negative is invariant
x the commons from
overe ploiting until MB = 0. xe ternalities.
is invariant

Supply Short Run

SLong A supplier’s costs can
This gives the supply/demand curve of one individual in the market. Don’t forget
run, all factors variable
 be variable or fixed, so:
hort run, some variable

Very long run, tech variable TC = TF C + TV C.
that the actual curve is a sum of everyone in the market.

Express wrt quantity:
 Very Long Run

MC ATC = AFC + AVC

Shutdown

Capacity

SRAC LRAC
Changing the LRAC’s shape is possible. Tech
Minimized when they changes move the curve downwards, reducing
cross the marginal
ATC cost curve ( TC ).
Δ /ΔQ costs for every possible production level.
Productive Efficiency Economy Efficient Diseconomy
Firms always pay FC,
so if MC AVC, no
AVC point in staying open
< A firm is productively efficient if it is producing
at minimal cost (P = SRATC = LRATC).

of scale scale

(increasing (zero
of scale
(decreasing
and rm temporarily fi w A market is productively efficient if all firms
returns) returns) returns)
shuts do n (distinct
x have the same MC and is producing on the PPF.
Long Run
from e iting when
long-term is unviable) All ocative Efficiency
Economy/market is allocatively efficient if P = MC
De
ma
nd
All possible short-run cost curves’ respective
minimum points create a long-run average total cost and no DWL
. Measure failure by size of D L W :

curve. Minimized where marginal products per dollar

q B Perfect competition ligopoly Monopoly >O Pm
>
are e ual. reak even at P = LRAC.

→ → a
L bour Monopsonies are monopolies but
Po
w
a / r Marke
LRAC down MC down returns to scale up. upside-down, with one seller buyer. Minimum ages Pc
F cto ts →
unemployment. Unions collectively bargain for
MC
MR

better wages. This creates a labour surplus, which is

/ fix Q Q Q:
Human physical capital (stock) which produces cash ed by featherbedding (useless hiring) and m o c
flow. MRP = MR×MP acts as demand, do normal S D.
advertising.

Equilibrium differentials don’t change. ntrinsic

q I K pit M rkets a al aMP acts like the opposite of MC
M crosses at maximum P AP
(features) vs ac uired (invest) vs compensating Interest is the “price” of capital. max/diminishing
(non-monetary diffs) e.g. hazard pay or wage Do supply and demand with
F
discrimination. actor mobilit is ease in reuse in yy interest rate and investment
MP
max/diminishing
new industry, erodes temporar differentials.
Rent instead of price and uantity.
q productivity
AP
Gains = transfer earnings (opp cost) + economic rent Total production depends on tech
x
(e tra). More elastic transfer earnings.
→ TE
of labour and capital f (K , ). : TP = L MP
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