# INTRODUCTION. Two uses of price theory: 1. Descriptive (Positive Theory) 2. Prescriptive (Normative Theory)

Size: px
Start display at page:

Download "INTRODUCTION. Two uses of price theory: 1. Descriptive (Positive Theory) 2. Prescriptive (Normative Theory)"

Transcription

1 INTRODUCTION This course covers the field of microeconomics. Microeconomics addresses individual behavior in markets and the interrelationships between markets. This is quite different from macroeconomics, which focuses on economy-wide issues. As we will see, microeconomics focuses on how prices determine resource allocation. Accordingly, microeconomics is also referred to as price theory. Resource allocation addresses the following questions: (1) What s produced?, (2) How to produce?, and (3) Who gets it? Consider the who gets it? question. What systems could be used to answer this question? Two uses of price theory: 1. Descriptive (Positive Theory) 2. Prescriptive (Normative Theory) 1

2 Underlying our discussions will be the Fundamental Premise of Economics, which simply means that individuals are rational to the extent that they can weigh the benefits and costs of various options and pick that option which gives them the highest net benefit (Net Benefit = Benefit - Cost). 2

3 DEMAND AND SUPPLY What determines the price of a product? The demand and supply model is a simple way of answering this question. Consumer Side: Demand refers to the relationship between the quantity of a good or service that consumers are willing and able to buy during a specific time period and the determinants of that amount. Depending on the issue, we may look at individual, group, or market demand. Let s look at some of the determinants of the quantity consumers are willing and able to buy. We invoke ceteris paribus. [1] Price 3

4 Other determinants: (These shift the demand curve.) [2] Income [3] Prices of Related Goods 4

5 [4] Tastes and Preferences [5] Price and Income Expectations [6] Population of Buyers 5

6 Demand Function: Example: = 100-2P A + ½I + 2P B Generalize: Market Demand = Horizontal sum of all individual consumer demands. 6

7 Producer Side: Supply refers to the relationship between the quantity of a good or service that producers are willing and able to sell during a specific time period and the determinants of that amount. Similar to demand, we may speak of an individual firm, a group of firms, or a market supply. Some determinants: [1] Price 7

8 Other determinants: (These shift the supply curve.): [2] Input Prices and Technology [3] Prices of Related Goods or Services [4] Price Expectations 8

9 [5] Environment [6] Population of Sellers 9

10 Supply Function: Example: = P A + 3P B - ½W Generalize: Market supply = horizontal sum of individual firm supplies. 10

11 What are the market price and quantity? We determine this by solving for the market equilibrium. Equilibrium = A condition, which once achieved, tends to persist. 11

12 Comparative Statics: What happens if demand and/or supply shift? Consider some different scenarios: [1] Drought in California: impacts on water and tomato markets [2] Increase in the price of beef: impact on pork market (assuming beef and pork are substitutes in consumption) [3] Increase in the price of soybeans: impact on the corn market (assuming soybeans and corn are substitutes in production) 12

13 Consider a numerical example: Suppose the market demand and supply of beef are given by the following: Demand: Supply: where and are the quantities demanded and supplied of beef (in pounds), respectively. P B is the price of beef (in dollars), I is per capita consumer income (in dollars), and P C is the price of corn (in dollars). A. Currently, per capita consumer income is \$50,000 and the price of corn is \$4. Let s sketch the current market demand and supply curves for beef (being careful to determine the values of the horizontal- and vertical-axis intercepts) and determine the market equilibrium price and quantity of beef. B. Now, suppose per capita consumer income doubles to \$100,000. Let s illustrate the impact on the beef market. 13

14 What if both demand and supply change? Then it gets a little more difficult predicting the outcome. Consider: 14

15 How can governments influence a market? Consider two cases: [1] Price Controls [2] Taxes (we ll focus on the consumer side) Excise Tax - In this case, consumers are charged \$t per unit consumed. 15

16 ELASTICITY A very useful tool to a decision-maker is elasticity. Elasticity provides us with a tool to measure the effect of different factors on demand and/or supply. Consider the function: Y = f(x). In general, the elasticity of Y with respect to X equals: with and such that Interpretation: Consider: Y = 10-2X. 16

17 One problem is that the elasticity value depends on whether we move up or down the curve. To get around this problem, we will calculate the point elasticity. Point elasticity - rather than deal with large changes in X and Y, we deal with infinitesimally small changes, which in effect calculates the elasticity at a point on the curve. In this case, 17

18 Demand Elasticities: Price Elasticity of Demand å p = Point: Consider: Q = 100-2P 18

19 Categories of elasticity: A. Elastic: å p < -1 B. Inelastic: -1 < å p < 0 C. Unit Elastic: å p = -1 D. Perfectly Elastic: å p = - E. Perfectly Inelastic: å p = 0 Notice, with the linear demand equation above, the price elasticity varies along the curve. In the upper half, it is elastic. In the lower half, it is inelastic. At center, it is unit elastic. 19

20 Consider some price elasticities: Product Price Elasticity Cigarettes Beer Marijuana Horse Racing Fresh Tomatoes Housing Factors affecting å p : 1. Number and closeness of substitutes 2. The degree of necessity 3. The percentage of overall consumer expenditure dedicated to the good 4. Length of time over which consumers respond to price changes 20

21 One use of the price elasticity of demand is to infer the effect on total revenue (P x Q), which is the same as total expenditure of consumers, of a price change. For a firm, is it always best to increase its price? A knee-jerk reaction might be to say yes, but the answer depends on å p. Scenarios: 1. å p < < å p < 0 3. å p = -1 21

22 These three situations suggest a relationship between Q and TR, which is given below: For a firm interested in maximizing its profit, it should never operate in the inelastic region of its demand. Why? 22

23 Other Demand Elasticities: Cross Elasticity of Demand Point: Cases: Application: Market Definition and Antitrust - Du Pont (1947) 23

24 Income Elasticity of Demand å I = Point: Cases: 24

25 Consider a demand function: 25

26 Supply Elasticities: Price Elasticity of Supply (å S ) å S = Point: Similar categories with demand: Elastic, Inelastic, and Unit Elastic. Examples: 26

27 What Affects the Value of ç S? 1. Length of time over which producers respond to price changes 2. Substitutability of Inputs (Resources) across Production: 3. Possibilities of Storing the Product 27

28 THEORY OF THE CONSUMER Since demand addresses consumer behavior, several theories have been offered to explain consumer behavior. Consumer theory focuses on preferences. Also, consumers derive satisfaction (utility) from the consumption of goods or services. Three key assumptions: Completeness Transitivity Non-Satiation 28

29 Now, there are two approaches to address the theory. One is the cardinal approach, while the other is the ordinal approach. We will focus on the ordinal approach. Key to the ordinal approach is to model preferences with indifference schedules and indifference curves. Indifference schedule = Listing of different bundles that bring an individual the same satisfaction (i.e., utility). Consider an individual who can consume either milk and/or bread: Group 1 Indifference Schedule Group 2 Indifference Schedule Bundle Milk Bread Bundle Milk Bread A 10 qts 0 loaves E 12 qts 0 loaves B 7 1 F 10 1 C 5 2 G 8 2 D 4 4 H 6 4 Graph: 29

30 Properties: [1] Provided we are looking at two goods (i.e., two products for which more is preferred to less (non-satiation), then bundles on higher indifference curves coincide with greater utility. That is, utility higher indifference curves correspond to higher utility. [2] For two goods, indifference curves have a negative slope (due to non-satiation). 30

31 [3] Indifference curves cannot intersect each other (due to transitivity). [4] Indifference curves must pass through every point in the commodity space (due to completeness). 31

32 [5] Indifference curves are convex to the origin (due to the Law of Diminishing Marginal Utility). From the cardinal approach: According to the Law of Diminishing Marginal Utility, although total satisfaction increases as more of a good is consumed (i.e., non-satiation), the increases in satisfaction associated with additional consumption must eventually diminish. Consider: Number of times eat chicken for dinner per week Total Utility Marginal Utility 0 0 utils Now, Marginal Rate of Substitution (MRS) = The rate at which a consumer is willing to trade the consumption of one commodity for another, while maintaining satisfaction. It is an indication of the relative importance the consumer attaches to one commodity relative to another commodity. MRS = slope of the indifference curve < 0 Or, So, if indifference curves are convex, then MRS (in absolute value) falls as we slide down the indifference curve. 32

33 It turns out: How much bread and milk will the individual consume? We need to bring in the consumer s budget constraint. That is, I = income = budget = 33

34 Equilibrium of the consumer: Following the Fundamental Premise of Economics, consumers seek to maximize their satisfaction subject to the budget constraint. That is, Given a budget and prices, consumers will choose to consume somewhere on their budget line. Why? Where is the best point? That is, given the consumer will lie on the budget line, which bundle yields the highest satisfaction? 34

35 That is, the budget line will be tangent to the indifference curve at the best bundle possible. Or, 35

36 What happens if income or prices change? Price-Consumption Curve and Income- Consumption Curve: 36

37 Recall when the price changes, the consumer changes consumption because of the substitution effect and the income effect. Let s formalize this in terms of ordinal utility theory. Suppose the price of bread increases, graphically The substitution effect is the change in quantity purchased attributable to the change in price, independent of the gain of loss in utility. The income effect is the change in quantity purchased that is attributable solely to the gain or loss in utility. Graphically, 37

38 Derivation of individual demand: 38

39 THEORY OF THE FIRM In this next section of the course we will get behind the supply curve. That is, we will address the production of a good or service. A firm is an organization that uses inputs to produce outputs. What are the goals of a firm? But the choices available to a firm are limited. For example, profit is constrained by market demand, input supply, and technology. Now, as we said, firms use inputs to produce output. This is reflected in the production function, given by: Example: Q = X 1 + 3X 2 Note: Just like demand and supply, the time period is important. Key to the time issue is the substitutability of inputs. Couple assumptions: 1. Technology is given. 2. Firms operate efficiently. 39

40 Role of time: Depending on the time frame, some inputs may be fixed. For example, consider weekly production of a textile mill. It must make choices knowing that the number of looms it has are fixed. Yet labor may be variable. If, instead, we looked at production on a minute-by-minute basis, all inputs may be fixed. We capture the role of time by splitting it into two periods: the short run (SR) and the long run (LR). SR = a period of time short enough that at least one input is fixed. LR = a period of time sufficiently long that all inputs are variable. So, we have fixed and variable inputs, depending on the period of time we are looking at. 40

41 For simplicity, let s collapse all of our inputs down to just two: capital (K) and labor (L). Let s look at a fictitious newspaper company. Start with daily production, assuming this is the short run. So, Q = number of newspapers produced per day L = number of workers employed per day K = number of printing presses used per day - assume fixed at 3 Q (TP) L K AP MP

42 General shapes: 1. If MP > AP, AP is rising. 2. If MP < AP, AP is falling. 3. MP = AP at maximum of AP. 4. It is irrational to operate where MP < Law of Diminishing Marginal Returns: As additional units of a variable input are combined with a fixed input, at some point the additional output (MP) must diminish. In our case, diminishing returns begins with the hiring of the 5 th worker. 42

43 We can use production functions to help us figure out the optimal amount of an input to use. Consider a cement company interested in hiring the optimal number of workers per day. Currently, it receives \$15/ton for its cement (output price), and pays a typical worker \$30/day (input price). Suppose it is currently employing 20 workers, and the marginal product of the 21 st worker is 4 tons of cement. Should it hire the 21 st worker? Instead, suppose the firm is employing 30 workers, and the marginal product of the 30 th worker is 1. What should it do? 43

44 Define: Marginal Revenue Product = change in total revenue due to a change in an input. In our first example, MRP = \$60. In our second example, MRP = \$15. Rule: If P INPUT < MRP INPUT, then hire more of the input. If P INPUT > MRP INPUT, then hire less of the input. So, to maximize profit, the firm should hire to the point where P INPUT = MRP INPUT. In our example, the marginal revenue product of labor equals (Note: This assumes that the firm is purely competitive (also called perfectly competitive), which we will address later.): 44

45 Long Run Production: Now, let s suppose that the time interval for production decisions is sufficiently long that all inputs are variable (i.e., the long run). Consider an example of a firm that cuts chords of wood. It is interested in daily production, which is sufficiently long that its inputs (chain saws (K) and labor (L)) are both variable. Let s look at the production table: Notice: There are more choices on how to produce a given output. That is, when we move the long run, the there are less constraints on production. Consider, for example, that K were fixed at 6, then there would be only one way to produce 16 chords of wood (hire 2 workers). Now, with K and L variable, there are two ways to produce 16 chords of wood. So, the key to the long run is the substitutability of inputs. If one chooses to maintain production, they can trade off one input for another. What should guide your decision? Should you be labor-intensive or capital-intensive? Notice that the table does illustrate some short run issues. Namely, if we hold one input fixed and vary the other input, then marginal product is positive and the firm is encountering diminishing returns. 45

46 Let s graph the production table: This leads to a series of isoquants ( same quantity ). Each isoquant represents a different level of production. Properties of isoquants: Higher isoquants yield greater output. Why? MP s > 0 (rational firms) 46

47 Isoquants have a negative slope. Why? MP s > 0 Isoquants are convex to the origin. Why? Law of Diminishing Marginal Returns. Define: Marginal rate of technical substitution (MRTS) = slope of the isoquant. The MRTS represents the rate of tradeoff of one input for another, such that production is maintained at a certain level. 47

48 Note: So, by being convex to the origin, the MRTS (in absolute value) falls as we slide down the isoquant. Also, Let s see why. Consider the isoquant below: Imagine moving from point A to point B. But do it in two steps, via point C. Consider step 1: Holding K constant, we increase L, leading to a higher isoquant (and therefore a higher production). Consider step 2: Holding L constant, we decrease K, leading us back to the original isoquant (and therefore a lower production). 48

49 So, it must be that the increase in Q in step 1 (+) is offset by the decrease in Q in step 2 (-). Or, Or, + - Or, So, why is the isoquant convex? Diminishing returns. 49

50 When we speak of long run production, we characterize production by returns to scale. Three types: Increasing returns to scale (economies of scale) Decreasing returns to scale (diseconomies of scale) Constant returns to scale Cobb-Douglas Production Function: 50

51 How should we select the optimal combination of capital and labor? In addition to the isoquant (production), we will need to look at the relative costs of the two inputs. This is captured by the isocost ( same cost ) line Isocost = all combinations of variable inputs that yield the same cost (outlay). Note: M = total outlay = Example: Monthly outlay with P L = 1000 and P K = 500 (price per input per month) So, M = 1000L + 500K Now, what if we had \$10,000 allocated in expenditure? What combinations of K and L could spend \$10,000? Graph: In general, for a given M, the equation of the isocost is: 51

52 What happens when M, P L, or P K change? How select the inputs? Note: This assumes a purely competitive firm. Two approaches: A. Minimize the expenditure given some output. That is, produce an output as cheaply as possible. B. Maximize the output given some expenditure. That is, produce the most from some given outlay. Both A and B are centered on maximizing profit. 52

53 Let s simply consider A. Both A and B lead to the same input combination. Look at the following graph: The best combination of K and L is where the (given) isoquant is tangent to the isocost. That is, they have the same slope. Slope of Isoquant = Slope of Isocost = So, the best combination of K and L is where 53

54 That is, equate the marginal products per dollar. If, then increase L and decrease K. If, then decrease L and increase K. So, if you have many inputs, determine optimal mix by finding: 54

55 Cost: How are production and cost related? Intuitively, greater production coincides with greater cost. Now, economists view costs differently from accountants. Two types of costs: 1. Accounting Cost (Explicit Cost) Accounting profit (Að) = total revenue - accounting cost 2. Opportunity Cost (Implicit Cost) Economic cost = accounting cost + opportunity cost Economic profit (Eð) = total revenue - economic cost = total revenue - (accounting cost + opportunity cost) = Að - opportunity cost Economic profit guides decisions. Consider a farmer. The farmer can grow corn or wheat. By growing corn, the farmer gives up the opportunity to grow wheat. So, imagine that the farmer s opportunity cost of growing corn is the accounting profit she gives up by not growing wheat (Að wheat ). Suppose: Að wheat = \$30,000 Að corn = \$20,000 What should the farmer do? 55

56 Let s look more closely at the relationship between production and cost. Consider an example of a golf ball company. It produces golf balls with labor (L) and machinery (K), with the following Cobb-Douglas production function:, where Q is the number of cases produced, L is the number of workers hired, and K is the number of machines utilized. Now suppose this is the short run (e.g., daily), with K fixed at 4, such that the short run production function becomes: Further, let P L = \$30 and P K = \$1000. Think of the price of capital as perhaps the daily lease on a golf ball machine. What is the total cost per day? TC = 1000K + 30L = L (Same as total outlay from before) Consider different scenarios: L = 4 L = 16 L = 1 Let s derive the short run total cost function: 56

57 Notice that short run total cost consists of two parts: Total fixed cost = cost associated with the fixed input(s). It is the portion of total cost that does not vary with output. Total variable cost = cost associated with the variable input(s). It is the portion of total cost that does vary with output. Let s graphically derive these curves using another example: 57

58 Back to our newspaper example: Suppose P K = \$100 and P L = \$50 Q (TP) L K AP MP TVC TFC TC \$0 \$300 \$ \$50 \$300 \$ \$100 \$300 \$ \$150 \$300 \$ \$200 \$300 \$ \$250 \$300 \$ \$300 \$300 \$ \$350 \$300 \$650 58

59 Other short run costs: = change in TC or TVC due to a change in Q Q L K AP MP TVC TFC TC AVC AFC ATC MC \$0 \$300 \$ \$50 \$300 \$ \$100 \$300 \$ \$150 \$300 \$ \$200 \$300 \$ \$250 \$300 \$ \$300 \$300 \$ \$350 \$300 \$650 59

60 Let s put it all together: 60

61 One more illustration of the linkage between cost and production. Suppose we have a firm operating in the short run with two inputs, capital (K) and labor (L), where K is fixed and L is variable. Accordingly, [1] [2] 61

62 What about long run cost? In the long run all inputs are variable. Often, the long run is viewed as a planning horizon, in the sense that firms decide on a particular production level and then build a plant to meet that desired level. Let s see (Derivation of long run average cost): The shape of the long run average cost curve is linked to returns to scale. When LR average cost is declining, the firm operates under economies of scale. When LR average cost is rising, the firm operates under diseconomies of scale. 62

63 Adhering to the Fundamental Premise of Economics, firms wish to maximize profit. So, let s determine the price and quantity that will maximize profit. Ultimately, as we will see later, this depends upon the market in which the firm operates. Yet we can discuss some preliminary concepts at this point. Recall: Recall, Profit (ð) = Total Revenue (TR) - Total Cost (TC) Example: Suppose you own an ice cream shop. How much ice cream should you sell per day and at what price? Suppose you are currently producing 100 gallons a day at a price of \$10 per gallon, such that TR = \$1000. Moreover, suppose TC = \$900. Next, suppose to sell one more gallon (Q = 101) you must drop the price to \$9.99 (recall the demand curve). Also, by producing more, your total cost increases to \$905. Should you produce and sell 101 units? Suppose you are currently at Q = 100 and P = \$10, with TC = \$900. What if you cut Q to 99? Suppose by doing this, TR becomes \$995 and TC becomes \$850. Should you cut production? Definitions: Marginal Revenue (MR) = change in TR due to a change in Q Marginal Cost (MC) = change in TC due to a change in Q 63

64 Rules: If MR > MC, firm should produce and sell more to increase profit. IF MR < MC, firm should produce and sell less to increase profit. Hence, profit is maximized at the quantity where MR = MC. This is the profit maximizing rule we will follow. Graphically: MR = slope of TR MC = slope of TC 64

65 STRUCTURE, CONDUCT, PERFORMANCE So far we have not incorporated market structure into our analysis. We have essentially assumed the firm is not affected by rival behavior. Obviously, this is not the case - in many markets firms behave according to the perceived behavior of rivals. Traditionally, the approach to analyze such issues is captured by the structureconduct-performance paradigm (SCPP). According to the SCPP, market structure affects firm conduct which ultimately affects the performance of the market. Elements of Market Structure: 1. Concentration - focuses on the number and size distribution of firms in a market. 65

66 Some other elements of market structure - 2. Product Differentiation - 3. Entry and Exit Conditions - A barrier to entry is anything that limits the entry of firms into a market. Or, by the same token, any cost that must be encountered by entrants but not by existing firms. 4. Cost structures - 5. Level of integration - mergers and acquisitions 66

67 Elements of Firm Conduct: 1. Pricing behavior - 2. Product strategy and advertisement - 3. Research and development - 4. Plant investment - 5. Legal tactics - 67

68 Elements of Market Performance: 1. Profit - 2. Equity - 3. Employment - 4. Quality - 5. Market Welfare - 68

69 Consider some market structures: Perfect Competition: Market Structure - Many buyers and sellers Firms sell a homogeneous product Perfect knowledge of existing market conditions Free entry and exit 69

70 Implications: SR Conduct - Goal is to maximize profit. 70

71 Consider a loss situation: Example: At P = MC, P Q TFC TVC TC What should the firm do? 71

72 Instead, what if at P = MC: TR TFC TVC TC What should the firm do? Short run Supply: 72

73 What about long run conduct in perfect competition? The essence of the long run is the growth and decline of industries. Industries grow by firms entering or existing firms expanding their capital stock. Industries decline by firms exiting or existing firms reducing their capital stock. In both cases, the capital stock of the industry changing, which is a long run issue. What prompts entry? What prompts exit? Implications: So, what we get out of a perfectly competitive market are the following: 1. price taking - no control over price - very intense competition. 2. economic profits driven away in the long run. 73

74 Monopoly: Market Structure - A. Single seller B. Significant barriers to entry Three Types 1. Natural Barriers: Advantages held by incumbents not owing to actions taken by them or the government to deter entry. Absolute cost advantages Economies of scale 74

75 2. Government Imposed Barriers: Actions taken by the government to limit the number of firms in the market. Licenses Government franchise Patents 3. Strategic Barriers: Actions taken by incumbents to deter entry 75

76 Suppose that barriers to entry are such that the market can only sustain one firm (i.e., monopoly). In this case, the market demand is the firm demand. That is, in the short run: Numerical: 76

77 Similar to any market in the short run, as long as price exceeds average variable cost the firm should produce. If price drops below average variable cost, the firm should shutdown production. That is, In the long run, there is no threat of entry. Consequently, long run profit can be sustained. 77

78 Compare monopoly to perfect competition: The perfectly competitive market leads D = S, or P = MC. In monopoly, however, price exceeds marginal cost. Hence, the monopolist will tend to restrict output below the competitive level and as a result raise price. Graph: Market Welfare = sum of net gains to consumers and producers in a market. Consumer surplus (CS) = net gains to consumers in a market. 78

79 Producer surplus (PS) = net gains to producers in a market. Market welfare is higher under perfect competition than under monopoly. Indeed, the monopolist tends to win (higher profit) at the consumer s loss (higher price). This criticism of monopoly is the basis for antitrust law. Antitrust laws are designed to limit behavior that would increase the likelihood of monopoly. 79

80 Consider an alternative pricing scenario: Price Discrimination In many situations, it is more profitable for a firm to charge different prices to different consumers. Price Discrimination: Charging different prices to different consumers, not owing to cost differences. Scenarios: Senior discounts Quantity discounts Car dealerships Consider a car dealership. How does price discrimination emerge? Why is it profitable to price discriminate? 80

81 This is known as First Degree Price Discrimination. In this case, the price discriminator extracts all consumer surplus from the market. Accordingly, CS = 0 and W = PS. Now, for price discrimination to be profitable, two things must occur: 1. Price arbitrage must be prevented 2. Different consumers must be willing to pay different prices. This is equivalent to consumers facing different price elasticities. 81

82 First degree price discrimination is very difficult to do, since the firm must know the reservation price of every consumer. More commonly what we see is Third Degree Price Discrimination. This is the case when the firm segments its market into two or more groups, charging each group a different price. Consider the graphs below: Note: MR T is the total marginal revenue, which is the horizontal sum of the group A and B marginal revenue curves. Three questions that must be answered to maximize profit: How much to produce overall? How should this overall amount be allocated across the two groups? What price to charge each group? 82

83 The group charged the higher price is that which faces the less elastic demand. Why? Alternative Markets: Consider some examples - Local Fast food Auto industry 83

84 Monopolistic Competition: The vast majority of markets are neither perfectly competitive nor monopoly. Consider monopolistic competition: Market Structure: Many sellers in the market Firm produce slightly differentiated products Product differentiation: When buyers perceive differences among the brands of a product. This creates brand loyalty, leading to firms facing downward sloping demand curves. Examples: physical attributes, location, service. An implication: Firms advertise in this type of market to further differentiate their product from the competition. Easy entry and exit 84

85 Short run profit maximizing behavior: Long run profit maximizing behavior: Advantages: Advertising and product innovation Weaknesses: Price higher than under perfect competition. Also, advertising raises price. 85

86 Oligopoly: Market Structure: Few firms High concentration Mutual interdependence Substantial barriers to entry government imposed natural strategic Threat of Predatory Pricing Product Differentiation Control of Inputs Identical or differentiated products 86

87 Many different models to explain behavior. They differ in terms of how firms react to mutual interdependence. Due to mutual interdependence, firms must form expectations of how rivals will react to chosen actions. Examples of Beliefs: Two firms: A and B 1. Maximin Belief - Each believes the other firm s sole objective is to cause the most damage. 2. Cournot Belief - Each believes whatever it does the other firm will not respond. Let s look at it from the perspective of choosing a quantity. Example: Firms produce a product, dump it on the market, and receive a price. This would apply in situations where inventory holdings are not feasible. For example, the corn wet milling industry has been determined to follow this situation. In terms of quantity, a Cournot belief is such that each firm treats the other firm s production as given when making its quantity choice. 87

88 Consider the market demand given by Q = P: Define: Firm (Residual) Demand = Market Demand - other firm production Suppose each firm has a total cost given by: TC A = 100q A and TC B = 100q B Thus, each firm has a marginal cost which is constant at 100. What if A believes B will produce zero? What if A believes B will produce 100? 88

89 What if A believes B will produce 200? A s Reaction Curve = Relationship between A s optimal production and B s production. B has a similar reaction curve. Graph: Can we predict an outcome? 89

90 3. Cooperative Belief - Firms see the market in a similar light and believe that each recognizes that cooperation is better than competition. There are two general forms of cooperation: Explicit Cooperation - Explicit arrangements to limit competition among firms in the same line of business. People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. - Adam Smith (The Wealth of Nations). Two common forms of explicit cooperation are cartels and price fixing conspiracies. Both yield similar outcomes - supracompetitive profits. A cartel refers to an agreement to act in unison with the goal of raising the collective profits of a group of firms. Price fixing schemes seek to maintain prices above levels they otherwise would be without cooperation. Implicit Cooperation - Due to market conditions, firms charge similar prices or otherwise act with the appearance of explicit cooperation. Examples: Markup Pricing, Price leadership. 90

91 Cartel: A cartel occurs when firms seek to maximize the joint profits of the members by using a series of quotas. Consider a market with two firms, A and B. If they form a cartel their goal is to maximize joint (cartel) profit, which is: ð C = ð A + ð B. Imagine these two firms pull their resources and effectively act as one firm (monopoly). Then MC C = horizontal sum of MC A and MC B. Acting in unison, the monopoly (cartel) output and price is Q C and P C, respectively. How should the cartel output be distributed? That is, quotas must be determined. Problem: Incentive to cheat (produce beyond the quota). Prediction: Cartels are unstable. If cartels are predicted to break-up, why do they occur? Role of punishments. 91

92 Consider some market structure factors that facilitate or hinder cooperation: 1. Number of Firms (concentration) 2. Mergers 3. Differentiated Products 4. Excess Capacity/High Inventories 5. Industry Council or Trade Association 92

93 Dominant Firm Price Leadership: In this situation a dominant firm (typically controlling 50-90% of the market) sets the price and others (followers) adjust to that price. Examples: Steel, Cigarettes, Banking Graph: 93

94 Emphasis of late in studies of oligopoly have focused on the use of game theory. Game theory is a formal technique of capturing rivalry. It was initially developed in World War II as a means of predicting Germany s response to Allied invasion plans. In the 1970s it began to gain acceptance as a means of modeling oligopoly behavior. It centers on a game, which has three components: Rules - Strategies - Payoffs - Example: Rock-Papers-Scissors Consider an advertising game between two firms: A and B Rules: Both select advertising level at the same time (simultaneous play). They play once. They have complete information - each knows the possible moves and payoffs of each player. Advertising does not affect the market demand. It only affects the distribution of market demand. If both select the same advertising level, they distribute the market demand 50/50. If one advertises more than the other, it receives a greater share of the market. Strategies: Each can select either a low or high advertising level. 94

95 Possible outcomes: Payoffs Firm A and B select low advertising ð A = \$10m, ð B = \$10m Firm A and B select high advertising ð A = \$5m, ð B = \$5m Firm A select high, Firm B select low ð A = \$20m, ð B = \$3m Firm A select low, Firm B select high ð A = \$3m, ð B = \$20m We illustrate this with a payoff matrix: L A H L 10, 10 20, 3 B H 3, 20 5, 5 What do we predict will be the outcome? Two approaches - Dominance Arguments - Equilibrium Arguments - 95

96 Prisoners Dilemma: Consider the Cournot game: Consider the Cartel game: 96

97 What about a dynamic game? This is where moves are sequential. With dynamic games, they can be represented with a game tree, which consists of nodes and branches. Example: Entry Game As we ve said, entry drives profits down. Consequently, incumbent firms are hurt when entrant firms come into a market. Can an incumbent deter entry? One potential method - threat of predatory pricing. Consider two firms - entrant (E) and incumbent (I). The entrant must decide whether or not to enter the market. If the entrant comes into the market, the incumbent must decide to fight (predatory price) or cooperate. This is illustrated below: What will happen? Backwards Induction - 97

98 Consider the ultimatum game. Suppose that \$100 is to be divided up between two people. One person, the proposer, offers a certain distribution of the \$100. The other person, the responder, then must decide to accept or not accept the offer. If the offer is not accepted, each gets \$0. If the offer is accepted, each gets the offered amount. What is the Nash Equilibrium? 98

99 INPUT MARKETS Let s shift gears. Up to this point, we ve focused on output markets. However, there are also input markets. Analysis of these markets can help us answer such questions: What determines an input price? What determines income? Recall that optimal input usage (i.e., that which maximizes profit) occurs when the following holds: (Note: This assumes that input prices are given. In other words, the input buyers and sellers are price takers). But this is akin to: But recall: So, to maximize profit, firms should select inputs such that: 99

100 Or:,, * * * But profit is maximized when MR = MC. So, the above is equivalent to:,, * * * 100

101 And by rearranging, we get: * * *,, Now, So, = marginal revenue product of input A (i.e., MRP A ). MRP measures the change in total revenue due to hiring one more unit of the input. Now, in the case of a purely competitive firm, marginal revenue equals price. So, MRP = P output * MP, which is the same expression we had before in the notes. In this case, with MRP = MR * MP, we generalize to any type of output market, whether it is perfectly or imperfectly competitive. Example: A firm currently has 5 machines. It s contemplating buying a 6 th machine, for which the marginal product is 1. Also, suppose MR = \$80. If the price of the machine is \$40, what should the firm do? 101

102 Indeed, from before: If P INPUT < MRP INPUT, then hire more of the input. If P INPUT > MRP INPUT, then hire less of the input. What we want to do is to predict how input markets will behave under different scenarios. Case I: Input and Output Market are Competitive In this case, all prices are taken as given. Buyers and sellers individually have no influence on input and output prices. So, for example, individual firms can t influence the prices they receive for their produce or the prices they pay for their inputs. As before, in terms of input selection, inputs should be hired to the point where the following holds: * *,, 102

103 Consider a simple scenario, where the firm only has one variable input. That is, except for input A, all other inputs are fixed (recall the short run). Go back to a competitive firm: In order to maximize profit, the firm will operate under diminishing returns in the short run. Accordingly, the MRP curve becomes: Indeed, the MRP curve is the firm s demand curve for input A. 103

104 Now, if more than one input is variable, it gets a little tricky. First, consider the case of a multifactor adjustment. This relates to the case where two variable inputs might be substitutes or complements to each other. Substitutes: Complements: Adjusting for this will modify the demand for the input (i.e., long run input demand). In particular, this adjustment impacts the marginal productivity of the input in question, such that: 104

105 Now, previously we dealt with the individual firm demand for an input. What if we want the market demand. We might be inclined to simply horizontally add up all the firm demands. However, this would be incorrect, since we need to account for the industry adjustment. Again, this will change the demand curve (i.e., input market demand): Market Equilibrium: 105

106 Case II: Input Market Competitive but Output Market not Competitive In this case, individual buyers of inputs take the input price as given, but individual sellers of outputs have some control over their price. For example, a local bar may operate in a monopolistically competitive output market but takes the price it pays for liquor as given. In this case, MRP = MR * MP, with P output > MR. Consider the case of a single variable input, A, with all other inputs fixed. Similar to before, the MRP curve is the firm s demand for the input. Except in this case, the graphical derivation of MRP is slightly changed: Now, if other inputs are variable, then just like before we have to take account of the multifactor adjustment. Accordingly, 106

107 To get the market demand for the input, then it is very tricky to derive the market demand, since we have to account for how input buyers compete against each other in the output market. We ll leave that for another class! Case III: Input Market not Competitive but Output Market Competitive In this case, input buyers (i.e., firms) sell their output in a competitive market. So, they take the price they receive for their product as given. However, they have some control over the price they pay for their input(s). For example, we might have a singly buyer of an input (i.e., a monopsony), such as a local steel mill. Or there might be a market with a few input buyers (i.e., oligopsony). Let s tackle the case of a monopsony. In this case, since the monopsonist is the only buyer of the input, the market supply of the input is the one faced buy the monopsonist. That is, in terms of input A: In the previous cases of competitive input markets, each buyer was so small that it simply took the input price as given when making its hiring decisions. This is akin to each firm having a perfectly elastic input supply curve, given by: 107

108 Consider a monopsonist who faces an upward sloping supply curve of input A. The supply schedule is given as: P A Q A Total Cost of Input A Marginal Expenditure for Input A \$5 10 \$ \$7 11 \$77 \$27 \$9 12 \$108 \$31 \$11 13 \$143 \$35 \$13 14 \$182 \$39 The marginal expenditure (ME) is the change in total cost of input A from hiring one more unit of the input. As you can see, ME A > P A. Graphically, 108

109 Now, how much of input A will the monopsonist wish to employ? If we assume all other inputs are fixed, except for input A, then the firm should hire to the point where: Let s see: 109

110 And if there are several inputs, then each input should be hired to the point such that the following holds: * * *,, Case IV: Both Input and Output Markets not Competitive 110

### Chapter 1- Introduction

Chapter 1- Introduction A SIMPLE ECONOMY Central PROBLEMS OF AN ECONOMY: scarcity of resources problem of choice Every society has to decide on how to use its scarce resources. Production, exchange and

### AP Microeconomics Review Session #3 Key Terms & Concepts

The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph

### AP Microeconomics Review With Answers

AP Microeconomics Review With Answers 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry (which means show

### Practice Exam 3: S201 Walker Fall 2009

Practice Exam 3: S201 Walker Fall 2009 I. Multiple Choice (3 points each) 1. Which of the following statements about the short-run is false? A. The marginal product of labor may increase or decrease. B.

### 2003/2004 SECOND EXAM 103BE/BX/BF Microeconomics, Closed part

1 2003/2004 SECOND EXAM 103BE/BX/BF Microeconomics, Closed part Note 1: Always read all the options before choosing one, and then select the best option. Sometimes the final option may read like all the

### Principles of Economics. January 2018

Principles of Economics January 2018 Monopoly Contents Market structures 14 Monopoly 15 Monopolistic competition 16 Oligopoly Principles of Economics January 2018 2 / 39 Monopoly Market power In a competitive

### BUSINESS ECONOMICS (PAPER IV-PART I)

BUSINESS ECONOMICS (PAPER IV-PART I) (60 MARKS) Q1: Macroeconomics is also called economics (a) applied (b) aggregate (c) experimental (d) none Q2: A Study of how increase in the corporate income tax rate

### ECON 230D2-002 Mid-term 1. Student Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 230D2-002 Mid-term 1 Name Student Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Scenario 12.3: Suppose a stream is discovered whose

### Eco402 - Microeconomics Glossary By

Eco402 - Microeconomics Glossary By Break-even point : the point at which price equals the minimum of average total cost. Externalities : the spillover effects of production or consumption for which no

### Contents. Concepts of Revenue I-13. About the authors I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11

Contents About the authors I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11 1 Concepts of Revenue 1.1 Introduction 1 1.2 Concepts of Revenue 2 1.3 Revenue curves under perfect competition 3 1.4 Revenue

### ECON 102 Brown Final Exam (New Material) Practice Exam Solutions

www.liontutors.com ECON 102 Brown Final Exam (New Material) Practice Exam Solutions 1. B A very large percent of their earnings comes from economic rent 2. B Any funds left, after everyone who has a claim

### Practice Exam 3: S201 Walker Fall with answers to MC

Practice Exam 3: S201 Walker Fall 2007 - with answers to MC Print Your Name: I. Multiple Choice (3 points each) 1. If marginal utility is falling then A. total utility must be falling. B. marginal utility

### Week One What is economics? Chapter 1

Week One What is economics? Chapter 1 Economics: is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives

### 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

### Many sellers: There are many firms competing for the same group of customers.

Microeconomics 2 Chapter 16 Monopolistic Competition 16-1 Between monopoly and perfect Competition One type of imperfectly competitive market is an oligopoly, a market with only a few sellers, each offering

### 2000 AP Microeconomics Exam Answers

2000 AP Microeconomics Exam Answers 1. B Scarcity is the main economic problem!!! 2. D If the wages of farm workers and movie theater employee increase, the supply of popcorn and movies will decrease (shift

### Managerial Economics & Business Strategy. Final Exam Section 2 May 11 th 7:30 am-10:00 am HH 076

Managerial Economics & Business Strategy Final Exam Section 2 May 11 th 7:30 am-10:00 am HH 076 Grading Scale 5% - Attendance 8% - Homework (Drop the lowest grade) 7% - Quizzes (Drop the lowest grade)

### CONTENTS. Introduction to the Series. 1 Introduction to Economics 5 2 Competitive Markets, Demand and Supply Elasticities 37

CONTENTS Introduction to the Series iv 1 Introduction to Economics 5 2 Competitive Markets, Demand and Supply 17 3 Elasticities 37 4 Government Intervention in Markets 44 5 Market Failure 53 6 Costs of

### Principles of Microeconomics Module 5.1. Understanding Profit

Principles of Microeconomics Module 5.1 Understanding Profit 180 Production Choices of Firms All firms have one goal in mind: MAX PROFITS PROFITS = TOTAL REVENUE TOTAL COST Two ways to reach this goal:

### 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

### 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

### 4. A situation in which the number of competing firms is relatively small is known as A. Monopoly B. Oligopoly C. Monopsony D. Perfect competition

1. Demand is a function of A. Firm B. Cost C. Price D. Product 2. The kinked demand curve explains A. Demand flexibility B. Demand rigidity C. Price flexibility D. Price rigidity 3. Imperfect competition

### 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

### FINAL EXAMINATION. Special Instructions: Date: DECEMBER 15, 2000 School Year: Course and No.: ECON1006EA Time: 1:30 PM- 3:30 PM

FINAL EXAMINATION Date: DECEMBER 15, 2000 School Year: 2000-2001 Course and No.: ECON1006EA Time: 1:30 PM- 3:30 PM Professor: SARLO, C Department: Arts & Science Number of Pages: 11 + cover Time Allowed:

### INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION

ECO105 (F) / Page 1 of 12 Section A INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION Instructions: This section consists

### Thanksgiving Handout Economics 101 Fall 2000

Thanksgiving Handout Economics 101 Fall 2000 The purpose of this handout is to provide a variety of problems illustrating many of the ideas that we have discussed in class this semester. The questions

### MICRO FINAL EXAM Study Guide

AP MICROECONOMICS-217 Name: MICRO FINAL EXAM Study Guide Instructions: Please fight senioritis! Study & be efficient with your time. DUE: Friday April 28 th (Multiple choice block 4/26 th or 27 th Free

### AP Microeconomics. Content Skills Learning Targets Assessment Resources & Technology

St. Michael Albertville High School Teacher: Matthew Rooker AP Microeconomics October 2014 Content Skills Learning Targets Assessment Resources & Technology November 2014 Content Skills Learning Targets

### MICRO EXAM REVIEW SHEET

MICRO EXAM REVIEW SHEET 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry 3. Natural Monopoly with Fair-Return

### Economics MCQ (1-50) GAT Subject Management Sciences.

Economics MCQ (1-50) GAT Subject Management Sciences www.accountancyknowledge.com 51. If a 5% increase in price causes no change in total revenue, this means? (a) Demand is price inelastic (b) Demand is

### Chapter 33: Terms of Trade

Chapter 33: Terms of Trade 1 The Terms of Trade The division of the gains from trade depends on the terms of trade. The terms of trade are measured by the ratio of the price of exports to the price of

### Syllabus item: 42 Weight: 3

1.5 Theory of the firm and its market structures - Production and costs Syllabus item: 42 Weight: 3 Definition: Total product (TP): The total output that a firm produces, using its fixed and variable factors

### Microeconomics Exam Notes

Microeconomics Exam Notes Opportunity Cost What you give up to get it Production Possibility Frontier Maximum attainable combination of two products (Concept of Opportunity Cost). Main Decision Makers:

### REDEEMER S UNIVERSITY

REDEEMER S UNIVERSITY Km 46/48 Lagos Ibadan Expressway, Redemption City, Ogun State COLLEGE OF MANAGEMENT SCIENCE DEPARTMENT OF ECONOMICS AND BUSINESS STUDIES COURSE CODE /TITLE ECO 202/Microeconomics

### Introduction Question Bank

Introduction Question Bank 1. Science of wealth is the definition given by 2. Economics is the study of mankind of the ordinary business of life given by 3. Science which tells about what it is & what

### 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

### Unit 6 Perfect Competition and Monopoly - Practice Problems

Unit 6 Perfect Competition and Monopoly - Practice Problems Multiple Choice Identify the choice that best completes the statement or answers the question. 1. One characteristic of a perfectly competitive

### SCHOOL OF ACCOUNTING AND BUSINESS BSc. (APPLIED ACCOUNTING) GENERAL / SPECIAL DEGREE PROGRAMME

All Rights Reserved No. of Pages - 07 No of Questions - 08 SCHOOL OF ACCOUNTING AND BUSINESS BSc. (APPLIED ACCOUNTING) GENERAL / SPECIAL DEGREE PROGRAMME YEAR I SEMESTER I INTAKE VIII (GROUP B) END SEMESTER

### Econ 300: Intermediate Microeconomics, Spring 2014 Final Exam Study Guide 1

Econ 300: Intermediate Microeconomics, Spring 2014 Final Exam Study Guide 1 Chronological order of topics covered in class (to the best of my memory). Introduction to Microeconomics (Chapter 1) What is

### Micro Semester Review Name:

Micro Semester Review Name: The following review is set up to emphasize certain concepts, graphs and terms. It is the responsibility of the individual teachers to emphasize and review the analysis aspects

### Microeconomics. Use the Following Graph to Answer Question 3

More Tutorial at www.dumblittledoctor.com Microeconomics 1. To an economist, a good is scarce when: *a. the amount of the good available is less than the amount that people want when the good's price equals

### ADVANCED PLACEMENT MICROECONOMICS Maple Grove Senior High School Jeff Rush Social Studies Department

ADVANCED PLACEMENT MICROECONOMICS Maple Grove Senior High School Jeff Rush rushj@district279.org Social Studies Department Required textbook Economics, McConnell and Brue, 17 th edition, 2008. Course description

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

AUBG, Fall 2015, Principles Micro with P. Stankov, Sample MT2 NOTE: The actual no. of questions on the actual MT will be 30, each for 0.67 grade points. MULTIPLE CHOICE. Choose the one alternative that

### 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

### SCHOOL OF ACCOUNTING AND BUSINESS BSc. (APPLIED ACCOUNTING) GENERAL / SPECIAL DEGREE PROGRAMME END SEMESTER EXAMINATION JULY 2016

All Rights Reserved No. of Pages - 08 No of Questions - 08 SCHOOL OF ACCOUNTING AND BUSINESS BSc. (APPLIED ACCOUNTING) GENERAL / SPECIAL DEGREE PROGRAMME END SEMESTER EAMINATION JULY 2016 BEC 30325 Managerial

Question # 1 of 15 ( Start time: 01:24:42 PM ) Total Marks: 1 A person with a diminishing marginal utility of income: Will be risk averse. Will be risk neutral. Will be risk loving. Cannot decide without

### Syllabus item: 57 Weight: 3

1.5 Theory of the firm and its market structures - Monopoly Syllabus item: 57 Weight: 3 Main idea 1 Monopoly: - Only one firm producing the product (Firm = industry) - Barriers to entry or exit exists,

### Econ190 May 1, No baseball caps are allowed (turn it backwards if you have one on).

Heather Krull Final Exam Econ190 May 1, 2006 Name: Instructions: 1. Write your name above. 2. No baseball caps are allowed (turn it backwards if you have one on). 3. Write your answers in the space provided

### SHORT QUESTIONS AND ANSWERS FOR ECO402

SHORT QUESTIONS AND ANSWERS FOR ECO402 Question: How does opportunity cost relate to problem of scarcity? Answer: The problem of scarcity exists because of limited production. Thus, each society must make

### 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

### Practice Exam 3: S201 Walker Fall 2004

Practice Exam 3: S201 Walker Fall 2004 I. Multiple Choice (3 points each) 1. Which of the following statements about the short-run is false? A. The marginal product of labor may increase or decrease. B.

### Section I, Multiple Choice (40 points)

ECO 230, Final Exam Name: Summer I, 2003 Eastern Kentucky University Dr. Ruppel Section I, Multiple Choice (40 points): Circle the letter in front of the best answer. 1. If Canada can increase its production

### not to be republished NCERT Chapter 6 Non-competitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET

Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter

### Contents in Brief. Preface

Contents in Brief Preface Page v PART 1 INTRODUCTION 1 Chapter 1 Nature and Scope of Managerial Economics and Finance 3 Chapter 2 Equations, Graphs and Optimisation Techniques 21 Chapter 3 Demand, Supply

### Question Paper Business Economics I (MB1B3): January 2009

Question Paper Business Economics I (MB1B3): January 2009 Answer all 78 questions. Marks are indicated against each question. 1. Which of the following is not responsible for an increase in demand for

### 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

### short run long run short run consumer surplus producer surplus marginal revenue

Test 3 Econ 3144 Name Fall 2005 Dr. Rupp 20 Multiple Choice Questions (50 points) & 4 Discussion (50 points) Signature I have neither given nor received aid on this exam Use this table to answer questions

### Microeconomics. Use the graph below to answer question number 3

More Tutorial at Microeconomics 1. Opportunity costs are the values of the: a. minimal budgets of families on welfare b. hidden charges passed on to consumers c. monetary costs of goods and services *

### Microeconomics. Use the graph below to answer question number 3

More Tutorial at Microeconomics 1. Opportunity costs are the values of the: a. minimal budgets of families on welfare b. hidden charges passed on to consumers c. monetary costs of goods and services *

### 1.3. Levels and Rates of Change Levels: example, wages and income versus Rates: example, inflation and growth Example: Box 1.3

1 Chapter 1 1.1. Scarcity, Choice, Opportunity Cost Definition of Economics: Resources versus Wants Wants: more and better unlimited Versus Needs: essential limited Versus Demand: ability to pay + want

### Microeconomics: MIE1102

TEXT CHAPTERS TOPICS 1, 2 ECONOMICS, ECONOMIC SYSTEMS, MARKET ECONOMY 3 DEMAND AND SUPPLY. MARKET EQUILIBRIUM 4 ELASTICITY OF DEMAND AND SUPPLY 5 DEMAND & CONSUMER BEHAVIOR 6 PRODUCTION FUNCTION 7 COSTS

### Section I (20 questions; 1 mark each)

Foundation Course in Managerial Economics- Solution Set- 1 Final Examination Marks- 100 Section I (20 questions; 1 mark each) 1. Which of the following statements is not true? a. Societies face an important

### Final Term Examination Spring 2006 Time Allowed: 150 Minutes. Question No. 1 Marks :1. Question No.

www.vustuff.com WWW.VUTUBE.EDU.PK ECO402 Microeconomic s Final Term Examination Spring 2006 Time Allowed: 150 Minutes Question No. 1 Marks :1 Economies of scale and economies of scope are synonymous. Question

### 1 of 38 4/29/14 10:16 PM

1. award: Refer to Figure 1.8. If the university decides to lower grading standards, then This curve will shift rightward. This curve will pivot up and to the left. The curve will begin to bend downward

### 1 of 14 5/1/2014 4:56 PM

1 of 14 5/1/2014 4:56 PM Any point on the budget constraint Gives the consumer the highest level of utility. Represent a combination of two goods that are affordable. Represents combinations of two goods

### Full file at

Chapter 1 There are no Questions in Chapter 1 1 Chapter 2 In-Chapter Questions 2A. Remember that the slope of the line is the coefficient of x. When that coefficient is positive, there is a direct relationship

### To produce more beach balls, you must give up ever increasing quantities of ice cream cones.

Unit 01: Basic Concepts (Macro/Micro) Scarcity The Economic Problem: Unlimited wants, limited economic resources Factors of Production: -Land -Labor -Capital -Entrepreneurship Big 3 Questions: -What to

### Eco 202 Exam 2 Spring 2014

Eco 202 Exam 2 Spring 2014 PLEASE ANSWER 50 OF THE FOLLOWING QUESTIONS. 1. Jon Brooks quit his job in a bicycle shop, where he earned \$15,000 per year, to become a graduate student in economics. At the

### 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

### 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

### 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

### Micro Economics M.A. Economics (Previous) External University of Karachi Micro-Economics

Micro Economics M.A. Economics (Previous) External University of Karachi Micro-Economics Annual Examination 1997 Time allowed: 3 hours Marks: 100 Maximum 1) Attempt any five questions. 2) All questions

### 23 Perfect Competition

23 Perfect Competition Learning Objectives After you have studied this chapter, you should be able to 1. define price taker, total revenues, marginal revenue, short-run shutdown price, short-run breakeven

### FOR MORE PAPERS LOGON TO

ECO401- Economics Question No: 1 ( Marks: 1 ) - Please choose one In pure capitalism, the role of government is best described as: Significant. Extensive. Nonexistent. Limited. Question No: 2 ( Marks:

### UNIT 1 INTRODUCTION. Q. 1 PPC is concave because of: A. Law of diminishing returns. B. Law of DMU. C. Both D. None

UNIT 1 INTRODUCTION Q. 1 PPC is concave because of: A. Law of diminishing returns. B. Law of DMU C. Both D. None Q2. PPC is downward sloping because of: a) MRT is diminishing b) Constant MRT c) Increasing

### Chapter 10 Pure Monopoly

Chapter 10 Pure Monopoly Multiple Choice Questions 1. Pure monopoly means: A. any market in which the demand curve to the firm is downsloping. B. a standardized product being produced by many firms. C.

### full revision of micro economics

www.examhelplogger.com full revision of micro economics JOIN CLASS 12 TH FREE BATCH ON WHATS APP M 98 91 291 604 MICRO ECONOMICS Studies The Behaviour Of An Individual Economic Unit. Example : Demand Of

### = AFC + AVC = (FC + VC)

Chapter 13-14: Marginal Product, Costs, Revenue, and Profit Production Function The relationship between the quantity of inputs (workers) and quantity of outputs Total product (TP) is the total amount

### Lecture 11 Imperfect Competition

Lecture 11 Imperfect Competition Business 5017 Managerial Economics Kam Yu Fall 2013 Outline 1 Introduction 2 Monopolistic Competition 3 Oligopoly Modelling Reality The Stackelberg Leadership Model Collusion

### MICROECONOMICS - CLUTCH CH MONOPOLISTIC COMPETITION.

!! www.clutchprep.com CONCEPT: CHARACTERISTICS OF MONOPOLISTIC COMPETITION A market is in monopolistic competition when: Nature of Good: The goods for sale are, but not identical - Products are said to

### Practice EXAM 3 Spring Professor Walker - E201

Practice EXAM 3 Spring 2009 - Professor Walker - E201 1. The theory behind short run production costs can be narrowed to an assumption that MC is expected to initially fall, but rise at larger levels of

### Foundations of Business Analysis and Strategy

k 11 i- f l I_J I I } I II j "J 1r%\ "J T. "u ' Foundations of Business Analysis and Strategy TENTH EDITION (hristopher R. Thomas University of South Florida Exide Professor of Sustainable Enterprise S.

### CHAPTER NINE MONOPOLY

CHAPTER NINE MONOPOLY This chapter examines how a market controlled by a single producer behaves. What price will a monopolist charge for his output? How much will he produce? The basic characteristics

### DEFINITIONS A 42. Benjamin Disraeli. I hate definitions.

DEFINITIONS I hate definitions. Benjamin Disraeli adverse selection: opportunism characterized by an informed person s benefiting from trading or otherwise contracting with a less informed person who does

### ECONOMICS SOLUTION BOOK 2ND PUC. Unit 6. I. Choose the correct answer (each question carries 1 mark)

Unit 6 I. Choose the correct answer (each question carries 1 mark) 1. A market structure which produces heterogenous products is called: a) Monopoly b) Monopolistic competition c) Perfect competition d)

### 1. Fill in the missing blanks ( XXXXXXXXXXX means that there is nothing to fill in this spot):

1. Fill in the missing blanks ( XXXXXXXXXXX means that there is nothing to fill in this spot): Quantity Total utility Marginal utility 0 0 XXXXXXXXXXX XXXXXXXXXXX XXXXXXXXXXX 200 0 = 200 1 200 XXXXXXXXXXX

### 1. Why is utility subjective? 2. What are inferior options? 3. Suppose the price of A is 1, the price of B is 2 and the price of C is 1.

Study Questions for Chapters 7-11 Chapter 7 1. Why is utility subjective? 2. What are inferior options? 3. Suppose the price of A is 1, the price of B is 2 and the price of C is 1.50 a. Complete the following

### Unit 13 AP Economics - Practice

DO NOT WRITE ON THIS TEST! Unit 13 AP Economics - Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. A natural monopoly exists whenever a single

### Sample Multiple-Choice Questions

E03 3 Microeconomics Summative Exam SAMPLE QUESTIONS Sample Multiple-Choice Questions Circle the letter of each correct answer 1 True statements about the theory of the firm in the short run and long run

### THE UNIVERSITY OF WESTERN ONTARIO. E. Rivers ECONOMICS 1021B-001 March 18, 2012 MIDTERM #2. 2. Check that your examination contains 50 questions.

NAME THE UNIVERSITY OF WESTERN ONTARIO LONDON CANADA E. Rivers ECONOMICS 1021B-001 March 18, 2012 MIDTERM #2 INSTRUCTIONS: 1. You will have 2 hours to complete the exam. 2. Check that your examination

### TWELFTH EDITION. University of South Florida. Texas A&M University Late Professor Emeritus. Mc Graw Hill Education

MANAGERIAL Foundations of Business Analysis and Strategy TWELFTH EDITION Christopher R. Thomas University of South Florida S. Charles Maurice Texas A&M University Late Professor Emeritus Mc Graw Hill Education

### PICK ONLY ONE BEST ANSWER FOR EACH BINARY CHOICE OR MULTIPLE CHOICE QUESTION.

Econ 101 Summer 2015 Answers to Second Mid-term Date: June 15, 2015 Student Name Version 1 READ THESE INSTRUCTIONS CAREFULLY. DO NOT BEGIN WORKING UNTIL THE PROCTOR TELLS YOU TO DO SO You have 75 minutes

### Chapter 15 Oligopoly

Goldwasser AP Microeconomics Chapter 15 Oligopoly BEFORE YOU READ THE CHAPTER Summary This chapter explores oligopoly, a market structure characterized by a few firms producing a product that mayor may

### 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

### Short-Run Costs and Output Decisions

Semester-I Course: 01 (Introductory Microeconomics) Unit IV - The Firm and Perfect Market Structure Lesson: Short-Run Costs and Output Decisions Lesson Developer: Jasmin Jawaharlal Nehru University Institute

### The following key should help you understand the different types of activities students engage in during the course:

AP Microeconomics Course Overview Name Description AP Microeconomics AP Microeconomics studies the behavior of individuals and businesses as they exchange goods and services in the marketplace. Students

### Economics 203: Intermediate Microeconomics I. Sample Final Exam 1. Instructor: Dr. Donna Feir

Last Name: First Name: Student Number: Economics 203: Intermediate Microeconomics I Sample Final Exam 1 Instructor: Dr. Donna Feir Instructions: Make sure you write your name and student number at the

### 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