Price cap incentive regulation pricing involves:(1) setting a max price the firm can charge, (2) Letting

firms keep any profit they make from bringing cost

down below that price (3) readjusting the price cap periodically. Gives firms incentives to cut cost. The indifference Curve: shows combinations of goods among
which a household is indifferent. A curve that shows the combinations of goods among which a consumer is indifferent. These “baskets” of goods generate the
same amount of utility for the consumer. The Budget Line tells you what you can afford. Monopoly’s profit = MR-MC. Monopolies produce when MR=MC
and charge P at the Demand curve. Monopolies underproduce, the create a DWL. Perfectly competitive markets do not create a DWL. Natural Monopolies
have huge fixed cost, and small marginal cost. Cost+ Norm. Profit = Rev. -- Rev. /Qty = Price -- Monopolistic competition- If P>ATC = ecoprofit If P = ATC =
norm. profit If P<ATC = eco loss. Firms want to produce where MC=MR Perfect Competition -- Price is unaffected by quantity. Game Theory- Developed to
take account of mutual interdependence between oligopolistic competition. NATURAL MONOPOLY- Marginal cost pricing regulation- A-Must set P=MC B.
Efficient qty. for society- not DWL C. P<ATC eco loss, - firms may shut down without subsidies. AVERAGE total cost pricing regulation. A. Must set P=LRAC/
ATC B. Smaller DWL than unreg. C. P=ATC so norm. profit D. Companies can pad cost Price cap/incentive reg.- A gov’t sets max price the company can
charge B. Company can keep profits. C. Company may sacrifice repairs/needed upgrades to keep cost low. Perfect Competition- -Produce at min. of ATC. -
Efficient for society and low cost. -Homogeneous Product - easier to produce at capacity. Monopolistic Competition- Produce LESS than capacity - Excess
Capacity is NOT efficient (DWL) - Customers want VARIETY - Spends lot on advertising causing higher cost. price elasticity of demand (%∆QD)/(%∆P) A
decrease in the demand and the supply result in a decrease in the equilibrium qty. True about public goods- Private mkts. left alone likely produce less than the
efficient qty of a public good. The U.S. imposes a tariff on toms. imported from mex. The tariff will decrease the consumer surp. Increase producer surp of US.
tom producers, and Decrease the US surp. Producing paper causes pollution, the eff. qty of paper is when the... MSB of paper is = to MSC of paper.
In perfect competition- MC=MR=Price=demand

Natural Monopoly- One firm can supply the entire market at a lower cost than two or more firms. Demand Crosses LRAC where LRAC is decreasing. IE Electric
Companies. Excludable good: Can Charge for it. Rival good- Only one person can use/posses it at a time. Non-Rival- Many can share at the same time.
Excludable: You can be prevented from using/ possessing it. Non-excludable- you can not be prevented from using/possessing it Private Good-Excludable and
Rival Most consumer goods that someone can buy, sell, enjoy. Public good- Excludable and non-rival (parks, roads, national defense). Common Resource-
Rival but, non-excludable Fish in the sea, bench down town, community garden. Marginal Utility- (%change Total utility/change Q) Decreases as consumption
increases. (MU/P)Elasticity of Demand- |%∆QD / %∆P| Causes of a change in Demand: Prefs. Demand shifts right. Expected Future Price ^ = Demand ^
Credit easier = D^ Adverse Selection-Occurs when people who really need insurance are more likely to seek it than others. Moral Hazard-Occurs when people
who already have insurance are more likely to engage in hazardous behavior. Perfect Competition- Lots of firms and buyers, identical product. Short Run: At
least one of the firms inputs are fixed. Long Run: All inputs can be varied. Monopolistic Competition: Many firms, no barriers to entry-unique product. Marginal
Cost Pricing Rule: Produce where P=MC causes ecoloss, no dwl. Average cost pricing rule: Produce where P=LRAC causes norm. profit, but causes DWL.
Externalities- External costs are costs paid by those who don’t consume the product (pollution). The gov’t can internalize those cost with property rights and
taxes (using marketble permits). External benefits are those benefits enjoyed by those who don’t consume the product (flushots) Tit-4-tat a firm does this time
what its competitor did last.Normal Good: A good for which demand increases as income increases. Inferior Good: A good for which demand decreases as
income increases.Factors that shift the Demand Curve: Normal good Income ^ demand ^ Shift (R)
Normal good: Income \/ Demand \/ Shift (L) -Inferior good: Income ^ Demand \/ (L) -Inferior good: Income \/ Demand ^ (right) -Elasticity > 1 is elastic (strong) -
Elasticity <1 is inelastic Elasticity = 1 unit elastic. SUBSTITUTE- A good that can be used in place of another good. PRICE ELASTICITY OF DEMAND- The
units-free measure of responsiveness of a quantity demanded of a good to a change in its price, when all other influences on buyers plans remain the same.
PERFECTLY ELASTIC DEMAND- Demand with an infinite price elasticity; The quantity demanded changes by an infinitely large percentage in response to a
tiny price change. Rational Ignorance- Cost of being informed exceeds the benefits to the individual.
PERFECTLY INELASTIC DEMAND: Demand with the price elasticity of zero; the quantity demanded remains constant when the price changes. LAW OF
DEMAND: As the price goes up, quantity goes down. As price goes down, quantity demanded rises. Factors that shift demand: Income, Price of related goods,
Preference, Number of demanders, Expected future income effective future price. Factors that shift supply: Cost, Technology, Number of suppliers, price of
related production goods, state of nature.
Sherman Act 1890- The first federal anti-monopoly law. This act had two sections, Section one focused on firm conduct, and section two deals with industry
structure. This act covers legal restrictions on general attempts to monopolize or set prices. Clayton Act (1914)- This legislation outlawed price discrimination,
interlocking board of directors, exclusive deals, tying contracts, and the acquisition of the competing companies by purchasing the shares of the competitor only
if those practices “substantially lessen competition or create a monopoly”
Vertical Merger- When a company buys a competitor. NOT Examined closely. Horizontal Merger- When a company buys a competitor. Examined closely.
Conglomerate Merger- When a company buys another company in an unrelated market. Consumer equilibrium occurs when MU/P = MU/P
Marginal Private Benefit- Benefit from an additional unit of a good or service. Marginal Social Benefit- The marginal benefit is enjoyed by society.
Marginal Private Cost- The cost of producing an additional unit or good. Marginal Social Cost- Marginal cost incurred by the entire society.
The Tragedy of the Commons=The absence of incentives to prevent the over use or depletion of a commonly-owned resource. Individual Transferable
Quota- A production limit has been set, voucher can be transferred. Rational ignorance- the decision NOT to acquire information because the cost of doing so
exceeds the expected benefit.

Natural Monopoly- One firm can supply the entire market at a lower cost than two or more firms. Demand Crosses LRAC where LRAC is decreasing. IE Electric
Companies. Excludable good: Can Charge for it. Rival good- Only one person can use/posses it at a time. Non-Rival- Many can share at the same time.
Excludable: You can be prevented from using/ possessing it. Non-excludable- you can not be prevented from using/possessing it Private Good-Excludable and
Rival Most consumer goods that someone can buy, sell, enjoy. Public good- Excludable and non-rival (parks, roads, national defense). Common Resource-
Rival but, non-excludable Fish in the sea, bench down town, community garden. Marginal Utility- (%change Total utility/change Q) Decreases as consumption
increases. (MU/P)Elasticity of Demand- |%∆QD / %∆P| Causes of a change in Demand: Prefs. Demand shifts right. Expected Future Price ^ = Demand ^
Credit easier = D^ Adverse Selection-Occurs when people who really need insurance are more likely to seek it than others. Moral Hazard-Occurs when people
who already have insurance are more likely to engage in hazardous behavior. Perfect Competition- Lots of firms and buyers, identical product. Short Run: At
least one of the firms inputs are fixed. Long Run: All inputs can be varied. Monopolistic Competition: Many firms, no barriers to entry-unique product. Marginal
Cost Pricing Rule: Produce where P=MC causes ecoloss, no dwl. Average cost pricing rule: Produce where P=LRAC causes norm. profit, but causes DWL.
Externalities- External costs are costs paid by those who don’t consume the product (pollution). The gov’t can internalize those cost with property rights and
taxes (using marketble permits). External benefits are those benefits enjoyed by those who don’t consume the product (flushots) Tit-4-tat a firm does this time
what its competitor did last.Normal Good: A good for which demand increases as income increases. Inferior Good: A good for which demand decreases as
income increases.Factors that shift the Demand Curve: Normal good Income ^ demand ^ Shift (R)
Normal good: Income \/ Demand \/ Shift (L) -Inferior good: Income ^ Demand \/ (L) -Inferior good: Income \/ Demand ^ (right) -Elasticity > 1 is elastic (strong) -
Elasticity <1 is inelastic Elasticity = 1 unit elastic. SUBSTITUTE- A good that can be used in place of another good. PRICE ELASTICITY OF DEMAND- The
units-free measure of responsiveness of a quantity demanded of a good to a change in its price, when all other influences on buyers plans remain the same.
PERFECTLY ELASTIC DEMAND- Demand with an infinite price elasticity; The quantity demanded changes by an infinitely large percentage in response to a
tiny price change. Rational Ignorance- Cost of being informed exceeds the benefits to the individual.
PERFECTLY INELASTIC DEMAND: Demand with the price elasticity of zero; the quantity demanded remains constant when the price changes. LAW OF
DEMAND: As the price goes up, quantity goes down. As price goes down, quantity demanded rises. Factors that shift demand: Income, Price of related goods,
Preference, Number of demanders, Expected future income effective future price. Factors that shift supply: Cost, Technology, Number of suppliers, price of
related production goods, state of nature.
Sherman Act 1890- The first federal anti-monopoly law. This act had two sections, Section one focused on firm conduct, and section two deals with industry
structure. This act covers legal restrictions on general attempts to monopolize or set prices. Clayton Act (1914)- This legislation outlawed price discrimination,
interlocking board of directors, exclusive deals, tying contracts, and the acquisition of the competing companies by purchasing the shares of the competitor only
if those practices “substantially lessen competition or create a monopoly”
Vertical Merger- When a company buys a competitor. NOT Examined closely. Horizontal Merger- When a company buys a competitor. Examined closely.
Conglomerate Merger- When a company buys another company in an unrelated market. Consumer equilibrium occurs when MU/P = MU/P
Marginal Private Benefit- Benefit from an additional unit of a good or service. Marginal Social Benefit- The marginal benefit is enjoyed by society.
Marginal Private Cost- The cost of producing an additional unit or good. Marginal Social Cost- Marginal cost incurred by the entire society.
The Tragedy of the Commons=The absence of incentives to prevent the over use or depletion of a commonly-owned resource. Individual Transferable
Quota- A production limit has been set, voucher can be transferred. Rational ignorance- the decision NOT to acquire information because the cost of doing so
exceeds the expected benefit.