Capstone: The Course in Forty Views

This is Unit Seventeen of Principles of Microeconomics, part two of two: the second seventeen of forty views, from the industry over time to what the course rests on. Part one walked the tools back from scarcity to the shutdown test. This part carries on through the industry, the other structures, the factor markets and the failures, and stops twice at the exam's remaining sample questions. Two capstones gather everything: one rule behind seven decisions, and one triangle behind six wedges. The last entry is the course's account of its own sources. By the end you will be able to restate competition over time. To restate the other structures. To state the one rule and compute marginal factor cost. To restate the factor markets and the negative externality. And to see one triangle behind every loss, and say what the course rests on.

Three entries on the industry over time: supply, entry and exit, the industry's own supply curve, and what competition achieves.

The industry over time.

MIC 1624 Supply, Entry and Exit

A competitive firm's supply is marginal cost above the shutdown point. Profit draws entry and lowers price; loss drives exit; the long run ends at price equal to marginal cost at minimum average cost. Zero economic profit is normal profit, and nobody loses in the long run.

The industry's own supply curve.

MIC 1625 Long-Run Industry Supply

Entry can leave input prices unchanged, raise them, or lower them, giving flat, upward or downward long-run supply. The slope is what expansion does to input prices, and the firm's average cost is a U in every case.

What competition achieves.

MIC 1626 Efficiency in Competition

Long-run competition is productively efficient, at minimum average cost, and allocatively efficient, at price equal to marginal cost. Every other structure is measured against it. Efficient is not fair, and it assumes no externality.

Four entries on the other structures: the single seller, two prices, many small monopolies, and the few.

The single seller.

MIC 1627 Monopoly, Restated

A monopoly persists behind barriers. Its marginal revenue is below price, so it produces where marginal revenue meets marginal cost and charges the demand price above: less output, higher price, a deadweight triangle and a transfer rectangle. The objection is the missing output, not the profit.

Charging two prices.

MIC 1628 Price Discrimination, Restated

A seller with market power charges different buyers different prices for the same good when it can set prices, tell elasticities apart, and prevent resale; the less elastic group pays more. Cost differences are not discrimination.

Many small monopolies.

MIC 1629 Monopolistic Competition, Restated

Many firms, easy entry, differentiated products. Entry shifts each firm's demand left until it touches average cost, zero profit, below minimum average cost: excess capacity, the price of variety. Zero profit does not make it efficient, since price still exceeds marginal cost.

The few.

MIC 1630 Oligopoly and Games, Restated

A few firms, each watching the others. Collusion would reach the monopoly outcome, but cheating is dominant, all cheating is the equilibrium, and the cartel breaks; repetition can hold it. A Nash equilibrium is where nobody gains by changing alone, not the best cell.

Two entries: the rule underneath every decision, and the sixth sample question.

The rule underneath every decision.

MIC 1631 One Rule, Seven Decisions

Every decision in this course is the same decision: do one more unit while its marginal benefit is at least its marginal cost, and stop where they meet. Only what counts as benefit and cost changes. Marginal utility against price; price or marginal revenue against marginal cost; marginal revenue product against marginal factor cost; a machine's present value against its price; abatement saved against damage; a public good's summed benefit against its cost; and the whole market where demand meets supply. The car wash's fourth worker adds eighteen cars worth one hundred eighty for one hundred fifty: hire, produce, and worth making; the fifth adds fourteen cars at ten seventy-one each, above the price: none of the three. Every common error is an average where a marginal belongs, the rule does not say the curves are right, and sunk costs are on neither side.

The sixth sample question.

MIC 1632 Sample Question Six: Marginal Factor Cost

Marginal factor cost is what one more worker adds to total cost. In a competitive labor market it equals the wage and is constant, and the exam's answer is that it is the market wage, the same for every worker hired; under monopsony it exceeds the wage and rises. At a wage of one hundred twenty, the first, fourth and tenth worker each add one hundred twenty. In a one-employer town where the third worker comes at one twenty, marginal factor cost is one sixty, since two others got a raise. The exam's case is the constant one, and the anchor's name for it is the marginal cost of labor.

Four entries on the factor markets and the seventh sample question: labor demand, power, capital, and the negative externality.

Where labor demand comes from.

MIC 1633 Derived Demand and the Hiring Rule

A firm's demand for labor is derived from its product's demand: marginal revenue product, marginal product times marginal revenue, and its falling part is the demand curve. A wage change moves along it; product price, technology and the number of firms shift it.

Power on either side.

MIC 1634 Power in the Labor Market

A monopsonist hires where marginal revenue product meets rising marginal factor cost and pays the supply wage: fewer workers, lower wage. A union wage above equilibrium: fewer jobs, excess supply. Union against monopsonist: the wage is indeterminate and employment can rise. The market a policy faces decides its effect.

The other factor.

MIC 1635 Capital and Interest, Restated

The interest rate is capital's price, set where saving meets borrowing. A future sum is worth its present value at that rate, and a firm invests while returns' present value exceeds cost, so capital demanded falls as the rate rises. Discount each date separately.

The seventh sample question.

MIC 1636 Sample Question Seven: A Negative Externality

When production harms a third party, marginal social cost lies above marginal private cost by the external cost. The market clears where demand meets private cost and the optimum where demand meets social cost, so the market overproduces; the exam's answer is that marginal social cost exceeds marginal private cost and output is above the efficient level. The market clears at six dollars and eight thousand; with two dollars of damage per unit the optimum is seven dollars and six thousand, and a two-dollar tax corrects it exactly. Overproduction is the negative case, and the optimum is six thousand, not zero.

Four entries to close: the goods markets underprovide, government's other tasks, one shape behind every loss, and what the course rests on.

The goods markets underprovide.

MIC 1637 Public Goods and the Positive Case

A positive externality underproduces, and a subsidy equal to the spillover corrects it. A public good is underprovided because users ride free, and taxes provide it. A common resource is overused because nobody owns it. Classify by the good's two properties, not by who provides it.

Government's remaining tasks.

MIC 1638 Government's Other Tasks, Restated

Antitrust measures concentration by the Herfindahl index and presumes against mergers above dated thresholds; natural monopolies are priced at marginal or average cost. Inequality is read from the Lorenz curve and the Gini. Insurance can vanish through adverse selection, and mandates or classification hold it. Every remedy has a second edge: capture, the poverty trap, moral hazard.

The one shape behind every loss.

MIC 1639 One Triangle, Six Wedges

Every deadweight loss in this course is the same triangle, differing only in what drives the wedge. A tax drives it by law, a ceiling by shortage, a floor by surplus, a monopoly by restriction, a tariff twice, and a negative externality the other way, past the efficient point. Rectangles are transfers, still in the economy; triangles are losses, gone. One market three times: demand one hundred minus quantity, supply twenty plus quantity, meeting at forty units and sixty dollars. A twenty-dollar tax gives thirty units and a triangle of one hundred with a revenue rectangle of six hundred; a ceiling at fifty gives the same triangle with no revenue; a twenty-dollar external cost gives the same triangle on the wrong side of the optimum. The triangle grows with elasticity, a tax equal to an external cost is a wedge that removes a wedge, and the triangle measures lost surplus, not lost revenue or jobs.

What this course rests on.

MIC 1640 What This Course Rests On

A course that teaches weighing evidence owes an account of its own. It rests on one anchor, the open textbook the examining board names; one witness, a second open textbook cited section by section; and primary documents for what neither supplies. Five decisions, taken on the companion course's precedent, await the owner's confirmation. One anchor chapter was left out and four of its ideas carried where they belonged. Where the witness had nothing, the course said so; where the anchor had nothing, the witness led; where neither had it, a dated primary source did. Some standard results are constructed from definitions and marked as such, and every worked number is the course's own. Contested results carry both sides and no verdict, no administration or advocacy source is voiced, and no historical sum is converted to today's dollars. The board's eight sample questions were the calibration set, and each has its entry, from the point inside the frontier to the quantity from a total-cost table. A record of sources is not a warrant of truth, the decisions are reversible, and what the course leaves out is listed so that a student who meets it elsewhere knows it was seen and set aside.

Look at what you can now do. You can restate competitive supply as marginal cost above shutdown, entry and exit to zero profit, the industry's supply curve as what expansion does to inputs, and competition as the efficiency benchmark. You can restate monopoly's missing output, who pays more under price discrimination, excess capacity as the price of variety, and the cell a cartel lands in. You can state the one rule behind seven decisions, and answer the exam that marginal factor cost in a competitive market is the wage, constant. You can restate derived demand, the effect of power on either side of the labor market, present value, and the negative externality where social cost sits above private cost. And you can restate the goods markets underprovide, government's other tasks with their second edges, one triangle behind six wedges, and what this course rests on. That is the course, in forty views; it began where the first entry begins.