This is my note for the course When Market Fails taught by Rebecca Stein at University of Pennsylvania.

Disclaimer

I am somewhat familiar with fundamental concepts of microeconomics and the power of free market. I am quite curious to learn about dark side of free market.

The notes is quite personal and maybe not follow exactly what has been taught, but also my personal adding views.

Notes

Week 1

Introduction

Cost & Profits

Recall to some basic mathematics:

profit = revenue - cost
revenue = price * quantity
cost = fixed cost + variable cost

Marginal productivity

marginal_productivity = change_output/change_input

Usually looks like below. The marginal productivity goes down because of the law of diminishing marginal productivity.

Marginal cost

Is reverse of marginal productivity

Perfect Competition

Definition

Four characteristics:

1. Produce standardized product

2. Industry has many buyers & sellers

3. No entry barrier

4. Full information

Any firm has no incentive to increase or decrease price –> price or all product are the same all the time.

Profit Maximization

Profit is maximized if marginal_revenue = marginal_cost

In perfect competition:

marginal_revenue = price

so marginal_revenue is a horizontal line while marginal_cost is a U-shape curve.

Proof

Why profit is maximized when marginal_revenue = marginal_cost

(quite easy)

Making Profit

Optimizing profit does not mean that you are making profit. E.g. if you are optimizing profit and the best value is -1, definitely you are losing money.

Short Run & Long Run

Short Run: the quantity of one (more) resource used is fixed.

Long Run: quantity of all resources can be varied.