Firms and customers III

Transcription

1 Firms and customers III MPA 612: Public Management Economics February 20, 2018 Fill out your reading report on Learning Suite!

2 Current events Now expanded to take advantage of your new vocabulary!

3 Plan for today ϵlasticitiϵs of dϵmand Market power

4 ϵlasticitiϵs of dϵmand What happens to quantities as prices change?

5 <latexit sha1_base64="xfgnsxqj6yrtyipxczp/+xf4v5u=">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</latexit> <latexit sha1_base64="yi1u1ciet4n66jzb8tehjz/jsxq=">aaacjxicbvbns8nafnzu7/pv9ehlsqhelkki6keq9eaxbwufpptn9kwxbjzh90uoib/gi3/fi4cqgif/its2glohfoazebx9eyrsghtdd6c0mzs3v7c4vf5ewv1br2xs3pg41ryapjaxvg2yaskunfgghntea4scca2gfzhyww+gjyjvnq4s6etstolqcizw6lzo/qemitfcxoqe0n3qh5rxzl8eiyw28m/m5drheyepal6enfjyt1j1a+4ydjruc1ilbbxuzej3yp5gojblzky77ibyyzhgwsxkzt81kddez3fqtlqxu7gtjc/m6a5vejsmtx0k6vj9ozgxyjhbfnhkxpde/pvg4n9eo8xwujmjlaqiik8whamkgnnrz7qnnhcua0sy18l+lfj7zmta2+yohprfk6dj86b2unmbh9wz86knrbjndsgeqzmjckauieeahjnh8kyg5nv5cl6cn+d9ei05xcww+qxn8wu/jatv</latexit> Responsiveness to price changes " = % % " = Q P P Q % change in demand that follows a 1% change in price Q P or Q P ϵ = 2: If price increases by 10%, quantity decreases by 20% ϵ = 0.5: If price increases by 10%, quantity decreases by 5%

6 ϵ = = Perfectly elastic Any change in price moves quantity to 0 Identical goods Two vending machines ϵ > 1 = Elastic Changes in price change the quantity a lot Goods with substitutes Diet Coke ϵ = 1 = Unit elastic Changes in price change the quantity the same ϵ < 1 = Inelastic Changes in price change the quantity a little Goods with few substitutes AIDS medicine ϵ = 0 = Perfectly inelastic Changes in price do nothing to the quantity Survival goods Water in the desert

7 ϵ = = Perfectly elastic ϵ > 1 = Elastic ϵ = 1 = Unit elastic ϵ < 1 = Inelastic ϵ = 0 = Perfectly inelastic

8 Warning though! Elasticities are not the same as the demand curve A linear demand curve has lots of elasticities!

9 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 Elastic Demand Unit elastic Inelastic $0.00 $ $ $ $ $80.00 $60.00 $40.00 $20.00 $ Revenue

10 Excel time! Go back to the Raspberry Cordial worksheet

11 Why do elasticities matter in public policy? Taxing things changes their prices Changing prices changes quantities Taxing elastic goods will make quantities go down a lot and decrease tax revenues Taxing inelastic goods will make quantities go down slightly and not hurt revenues

12 If P by 10%, Q 8.3% 2.7% 19.72%

13 General guidance Tax products with inelastic demand unless you're trying to change consumption Soda? Cigarettes? Alcohol? Property?

14 Market power Who gets to set the price?

15 Max π MC = MR Best Q Demand = MC Normal competition Demand = MC = MR = P

16 Where does price come from in perfect competition?

17 Price discrimination With perfect information, firms can set individualized demand curves for customers Price = WTP Lyft/Uber Airplane tickets Amazon

18 Price taking Firm decisions have no impact on the price of a good Perfect competition You re stuck with whatever the prevailing market price is

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20 But what if you could affect the price? Would you want to? Why or why not? Costs matter. Set price to your MC, maximize your profit.

21 Market power Ability to influence market prices This is why people get MBAs; move market away from perfect competition

22 Monopolies Switching costs Branding and differentiation Cost or input controls Government regulation Price discrimination

23 Monopolies Market = 1 firm Monopolists will naturally produce less quantity at higher prices than firms in competitive markets Creates deadweight loss

24 <latexit sha1_base64="ic38cl1jyxanfugksep3n+neqvm=">aaacb3icbzdlssnafiyn9vbjlershynfecsslik6eirdugyhsyumlsl00g6dxjizccv06czxcencxa2v4m63cdjmoa0/dpx85xzonn+lgrxsnl+1wtlyyupacv3f2nza3jf29+5elhbmbbyxihc8jaijibellyx0yk5q4dhs9kb1rn5+ifzqkgzjcuzcaa1c6lompei947abt67heroewaojhudv1tpqvk8oylxnnleyy+zucnfyusmbxi2e8ex0i5wejjsyisg6lhlln0vcuszirhcsqwker2hausqgkcdctaehtocxin3or1y9umip/t2rokcicecpzgdjozivzfc/wjer/qwb0jbojanxbjgfmcgjmkuc+5qtlnlygyq5vx+feig4wljlp6sqrpmtf41dkv+vzwa1vlvj0yica3aetoeflkan3iigsaegj+azvii37ul70d61j1lrqctn9sefaz8/ovet8q==</latexit> Math time! P = Q + 40 TC = Q

25 What they ll charge P = MC = best Q under competition MR = MC = max(π)

26 Consumer surplus WTP price paid Producer surplus Price sold WTS Deadweight loss Loss of surplus from Paretoefficient point

27 Natural monopolies Big expensive things with large capital outlays and low marginal cost Generally more efficient to just have one firm handle it Utilities Public transportation

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31 How do you fix monopolies? State ownership Pro: Better Q Con: Waste (x-inefficiency) Regulated monopolies Pro: Incentive to be efficient Con: Incentive to maximize capital (gold-plated water coolers)

32 How do you fix monopolies? Competitive bids Pro: Incentive to be efficient Con: Incomplete contracts Antitrust laws Pro: Increases competition Con: Bad for natural monopolies

33 How do you fix monopolies? Let the market go wild Pro: If monopolist can price discriminate, probably okay Con: Perfect price discrimination not possible + raises equity concerns

34 Switching costs Make it harder for consumers to switch away from you Brand-exclusive benefits Technology constraints Search costs Network costs

35 Branding and differentiation Make your stuff nonsubstitutable Advertising Brand loyalty

36 <latexit sha1_base64="o2/skqh4h3etfs3/pr38vpbdwuq=">aaacehicbvbns8naen34wetx1koxxsl0ykleua9csrcvqgrjc00pm+2mxbrzdbubqgn5c178k148qhj16m1/47bnqvsfddzem2fmxpgwqrtjfftlyyura+uljflm1vborr23/6bekjhxswbctkkkckoc+jpqrlqjjcgogwmgw8beb46ivftwez1oscdgfu4jipe2uteubpfeoppgcbxt5jmxwys4k9w8c0zikkrrjnjetstozzkclhk3ibvqwovax0fp4dqmxgoglgq7tqi7gzkaykbycpaqkia8rh3snpsjmkhonv0oh8dg6cfisfncw6n6eyjdsvljodsdmdidne9nxp+8dqqji05gezjqwvfsuzqyqawcxan7vbks2dgqhcu1t0i8qcypbuismxdc+zcxix9au6w5d2ev+nwrrgkcginqbs44b3vwazzgawwewtn4bw/wk/vivvsfs9ylq5g5ah9gff4aedccya==</latexit> If people are stuck with you (or like you a lot, or believe in your product, or if your stuff generally isn t substitutable) you can charge them more How much more? Markup depends on elasticity P MC P = 1 "

37 Elastic demand

38 Inelastic demand

39 Cost and input controls Own the means of production Control scarce inputs Control cheap supply chains

40 Government regulation Make the government stop others from competing with you Patents and intellectual property Licensing Prohibition of competition