Pricing with Perfect Competition. Advanced Pricing Strategies. Markup Pricing. Pricing with Market Power

Size: px
Start display at page:

Download "Pricing with Perfect Competition. Advanced Pricing Strategies. Markup Pricing. Pricing with Market Power"

Transcription

1 Pricing with Perfect Competition Advanced Pricing Strategies Herbert Stocker Institute of International Studies University of Ramkhamhaeng & Department of Economics University of Innsbruck Perfect Competition: Pricing without market power (perfect competition) is determined by market supply and demand. Every supplier perceives demand for his own product as perfectly elastic. Therefore, he has to accept market prices as they are, he is a price-taker. The individual producer must be able to forecast the market and then concentrate on managing production (cost) to maximize profits. On perfectly competitive markets you will rarely see advertisement. Why? Pricing with Market Power Pricing with market power (imperfect competition) requires the individual producer to know much more about the characteristics of demand as well as manage production. Monoplist is a price-searcher, he produces quantity where MR = and charges the maximum price that consumers are willing to pay. The same logic is essentially true for firms on monopolistic competitive markets! Under certain conditions, firms can catch even higher profits! Markup Pricing Remember: The condition for profit maximizing MR = gave us MR = P [1 (1/ E Q,P )] = This can be rearranged to express price directly as a markup over marginal cost P = [ ] 1 1 E Q,P If e.g. E Q,P = 2 then P = /(1 0.5) = 2, i.e. the monopolist charges double! 1

2 Capturing Consumer Surplus All pricing strategies we will examine are means of capturing consumer surplus and transferring it to the producer: P A: The firm would like to charge higher price to those consumers willing to pay it. Price Discrimination Producer Surplus B: Firm would also like to sell to these consumers but without lowering price to all consumers. MR D Q Both ways would allow the firm to capture more consumer surplus. Price Discrimination Price Discrimination Price Discrimination: The practice of charging different prices to various customers that are not based on differences in the costs of production. The three requirements for successful price discrimination are that: The firms possess some degree of market power. The firms have the ability to separate customers into different groups that have different price elasticities of demand. The firms have the ability to prevent resale among the different groups of customers. Two important effects of price discrimination: It can increase the monopolist s profits. It can reduce deadweight loss. Price Discrimination can benefit some consumers and hurt others. Economists distinguish different kinds of price discrimination: First degree price discrimination Second degree price discrimination Third degree price discrimination 2

3 First Degree Price Discrimination First Degree Price Discrimination First Degree Price Discrimination: Charge a separate price to each customer: the maximum or reservation price they are willing to pay. If the firm can price discriminate perfectly, each consumer is charged exactly what they are willing to pay. MR curve is no longer part of output decision. Incremental revenue is exactly the price at which each unit is sold the demand curve Perfect Price Discrimination: firm can reap all the consumer surplus! P Producer Surplus (Profit) MR D Q First Degree Price Discrimination In practice, perfect price discrimination is almost never possible: Impractical to charge every customer a different price (unless very few customers). Firms usually do not know reservation price of each customer. Sometimes, firms can discriminate imperfectly (e.g. lawyers, doctors, accountants). Second Degree Price Discrimination Assumes that firms charge maximum price consumers are willing to pay for different blocks of output (non-linear pricing). Each customer faces same price schedule, but pays different prices depending on quantity purchased. Example is quantity discounts. Second-degree price discrimination increases the revenue and the profit for the firm compared to charging a single price, but these increases are smaller than under first-degree discrimination. 3

4 Second Degree Price Discrimination Two-part pricing Second Degree Price Discrimination: Quantity discounts can increase producer surplus. P P 1 P 2 P 3 P 4 Q 1 Q 2 Q 3 MR Q 4 D Q Two-part pricing: charging customers a fixed fee for right to purchase product, then a variable fee that is a function of the number of units purchased. A fee is charged upfront for right to use/buy the product; An additional fee is charged for each unit the consumer wishes to consume. Examples: amusement park, golf course, telephone service. Pricing decision is setting the entry fee (A) and the usage fee (f ). Two-part pricing Two-part pricing Total Expenditure (TE) for Q units is Average price (P) is TE = A + fq P = TE Q = A + fq Q = A Q + f Average price decreases with quantity bought. P = A Q + f When consumers have identical demands, entire consumer surplus can be captured by setting f = A =consumer surplus (CS) Optimal usage fee and access charge are more difficult to determine with more groups of buyers with different demand. 4

5 Two-part pricing Third Degree Price Discrimination Third-Degree Price Discrimination: A pricing strategy under which firms with market power separate markets according to the price elasticity of demand and charge a higher price (relative to cost) in the market with the more inelastic demand. This is the most commonly used form of price discrimination. A higher price is charged in the market with the relatively more inelastic demand. Examples: airlines, premium vs. non-premium liquor, discounts to students and senior citizens, frozen vs. canned vegetables. Third Degree Price Discrimination Price Discrimination with increasing Market 2 $ Market 1 P 1 Y must equal total MR! Total MR is the horizontal sum of individual MRs. D 2 P 2 P 2 P 1 MR tot = MR 2 Quantity Market 2 Q 2 0 Q 1 MR 1 D 1 Quantity Market 1 (For simplicity we assume constant marginal cost!) Q 1 Q 2 X 5

6 Third Degree Price Discrimination Coupons and Rebates Examples: College students and senior citizens are not usually willing to pay as much as others because of lower incomes. These groups are easily distinguishable with ID s. Price reductions for locals in ski resorts Locals are easily distinguishable by their dialect. Hardback vs. paperback books: Company divides consumers into two groups: Those willing to buy the more expensive hardback and those willing to wait for the paperback. Publishers typically wait 12 to 18 months Those consumers who are more price elastic will tend to use the coupon/rebate more often when they purchase the product than those consumers with a less elastic demand. Coupons and rebate programs allow firms to price discriminate. About 20 30% of consumers in the USA use coupons or rebates. Firms can get those with higher elasticities of demand to purchase the good who would not normally buy it. Coupons and Rebates Airline Fares Differences in elasticities imply that some customers will pay a higher fare than others. Business travelers have few choices and their demand is less elastic. Casual travelers and families are more price-sensitive and will therefore be choosier. There are multiple fares for every route flown by airlines. They separate the market by setting various restrictions on the tickets: Stay over weekend or return on same day. Most expensive: no restrictions first class. 6

7 Bundling Bundling Bundling: where products are sold separately but also as a bundle which is less than the sum of prices as if they had been sold individually. Conditions necessary for bundling: Heterogeneous customers. Price discrimination is not possible. Demands must be negatively correlated. Examples: Microsoft, restaurants, car purchasing, vacation travel,... Tying Tying: The practice of requiring a customer to purchase one good in order to purchase another. Examples: Xerox machines and the paper. IBM mainframe and computer cards. Allows firm to meter demand and practice price discrimination more effectively. Cost-Plus Pricing Common technique for pricing when firms do not wish to estimate demand and cost conditions to apply the MR = rule for profit-maximization. Price charged represents a markup (margin) over average cost: P = (1 + m)atc where m is the markup on unit cost. 7

8 Cost-Plus Pricing Cost-Plus Pricing does not generally produce profit-maximizing price! Fails to incorporate information on demand & marginal revenue. Uses average, not marginal, cost. Pricing and Macroeconomics Macroeconomic conditions can influence pricing: Overall economic conditions influence markup and price discrimination. Periods of long-run economic expansion make consumers less cost-conscious and more value-conscious (demand is more price inelastic). However, ability to raise prices differs among sectors of the economy. Firms become rigid when they think other firms will not follow price increases. Managerial Price Sensitivity Analysis Price Elasticity & Pricing in Marketing The price elasticity of demand (in marketing literature often called price sensitivity) is one of the most important variables for managers. A managerial analysis of price elasticity should be a written document that can be criticized and improved over time. It should include some of the following questions: 8

9 Reference Price Reference Price Substitutes and Reference Price: Are there close substitutes to the product, and if so, are the buyers (or a segment of buyers) usually aware thereof when making a purchase? To what extent can buyers price expectations be influenced by the positioning of one brand relative to particular alternatives? Can buyers speed up or delay purchases based on expectations of future prices? How difficult is it for buyers to compare offers of different suppliers? Can the attributes of the product be determined by observation, or must the product be tested? Is the product highly complex, or are there few reliable cues for ascertaining quality? Does the product need after-sale service, like preventive maintenance or repairing, and how does after-sale service compare with competitors? Have most consumers past experiences with this product, or is it in it s early stages of life-cycle? Switching Cost Effect Expenditure Share To what extent have buyers already made investments (monetary and/or psychological) that they would need to incur again if they switched suppliers? For how long are buyers presumably locked by those expenditures? How significant are buyers expenditures for the product? For end consumers mainly the portion of income is important. For business customers also the absolute price might be important. 9

10 End-Benefit Fairness What end-benefit do buyers seek from the product? (e.g. fishing fishing rod). How price sensitive are buyers to the cost of the end benefit? What proportion of the end benefit does the price of the product account for? Does the customer pay the full cost of the product, or is it e.g. deductible from tax? Buyers are more sensitive to a product s price when it is outside the range that they perceive as fair or reasonable. How does the current price compare with prices people have paid in the past? What do buyers expect to pay for similar products? Do customers perceive the product as necessity or as a discretionary purchase? Framing Effect Framing Effect Prospect Theory: (D. Kahneman & A. Tversky) Essential idea: people frame purchasing decisions in their minds as a bundle of gains and losses. Consumers tend to be more price sensitive when they perceive the price as a loss rather than a foregone gain. Additionally, they are more price sensitive when the price is paid separately rather than as part of a bundle. Example: (Prospect Theory) Gas station A sells gasoline for $1.20 and gives a $0.10 per liter discount if the buyer pays with cash. Gas station B sells gasoline for $1.10 and charges a $0.10 surcharge if the buyer pays with credit card. Most people choose station A. 10

Lecture 6 Pricing with Market Power

Lecture 6 Pricing with Market Power Lecture 6 Pricing with Market Power 1 Pricing with Market Power Market Power refers to the ability of a firm to set its own price, as opposed to firms that are price takers and take market price as given.

More information

Monopoly. Cost. Average total cost. Quantity of Output

Monopoly. Cost. Average total cost. Quantity of Output While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

More information

UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Fall 2013

UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Fall 2013 UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Fall 2013 Monopolistic markets and pricing with market power (PR 10.1-10.4 and 11.1-11.4) Module 4 Sep. 20, 2014

More information

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22 Monopoly. Principles of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift in Demand and Effect of Tax Monopoly The monopolist is the single supply-side

More information

Chapter 10: Monopoly

Chapter 10: Monopoly Chapter 10: Monopoly Answers to Study Exercise Question 1 a) horizontal; downward sloping b) marginal revenue; marginal cost; equals; is greater than c) greater than d) less than Question 2 a) Total revenue

More information

EconS 301 Intermediate Microeconomics Review Session #9 Chapter 12: Capturing Surplus

EconS 301 Intermediate Microeconomics Review Session #9 Chapter 12: Capturing Surplus EconS 30 Intermediate Microeconomics Review Session #9 Chapter : Capturing Surplus. With second-degree price discrimination a) The firm tries to price each unit at the consumer s reservation price. b)

More information

Monopoly. While a competitive firm is a price taker, a monopoly firm is a price maker.

Monopoly. While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly A firm is considered a monopoly if... it is the sole seller of its product. its product does not

More information

Introduction. Learning Objectives. Learning Objectives. Economics Today Twelfth Edition. Chapter 24 Monopoly

Introduction. Learning Objectives. Learning Objectives. Economics Today Twelfth Edition. Chapter 24 Monopoly Roger LeRoy Miller Economics Today Twelfth Edition Chapter 24 Monopoly Introduction The cement market in Mexico is dominated by a single company that accounts for more than 70 percent of all sales. Why

More information

AP Microeconomics Chapter 11 Outline

AP Microeconomics Chapter 11 Outline I. Learning Objectives In this chapter students should learn: A. The characteristics of pure monopoly. B. How a pure monopoly sets its profit-maximizing output and price. C. The economic effects of monopoly.

More information

ECON 2100 Principles of Microeconomics (Summer 2016) Monopoly

ECON 2100 Principles of Microeconomics (Summer 2016) Monopoly ECON 21 Principles of Microeconomics (Summer 216) Monopoly Relevant readings from the textbook: Mankiw, Ch. 15 Monopoly Suggested problems from the textbook: Chapter 15 Questions for Review (Page 323):

More information

Monopoly. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University

Monopoly. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly

More information

Economics. Monopoly. N. Gregory Mankiw. Premium PowerPoint Slides by Vance Ginn & Ron Cronovich C H A P T E R P R I N C I P L E S O F

Economics. Monopoly. N. Gregory Mankiw. Premium PowerPoint Slides by Vance Ginn & Ron Cronovich C H A P T E R P R I N C I P L E S O F C H A P T E R Monopoly Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Vance Ginn & Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved In

More information

A monopoly market structure is one characterized by a single seller of a unique product with no close substitutes.

A monopoly market structure is one characterized by a single seller of a unique product with no close substitutes. These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 12 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Micro - HW 4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In central Florida during the spring, strawberry growers are price takers. The reason

More information

7 The Optimum of Monopoly, Price Discrimination

7 The Optimum of Monopoly, Price Discrimination Microeconomics I - Lecture #7, March 31, 2009 7 The Optimum of Monopoly, Price Discrimination 7.1 Monopoly Up to now we have analyzed the behavior of a competitive industry, a market structure that is

More information

Monopolistic Competition. Chapter 17

Monopolistic Competition. Chapter 17 Monopolistic Competition Chapter 17 The Four Types of Market Structure Number of Firms? Many firms One firm Few firms Differentiated products Type of Products? Identical products Monopoly Oligopoly Monopolistic

More information

CHAPTER 12 Pricing CHAPTER OUTLINE

CHAPTER 12 Pricing CHAPTER OUTLINE CHAPTER 12 Pricing CHAPTER OUTLINE 12.1 Why and How Firms Price Discriminate Why Price Discrimination Pays Who Can Price Discriminate Preventing Resales Not All Price Differences Are Price Discrimination

More information

Chapter 24. Introduction. Learning Objectives. Monopoly

Chapter 24. Introduction. Learning Objectives. Monopoly Chapter 24 Monopoly Introduction States have various licensing requirements for individuals who wish to practice specific professions. For example, Ohio requires a $100 license fee to become a kick boxer.

More information

Price Discrimination. It is important to stress that charging different prices for similar goods is not pure price discrimination.

Price Discrimination. It is important to stress that charging different prices for similar goods is not pure price discrimination. What is price discrimination? Price discrimination or yield management occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated

More information

Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials

Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials LESSON 5 Monopoly Introduction and Description Lesson 5 extends the theory of the firm to the model of a Students will see that the profit-maximization rules for the monopoly are the same as they were

More information

Monopoly and How It Arises

Monopoly and How It Arises Monopoly and How It Arises A monopoly is a market: That produces a good or service for which no close substitute exists In which there is one supplier that is protected from competition by a barrier preventing

More information

Chapter 6 Elasticity: The Responsiveness of Demand and Supply

Chapter 6 Elasticity: The Responsiveness of Demand and Supply hapter 6 Elasticity: The Responsiveness of emand and Supply 1 Price elasticity of demand measures: how responsive to price changes suppliers are. how responsive sales are to changes in the price of a related

More information

Special Pricing Practices. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e

Special Pricing Practices. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e Special Pricing Practices Chapter 11 Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Special Pricing Policies Introduction Cartel Arrangements Revenue

More information

Imperfect Competition (Monopoly) Chapters 15 Mankiw

Imperfect Competition (Monopoly) Chapters 15 Mankiw Imperfect Competition (Monopoly) Chapters 15 Mankiw What did we learn one week ago? Regulated prices Effect of a ceiling price Effect of a floor price. The cost of taxes and subsidies. Tax on producers

More information

COST OF PRODUCTION & THEORY OF THE FIRM

COST OF PRODUCTION & THEORY OF THE FIRM MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM One of the concepts mentioned in both Units I and II was and its components, total cost and total revenue. In this unit, costs and revenue

More information

Chapter 6 Setting Prices and Implementing Revenue Management

Chapter 6 Setting Prices and Implementing Revenue Management Chapter 6 Setting Prices and Implementing Revenue Management GENERAL CONTENT Multiple Choice Questions 1. The only function that brings operating revenues into the organization is. a. marketing b. management

More information

a. Sells a product differentiated from that of its competitors d. produces at the minimum of average total cost in the long run

a. Sells a product differentiated from that of its competitors d. produces at the minimum of average total cost in the long run I. From Seminar Slides: 3, 4, 5, 6. 3. For each of the following characteristics, say whether it describes a perfectly competitive firm (PC), a monopolistically competitive firm (MC), both, or neither.

More information

CHAPTER 8: SECTION 1 A Perfectly Competitive Market

CHAPTER 8: SECTION 1 A Perfectly Competitive Market CHAPTER 8: SECTION 1 A Perfectly Competitive Market Four Types of Markets A market structure is the setting in which a seller finds itself. Market structures are defined by their characteristics. Those

More information

Unit 4: Imperfect Competition

Unit 4: Imperfect Competition Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique

More information

MARKETING MANAGEMENT 12 th edition. 14 Developing Pricing Strategies and Programs

MARKETING MANAGEMENT 12 th edition. 14 Developing Pricing Strategies and Programs MARKETING MANAGEMENT 12 th edition 14 Developing Pricing Strategies and Programs Kotler Keller Chapter Questions How do consumers process and evaluate prices? How should a company set prices initially

More information

ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION

ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION YOUR NAME Row Number ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION Prof. Bill Even Novermber 12, 2014 FORM 1 Directions 1. Fill in your scantron with your unique-id and the form number

More information

ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION

ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION YOUR NAME Row Number ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION Prof. Bill Even Novermber 12, 2014 FORM 3 Directions 1. Fill in your scantron with your unique-id and the form number

More information

The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market.

The competition in monopolistically competitive markets is most likely a result of having many sellers in the market. Chapter 16 Monopolistic Competition TRUE/FALSE 1. The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market. ANS: T 2. The "monopoly" in monopolistically

More information

iv. The monopolist will receive economic profits as long as price is greater than the average total cost

iv. The monopolist will receive economic profits as long as price is greater than the average total cost Chapter 15: Monopoly (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- Monopolies have no close competitors and,

More information

Monopoly CHAPTER. Goals. Outcomes

Monopoly CHAPTER. Goals. Outcomes CHAPTER 15 Monopoly Goals in this chapter you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopoly s decisions

More information

Short run and long run price and output decisions of a monopoly firm,

Short run and long run price and output decisions of a monopoly firm, 1 Chapter 1-Theory of Monopoly Syllabus-Concept of imperfect competition, Short run and long run price and output decisions of a monopoly firm, Concept of a supply curve under monopoly, comparison of perfect

More information

13 C H A P T E R O U T L I N E

13 C H A P T E R O U T L I N E PEARSON PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N CASE FAIR OSTER Prepared by: Fernando Quijano w/shelly Tefft 2of 37 PART III MARKET IMPERFECTIONS AND THE ROLE OF GOVERNMENT Monopoly

More information

Microeconomics. More Tutorial at

Microeconomics.  More Tutorial at Microeconomics 1. Suppose a firm in a perfectly competitive market produces and sells 8 units of output and has a marginal revenue of $8.00. What would be the firm s total revenue if it instead produced

More information

Advanced Microeconomic Theory. Chapter 7: Monopoly

Advanced Microeconomic Theory. Chapter 7: Monopoly Advanced Microeconomic Theory Chapter 7: Monopoly Outline Barriers to Entry Profit Maximization under Monopoly Welfare Loss of Monopoly Multiplant Monopolist Price Discrimination Advertising in Monopoly

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Sample Test 3 Ch 10-13 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A cost incurred in the production of a good or service and for which

More information

MONOPOLY. Characteristics

MONOPOLY. Characteristics OBJECTIVES Explain how managers should set price and output when they have market power With monopoly power, the firm s demand curve is the market demand curve. A monopolist is the only seller of a product

More information

ECON December 4, 2008 Exam 3

ECON December 4, 2008 Exam 3 Name Portion of ID# Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. A fundamental source of monopoly market power arises from a. perfectly

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2 Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is correct? A) Consumers have the ability to buy everything

More information

PRICING. Quantity demanded is the number of the firm s product customers wish to purchase. What affects the quantity demanded?

PRICING. Quantity demanded is the number of the firm s product customers wish to purchase. What affects the quantity demanded? PRICING So far we have supposed perfect competition: the firm cannot affect the price. Whatever the firm produces is sold at the world market price. Most commodity businesses are highly competitive: regardless

More information

Other examples of monopoly include Australia Post.

Other examples of monopoly include Australia Post. In this session we will look at monopolies, where there is only one firm in the market with no close substitutes. For example, Microsoft first designed the operating system Windows. As a result of this

More information

Pricing Concepts. Essentials of 6 Marketing Lamb, Hair, McDaniel CHAPTER 19. Designed by Eric Brengle B-books, Ltd.

Pricing Concepts. Essentials of 6 Marketing Lamb, Hair, McDaniel CHAPTER 19. Designed by Eric Brengle B-books, Ltd. Pricing Concepts CHAPTER 19 Designed by Eric Brengle B-books, Ltd. Essentials of 6 Marketing Lamb, Hair, McDaniel Prepared by Deborah Baker Texas Christian University THE IMPORTANCE OF PRICE Discuss the

More information

VERSION 1. Economics 101 Lec 3 Elizabeth Kelly Fall 2000 Midterm #3 / Version #1 December 4, Student Name: ID Number: Section Number: TA Name:

VERSION 1. Economics 101 Lec 3 Elizabeth Kelly Fall 2000 Midterm #3 / Version #1 December 4, Student Name: ID Number: Section Number: TA Name: Economics 101 Lec 3 Elizabeth Kelly Fall 2000 Midterm #3 / Version #1 December 4, 2000 VERSION 1 TF+MC roblem Total Student Name: ID Number: Section Number: TA Name: NOTE: This information and the similar

More information

SAMPLE MULTIPLE CHOICE FINAL EXAM CHAPTER 6 THE ANALYSIS OF COSTS

SAMPLE MULTIPLE CHOICE FINAL EXAM CHAPTER 6 THE ANALYSIS OF COSTS 1. SAMPLE MULTIPLE CHOICE FINAL EXAM CHAPTER 6 THE ANALYSIS OF COSTS Long-run average cost equals long-run marginal cost whenever a) the production function exhibits constant returns to scale. b) fixed

More information

Commerce 295 Midterm Answers

Commerce 295 Midterm Answers Commerce 295 Midterm Answers October 27, 2010 PART I MULTIPLE CHOICE QUESTIONS Each question has one correct response. Please circle the letter in front of the correct response for each question. There

More information

Monopolistic Competition

Monopolistic Competition CHAPTER 16 Monopolistic Competition Goals in this chapter you will Examine market structures that lie between monopoly and competition Analyze competition among firms that sell differentiated products

More information

Basic Monopoly Pricing and Product Strategies

Basic Monopoly Pricing and Product Strategies Chapter 3 Basic Monopoly Pricing and Product Strategies Industrial 1 Introduction A monopolist has the power to set prices Consider how the monopolist exercises this power Focus in this section on a single-product

More information

Chapter 6 Elasticity: The Responsiveness of Demand and Supply

Chapter 6 Elasticity: The Responsiveness of Demand and Supply Economics 6 th edition 1 Chapter 6 Elasticity: The Responsiveness of Demand and Supply Modified by Yulin Hou For Principles of Microeconomics Florida International University Fall 2017 The Price Elasticity

More information

Copyright 2010 Pearson Education Canada

Copyright 2010 Pearson Education Canada What are the effects of a high gas price on buying plans? You can see some of the biggest effects at car dealers lots, where SUVs remain unsold while sub-compacts sell in greater quantities. But how big

More information

The Model of Perfect Competition

The Model of Perfect Competition The Model of Perfect Competition Key issues The meaning of perfect competition Characteristics of perfect competition and output under competition Competition and economic efficiency Wider benefits of

More information

Ecn Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman. Final Exam

Ecn Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman. Final Exam Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman Final Exam You have until 12:30pm to complete this exam. Be certain to put your name,

More information

2) All combinations of capital and labor along a given isoquant cost the same amount.

2) All combinations of capital and labor along a given isoquant cost the same amount. Micro Problem Set III WCC Fall 2014 A=True / B=False 15 Points 1) If MC is greater than AVC, AVC must be rising. 2) All combinations of capital and labor along a given isoquant cost the same amount. 3)

More information

Monopoly 2. Laugher Curve. The Welfare Loss from Monopoly. The Welfare Loss from Monopoly. Bad things that monopolist do!

Monopoly 2. Laugher Curve. The Welfare Loss from Monopoly. The Welfare Loss from Monopoly. Bad things that monopolist do! Laugher Curve Monopoly 2 Bad things that monopolist do! The First Law of Economics: For every economist, there exists an equal and opposite economist. The Second Law of Economics: They're both wrong. The

More information

Chapter 6. Elasticity

Chapter 6. Elasticity Chapter 6 Elasticity Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in this chapter. The text discusses the major determinants of price

More information

Ch. 7 outline. 5 principles that underlie consumer behavior

Ch. 7 outline. 5 principles that underlie consumer behavior Ch. 7 outline The Fundamentals of Consumer Choice The focus of this chapter is on how consumers allocate (distribute) their income. Prices of goods, relative to one another, have an important role in how

More information

Chapter 28 The Labor Market: Demand, Supply, and Outsourcing

Chapter 28 The Labor Market: Demand, Supply, and Outsourcing Chapter 28 The Labor Market: Demand, Supply, and Outsourcing Learning Objectives After you have studied this chapter, you should be able to 1. define marginal factor cost, marginal physical product of

More information

Assume that both pricing systems for beer are price discrimination. What type of price discrimination is each?

Assume that both pricing systems for beer are price discrimination. What type of price discrimination is each? Microeconomics, Price discrimination, final exam practice problems (The attached PDF file has better formatting.) *Question 1.1: Football Parties At the Harvard-Yale weekend, both football teams have beer

More information

ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION

ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION YOUR NAME Assigned Seat ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION Prof. Bill Even October 7, 2013 FORM 1 Directions 1. Fill in your scantron with your unique-id and the form number

More information

ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions

ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions www.liontutors.com ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions 1. A A large number of firms will be able to operate in the industry because you only need to produce a small amount

More information

Individual and Market Demand

Individual and Market Demand C H A P T E R 4 Individual and Market Demand Prepared by: Fernando & Yvonn Quijano CHAPTER 4 OUTLINE 4.1 Individual Demand 4.2 Income and Substitution Effects 4.3 Market Demand 4.4 Consumer Surplus 4.5

More information

2010 Pearson Education Canada

2010 Pearson Education Canada What Is Perfect Competition? Perfect competition is an industry in which Many firms sell identical products to many buyers. There are no restrictions to entry into the industry. Established firms have

More information

Extra Credit. Student:

Extra Credit. Student: Extra Credit Student: 1. A glass company making windows for houses also makes windows for other things (cars, boats, planes, etc.). We would expect its supply curve for house windows to be: A. Dependent

More information

Why do monopolies charge different prices to different customers: price discrimination: eg mobile phone tariffs)

Why do monopolies charge different prices to different customers: price discrimination: eg mobile phone tariffs) Why do monopolies charge different prices to different customers: price discrimination: eg mobile phone tariffs) We have previously seen how a monopolist chooses his profit maximising output - Which is

More information

1. Supply and demand are the most important concepts in economics.

1. Supply and demand are the most important concepts in economics. Page 1 1. Supply and demand are the most important concepts in economics. 2. Markets and Competition a. Def: Market is a group of buyers and sellers of a particular good or service. P. 66. b. Def: A competitive

More information

Preface. Chapter 1 Basic Tools Used in Understanding Microeconomics. 1.1 Economic Models

Preface. Chapter 1 Basic Tools Used in Understanding Microeconomics. 1.1 Economic Models Preface Chapter 1 Basic Tools Used in Understanding Microeconomics 1.1 Economic Models 1.1.1 Positive and Normative Analysis 1.1.2 The Market Economy Model 1.1.3 Types of Economic Problems 1.2 Mathematics

More information

MANAGERIAL ECONOMICS THEORY, APPLICATIONS, AND CASES EIGHTH EDITION. W.Bruce Allen The Wharton School University of Pennsylvania

MANAGERIAL ECONOMICS THEORY, APPLICATIONS, AND CASES EIGHTH EDITION. W.Bruce Allen The Wharton School University of Pennsylvania MANAGERIAL ECONOMICS THEORY, APPLICATIONS, AND CASES EIGHTH EDITION W.Bruce Allen The Wharton School University of Pennsylvania Neil A. Doherty The Wharton School University of Pennsylvania Keith Weigelt

More information

Market structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product.

Market structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product. Market structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product. This arises due to consumers indifference between the

More information

INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY. Monopolistic Competition

INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY. Monopolistic Competition 13-1 INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY Monopolistic Competition Pure monopoly and perfect competition are rare in the real world. Most real-world industries

More information

Chapter 2 Market forces: Demand and Supply Demand

Chapter 2 Market forces: Demand and Supply Demand Chapter 2 Market forces: Demand and Supply Demand Market demand curve A curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the

More information

JANUARY EXAMINATIONS 2005

JANUARY EXAMINATIONS 2005 No. of Pages: (A) 7 No. of Questions: 26 EC1000A ' JANUARY EXAMINATIONS 2005 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper

More information

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity CHAPTER 4 Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity CHAPTER OVERVIEW Price elasticity is one of the most useful concepts in economics. It measures the responsiveness

More information

Topic 4c. Elasticity. What is the difference between this. and this? 1 of 23

Topic 4c. Elasticity. What is the difference between this. and this? 1 of 23 Topic 4c Elasticity What is the difference between this and this? 1 of 23 Defining and Measuring Elasticity (I) Price elasticity of demand Ø The price elasticity of demand is the ratio of the percent change

More information

Name: R Number: Roster #:

Name: R Number: Roster #: ECO 2305-002 ** TEST 2 ** Ibrahim Ozayturk Name: R Number: Roster #: Use the following to answer question 1: Figure: Consumer Surplus 1. (Figure: Consumer Surplus) In the figure, when the price falls from

More information

Intermediate Microeconomics Midterm

Intermediate Microeconomics Midterm Econ 201 Spring 2016 Name: Student ID: Intermediate Microeconomics Midterm Thursday April 21, 2016 Beomsoo Kim There are 7 questions and 130 possible points. There are 2 pages to this exam. Please write

More information

ATC AVC. Economics EC460 Fall 2017 Professor Mike Conlin Price Discrimination

ATC AVC. Economics EC460 Fall 2017 Professor Mike Conlin Price Discrimination Economics EC Fall 7 Professor Mike Conlin Price Discrimination. The graph below depicts the demand curve and cost curves for a particular medical procedure from the Sparrow Medical Clinic. 7 MC ATC AVC

More information

CH 5 sample questions - 80

CH 5 sample questions - 80 Class: Date: CH 5 sample questions - 80 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The price elasticity of demand measures the that results from a.

More information

Gregory Clark Econ 1A, Winter 2012 SAMPLE FINAL

Gregory Clark Econ 1A, Winter 2012 SAMPLE FINAL Gregory Clark Econ 1A, Winter 2012 SAMPLE FINAL 1. Medical doctors in the USA earn very high incomes compared to some other countries such as Canada. Label each of the following with N for NORMATIVE, or

More information

Merchandise Forecasting and Budgeting

Merchandise Forecasting and Budgeting Chapter - 3 Merchandise Forecasting and Budgeting ============================================================= The Process of Merchandise Planning Customers visiting a retail shop, very often, know what

More information

Sample. Final Exam Sample Instructor: Jin Luo

Sample. Final Exam Sample Instructor: Jin Luo Final Exam Instructor: Jin Luo Multiple Choice (2 *30 = 60) Identify the letter of the choice that best completes the statement or answers the question. 1. Price takers refer to buyers and sellers in a.

More information

ECON 202 2/13/2009. Pure Monopoly Characteristics. Chapter 22 Pure Monopoly

ECON 202 2/13/2009. Pure Monopoly Characteristics. Chapter 22 Pure Monopoly ECON 202 Chapter 22 Pure Monopoly Pure Monopoly Exists when a single firm is the sole producer of a product for which there are no close substitutes. There are a number of products where the producers

More information

Chapter 11. Monopoly. I think it s wrong that only one company makes the game Monopoly. Steven Wright

Chapter 11. Monopoly. I think it s wrong that only one company makes the game Monopoly. Steven Wright Chapter 11 Monopoly I think it s wrong that only one company makes the game Monopoly. Steven Wright Chapter 11 Outline 11.1 Monopoly Profit Maximization 11.2 Market Power 11.3 Welfare Effects of Monopoly

More information

Exam 3 Practice Questions

Exam 3 Practice Questions Exam 3 Practice Questions 1. The price elasticity of demand is a measure of: a) how quickly a particular market reaches equilibrium. b) the change in supply associated with lower prices. c) the percent

More information

S11Microeconomics, Exam 3 Answer Key. Instruction:

S11Microeconomics, Exam 3 Answer Key. Instruction: S11Microeconomics, Exam 3 Answer Key Instruction: Exam 3 Student Name: Microeconomics, several versions Early May, 2011 Instructions: I) On your Scantron card you must print three things: 1) Full name

More information

Lecture 19: Imperfect Competition and Monopoly

Lecture 19: Imperfect Competition and Monopoly Lecture 19: Imperfect Competition and Monopoly No Lectures Next Week (No Lecture Tuesday, Nov 21) No discussion sections next week! Rent-Seeking p 1 A royalty charge for fish p 2 Perfect and Imperfect

More information

Market Structure & Imperfect Competition

Market Structure & Imperfect Competition In the Name of God Sharif University of Technology Graduate School of Management and Economics Microeconomics (for MBA students) 44111 (1393-94 1 st term) - Group 2 Dr. S. Farshad Fatemi Market Structure

More information

INTERPRETATION. SOURCES OF MONOPOLY (Related to P-R pp )

INTERPRETATION. SOURCES OF MONOPOLY (Related to P-R pp ) ECO 300 Fall 2005 November 10 MONOPOLY PART 1 INTERPRETATION Literally, just one firm in an industry But interpretation depends on how you define industry General idea a group of commodities that are close

More information

JANUARY EXAMINATIONS 2008

JANUARY EXAMINATIONS 2008 No. of Pages: (A) 9 No. of Questions: 38 EC1000A micro 2008 JANUARY EXAMINATIONS 2008 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates

More information

Economics 110 Midterm #2 Practice Multiple Choice Qs Spring 2014

Economics 110 Midterm #2 Practice Multiple Choice Qs Spring 2014 Midterm #2 Practice Multiple Choice Questions: Elasticity is a. a measure of how much buyers and sellers respond to changes in market conditions. b. the study of how the allocation of resources affects

More information

Lecture 2: Market Structure I (Perfect Competition and Monopoly)

Lecture 2: Market Structure I (Perfect Competition and Monopoly) Lecture 2: Market Structure I (Perfect Competition and Monopoly) EC 105. Industrial Organization Matt Shum HSS, California Institute of Technology October 1, 2012 EC 105. Industrial Organization ( Matt

More information

11.1 Monopoly Profit Maximization

11.1 Monopoly Profit Maximization 11.1 Monopoly Profit Maximization CHAPTER 11 MONOPOLY A monopoly is the only supplier of a good for which there is no close substitute. Monopolies are not price takers like competitive firms Monopoly output

More information

Pure Monopoly. McGraw-Hill/Irwin. Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Pure Monopoly. McGraw-Hill/Irwin. Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 10 Pure Monopoly McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Four Market Models Characteristics of the Four Basic Market Models Characteristic Number of firms

More information

Figure: Computing Monopoly Profit

Figure: Computing Monopoly Profit Name: Date: 1. Compared to perfect competition: A) monopoly produces more at a lower price. B) monopoly produces where MR > MC, and a perfectly competitively firm produces where P = MC. C) monopoly may

More information

microeconomics II first module

microeconomics II first module Lecture 2 Perfectly competitive markets Kosmas Marinakis, Ph.. Important notes 1. Homework 1 will is due on Monday 2. Practice problem set 2 is online microeconomics II first module 2013-18 Kosmas Marinakis,

More information

Chapter 8. Competitive Firms and Markets

Chapter 8. Competitive Firms and Markets Chapter 8 Competitive Firms and Markets Topics Perfect Competition. Profit Maximization. Competition in the Short Run. Competition in the Long Run. 8-2 Copyright 2012 Pearson Addison-Wesley. All rights

More information

Econ 2113 Test #2 Dr. Rupp Fall 2008

Econ 2113 Test #2 Dr. Rupp Fall 2008 D Econ 2113 Test #2 Dr. Rupp Fall 2008 Name Pledge: I have neither given nor received aid on this exam Version A Signature: Directions: Bubble in name: Last, First Bubble in 00 in Special Codes Sign the

More information