# Microeconomics II. Discussion Class Durban

Size: px
Start display at page:

Transcription

1 Microeconomics II Discussion Class Durban 1

2 What to expect? Discussion classes are: overview of the course We focus on what we think are challenging & non revision concepts Give you a start to understanding the whole picture exercises to help understanding Discuss questions Motivate for exam 2

3 2.4 MATHEMATICAL TREATMENT OF ELASTICITIES OF SUPPLY AND DEMAND elasticity Percentage change in one variable resulting from a 1-percent increase in another. Price Elasticity of Demand price elasticity of demand Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price. (2.1) This term is an inverse of slope 3

4 2.4 ELASTICITIES OF SUPPLY AND DEMAND Linear Demand Curve Demand curve that is a straight line example! Figure 2.11 Linear Demand Curve The price elasticity of demand depends: on the slope of the demand curve AND on the price and quantity (equation 2.4). So: elasticity varies along the curve as price and quantity change. Slope is constant for this linear demand curve. Near the top elasticity is large in magnitude. (to infinite) It becomes smaller as we move down the curve (to zero). 4

5 2.4 ELASTICITIES OF SUPPLY AND DEMAND income elasticity of demand (2.2) cross-price elasticity of demand (2.3) price elasticity of supply Percentage change in quantity supplied resulting from a 1-percent increase in price. Point versus Arc Elasticities point elasticity of demand the demand curve. arc elasticity of demand prices. Price elasticity at a particular point on Price elasticity calculated over a range of Exercise: If price of X were to increase from R10 to R20 and quantity demanded of X were to decrease from 30 to 10 units, the arc elasticity of demand would be: 5

6 If the price of good X were to increase from R10 to R20 and the quantity demanded of X were to decrease from 30 units to 10 units, the arc elasticity of demand is A smaller % change in P is accompanied by a bigger % change in Q So X is quite responsive to P change Change in P = 10 Change in Q = -20 Ave P = ( )/2 = R15 Ave Q = (30+10)/ 2 = 20 (-20/10) x (15/10) = (2/1) x (3/2) = 6/2 = 3 Alternatively USE : Ep = (q 0 q 1 ) / ( q 0 + q 1 ) (p 0 p 1 ) / (p 0 + p 1 ) Where: P0= 10; P1=20 AND Q0=30;Q1=10 6

7 Chapter 3 Consumer Behavior theory of consumer behavior Description of how consumers allocate incomes among different goods and services to maximize satisfaction Consumer behavior is best understood in three distinct steps: 1. Consumer preferences 2. Budget constraints 3. Consumer choices (The mix of 1 and 2) 7

8 3.1 CONSUMER PREFERENCES Some Basic Assumptions about Preferences 1. Completeness: Preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets. Thus, for any two market baskets A and B, a consumer will prefer A to B, will prefer B to A, or will be indifferent between the two. Note: these preferences ignore costs/affordabilty. 2. Transitivity: Preferences are transitive. Transitivity means that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. Transitivity is normally regarded as necessary for consumer consistency. If A > B and B > C then A > C 3. More is better than less/ non satiation: consumers are assumed to be desirable i.e., to be good. Consequently, consumers always prefer more of any good to less. In addition, consumers are never satisfied or satiated; more is always better, even if just a little better. 8

9 3.1 CONSUMER PREFERENCES Indifference Curves indifference curve: Curve representing all combinations of market bundles that provide a consumer with same level of satisfaction. Figure 3.2 E > B =A=D > H > G Why is E > D H > G Indifference curve map: many ICs which don t intersect, because that is irrational (so rationality is another assumption) 9

10 3.1 CONSUMER PREFERENCES Perfect Substitutes and Perfect Complements Figure 3.6 Perfect Substitutes and Perfect Complements MRS between two goods is constant (slope) If I don t have apples I can have oranges MRS is either ZERO or Infinite (slope) Think of shoes Left is useless without Right 10

11 3.1 CONSUMER PREFERENCES Utility and Utility Functions utility a number representing the satisfaction from a bundle. utility function Formula that assigns a level of utility to each bundle A utility function is an indifference curve map where each curve has an assigned value of utility E.g. U1 = 25 Figure 3.8 ordinal utility function Utility function that generates just a ranking of baskets in order of most to least preferred. cardinal utility function Utility function describing by how much one basket is preferred to another. Assigns a number 11

12 3.2 BUDGET CONSTRAINTS budget constraints: Constraints associated with limited incomes. The Budget Line budget line All combinations of goods for which the total amount of money spent is equal to income. P F P C I (3.1) F C TABLE 3.2 Market Baskets and the Budget Line Market Basket Food (F) Clothing (C) Total Spending A 0 40 \$80 B \$80 D \$80 E \$80 G 80 0 \$80 Budget line F + 2C = \$80 Where Pf = R1 and Pc = R2 F & C = respective units 12

13 3.2 BUDGET CONSTRAINTS****** The Budget Line Figure 3.10 A Budget Line From the table a budget line can be drawn describing the combinations of goods that can be purchased given \$ 80 The slope of the budget line (measured between points B and D) is P F /P C = 10/20 = 1/2. Increase in income pushes BL outward & shows that more can be afforded 13

14 3.3 CONSUMER CHOICE: a mix of ICs & BL Maximizing basket (equilibrium) must satisfy two conditions: 1. It must be located on the budget line. 2. It must give the consumer the most preferred combination of goods and services. A consumer maximizes satisfaction by choosing market basket A. At this point, the budget line and indifference curve U 2 are tangent. No higher level of satisfaction (e.g., market basket D) can be attained. At A, the point of maximization, the MRS between the two goods equals the price ratio. MRS = Pf/Pc MB = MC At B MRS > Pf/Pc i.e. consumer is willing to pay more than market price 14

15 MARGINAL UTILITY AND CONSUMER CHOICE: NB slide MU = additional utility from consuming additional unit of good Diminishing MU: the slope of the IC decreases as one moves from A to B Meaning: the more F is consumed, less utility comes from it Along IC utility is constant (i.e. du =0) That is: MUf as F changes + MUc as C changes = 0 Formally:. MUF. df + MUC. dc = 0 dc/df = - MUF/MUC MRS = slope of IC, which is dc/df So: MRS = dc/df = MUF/MUC At equilibrium (G) slopes of IC = slope of BL i.e. MUF/MUC = PF/PC This is the equi-marginal principle: Utility is maximised when consumer has equalised MU per rand across all goods In 1 st year, we said weighted MU for products equal C A G B F 15

16 CHAPTER 4 OUTLINE 4.1 Individual Demand 4.2 Income and Substitution Effects 4.3 Market Demand 4.4 Consumer Surplus 16

17 4.1 Deriving INDIVIDUAL DEMAND from Price changes Price Changes Figure 4.1 Effect of Price Changes A reduction in the price of food, with income and the price of clothing fixed, causes this consumer to choose a different market basket. (swivel out) In (a), the baskets that maximize utility for various prices of food (point A, \$2; B, \$1; D, \$0.50) trace out the price-consumption curve. Part (b) gives the demand curve, which relates the price of food to the quantity demanded 17

18 4.1 INDIVIDUAL DEMAND Income Changes Figure 4.2 Effect of Income Changes An increase in income, with the prices of all goods fixed, causes consumers to alter their choice of market baskets. In part (a), the baskets that maximize consumer satisfaction for various incomes (point A, \$10; B, \$20; D, \$30) trace out the income-consumption curve. Also called the ENGEL curve The shift to the right of the demand curve in response to the increases in income is shown in part (b). 18

19 4.1 INDIVIDUAL DEMAND Normal versus Inferior Goods Figure 4.3 An Inferior Good An increase in a person s income can lead to less consumption of one of the two goods being purchased. Here, hamburger, though a normal good between A and B, More of H is consumed with income increase becomes an inferior good when the incomeconsumption curve bends backward between B and C. Less of H is consumed with income increase 19

20 4.1 INDIVIDUAL DEMAND Substitutes and Complements Recall that: Two goods are substitutes if an increase in the price of one leads to an increase in the quantity demanded of the other. Two goods are complements if an increase in the price of one good leads to a decrease in the quantity demanded of the other. 20

21 4.2 INCOME AND SUBSTITUTION EFFECTS Substitution Effect substitution effect Change in consumption of a good associated with a change in its price. Price decrease leads to substituting towards good & vice versa Income Effect income effect Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant. If more or less is consumed depends on type of good (normal/inferior) The total effect of a change in price is given by the sum of the effects Total Effect (F 1 F 2 ) = Substitution Effect (F 1 E) + Income Effect (EF 2 ) 21

22 4.2 Graphically: INCOME AND SUBSTITUTION EFFECTS Figure 4.6 Income and Substitution Effects: Normal Good A decrease in the price of food has both an income effect and a substitution effect. The consumer is initially at A, on budget line RS. When the price of food falls, consumption increases by F 1 F 2 as the consumer moves to B. So this is Total Effect, which we must divide into substitution & income effects. To find income effect: imagine the parallel shift of BL back to original IC: This is EF2 (normal good-increase in consumption) The left over is the substitution effect : F1E Tot Effect (F1F2) = Sub Effect (F1E) + Inco. Effect (EF2) 22

23 4.2 INCOME AND SUBSTITUTION EFFECTS Income Effect Figure 4.7 Income and Substitution Effects: Inferior Good With inferior good we expect consumption of good to decrease with income increase So income effect direction is opposite direction We can see the Total effect: F1 F2 Then we imagine our parallel shift of BL to original IC (D) Y Effect = -ve F2E Left over is Sub Effect F1F2 = F1E F2E 23

24 4.2 INCOME AND SUBSTITUTION EFFECTS A Special Case: The Giffen Good Giffen good Good whose demand curve slopes upward because the (negative) Y effect is > Sub effect. Figure 4.8 Upward-Sloping Demand Curve: The Giffen Good Negative slope of Demand curve From A to B Why? -ve Y effect is bigger than Substitution Effect -So Total Effect is in opposite direction -Tot Effect EF1 = Sub (EF2) F2F1 Now do exactly the same thing for price INCREASEs where BL swivel inward 24

25 4.4 CONSUMER SURPLUS***** Consumer Surplus and Demand Figure 14.4 Consumer Surplus Generalized For the market as a whole, consumer surplus is measured by the area under the demand curve and above the line representing the purchase price of the good. Here, the consumer surplus is given by the yellow-shaded triangle and is equal to 1/2 (\$20 \$14) 6500 = \$19,500. Applying Consumer Surplus When added over many individuals, it measures the aggregate benefit that consumers obtain from buying goods in a market Consumer and producer surplus are useful in determining costs and benefits to society (welfare) 25

26 Network externalities Study the effects: bandwagon effect study guide snob effect guided by 26

27 CHAPTER 6 OUTLINE 6.1 The Technology of Production 6.2 Production with One Variable Input (Labor) 6.3 Production with Two Variable Inputs 6.4 Returns to Scale 27

28 Production The theory of the firm describes how a firm makes costminimizing production decisions and how the firm s resulting cost varies with its output. The Production Decisions of a Firm The production decisions of firms are analogous to the purchasing decisions of consumers, and can likewise be understood in three steps: 1. Production Technology (like ICs) 2. Cost Constraints (like BL) 3. Input Choices ( like consumer equilibrium) 28

29 6.1 THE TECHNOLOGY OF PRODUCTION factors of production Inputs into the production process (e.g., labor, capital, and materials). The Production Function Remember the following: Inputs and outputs are flows. q F( K, L) Equation (6.1) applies: constant K & Te Short run: some inputs are fixed (K & Te) Long run: all inputs are variable (6.1) production function: Function showing the highest q that a firm can produce for every specified combination of inputs. Production functions describe what is technically feasible when the firm operates efficiently. 29

30 6.2 REVISION: PRODUCTION WITH ONE VARIABLE INPUT (LABOR) K IS CONSTANT (L is also H) TABLE 6.1 Production with One Variable Input Amount Amount Total Average Marginal of Labor (L) of Capital (K) Output (q) Product (q/l) Product ( q/ L)

31 6.2 CLASSICAL PRODUCTION WITH ONE VARIABLE INPUT (LABOR) The Slopes of the Product Curve Figure 6.1 Production with One Variable Input The total product curve in (a) shows the output produced for different amounts of labor input. The average and marginal products in (b) DERIVED FROM (a). Slope of function is maximum at B (turning pt of MP) AP is maximum, when MP=AP MR=0 where function is flat 31

32 6.2 PRODUCTION WITH ONE VARIABLE INPUT (LABOR) The Law of Diminishing Marginal Returns law of diminishing marginal returns Figure 6.2 The Effect of Te. Improvement Labor productivity (output per unit of labor) can increase if there are new Te Shape of function shows increasing returns then decreasing returns, then no returns as L increase This is different to productivity increase because of Te (upward shift) Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease. 32

33 6.3 LR: PRODUCTION WITH TWO VARIABLE INPUTS Isoquants TABLE 6.4 Production with Two Variable Inputs LABOR INPUT Capital Input isoquant Curve showing all possible combinations of inputs that yield the same output. (similar to ICs) 33

34 6.3 PRODUCTION WITH TWO VARIABLE INPUTS Isoquants isoquant map Graph combining a number of isoquants, (from a production function). Figure 6.4 Production with Two Variable Inputs isoquant map, describes the firm s production function. Diminishing Marginal Returns Holding the amount of K say 3, (pt A) we can see that each additional unit of L generates less & less output. (55;25;15) Exercise: How can you show Diminishing Marginal returns by distance of isoquants 34

35 6.3 PRODUCTION WITH TWO VARIABLE INPUTS Substitution Among Inputs marginal rate of technical substitution (MRTS) Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant. This is similar to MRS, Explain MRTS = ΔK/ΔL (for a fixed q) Marginal Rate of Technical Substitution MRTS = the ability of the firm to replace capital with labor while maintaining the same level of output. On isoquant q 2, the MRTS falls from 2 to 1 to 2/3 to 1/3. So marginal returns from L decreases as one moves down isoquant, what about marginal return from K? What about total output? (6.2) (MP )/(MP ) ( K/ L) MRTS L K 35

36 MRTS MPL/MPK = -dk/dl = MRTS Similar to MUF/MUC = - dc/df = MRS Exercise: If inputs are substitutes: what do isoquants look like? If inputs are complements: what do isoquants look like? 36

37 6.4 RETURNS TO SCALE: We already drew D.R.T. (sld. 34)***** Describing Returns to Scale Figure 6.9 Returns to Scale constant returns to scale as shown by a movement along line 0A in part (a), the isoquants are equally spaced as output increases proportionally. when there are increasing returns to scale as shown in (b), the isoquants move closer together as inputs are increased along the line. 37

38 Production Costs - constraints Now that we have dealt with isoquants (similar to ICs) We now focus on costs (similar to BL income) You must see the parallels We also look at costs in SR and LR Economies of scale, etc. 38

39 7.1 REVISION: WHICH COSTS MATTER? Fixed Costs and Variable Costs total cost (TC or C) Total economic cost of production, consisting of FC & VC. fixed cost (FC) does not vary with output & that can be eliminated only by shutting down. variable cost (VC) as output varies. Cost that varies In the SR most costs are fixed & in LR most costs are variable rent & wages must be paid! Sunk costs can never be recovered 39

40 REVISION average total cost (ATC or just AC) Firm s total cost divided by q. average fixed cost (AFC) Fixed cost divided by q average variable cost (AVC) Variable cost divided by q. 40

41 7.2 REVISION: COST IN THE SHORT RUN The Shapes of the Cost Curves Figure 7.1 Cost Curves for a Firm In (a) total cost TC is the vertical sum of fixed cost FC and variable cost VC. In (b) ATC is the sum of AVC and AFC. MC crosses the average variable cost and average total cost curves at their minimum points. 41

42 7.3 NOW COST IN THE LONG RUN- K is flexible! NB The User Cost of Capital user cost of capital Annual cost of owning & using K, equal to economic depreciation plus forgone interest. (if it was invested in some bank) 42

43 7.3 COST IN THE LONG RUN The Cost-Minimizing Input Choice We now turn to a problem faced by firms: how to select inputs to produce a given output at minimum cost. For simplicity, we work with costs of K & L The Price of K The price of capital is its user cost, given by r = Depreciation rate + Interest rate. The Rental Rate of Capital rental rate Cost per year of renting one unit of capital. If the K market is competitive. The competitive return is the user cost of capital. So cost of K is r & cost of L is w 43

44 7.3 COST IN THE LONG RUN The Isocost Line isocost line Graph showing all possible combinations of L and K that can be purchased for a given cost. Total cost C of producing any some q = the sum of the firm s L cost (wl) + K cost rk: (7.2) If we rewrite the cost equation as an equation for a straight line, we see the slope of equation SLOPE = w/r [absolute value] Really a price ratio of L and K. Similar to slope of BL (Pf/Pc or Px/Py) 44

45 7.3 COST IN THE LONG RUN The Isocost Line with isoquant Figure 7.3 Isocost describe the combination of inputs to production that cost the same amount!!!! at A q 1 can be produced at min. cost with L 1 & K 1. This is equilibrium in the production side of economy MRTS = MPL/MPK = w/r In consumption we had MRS = MUF/MUC = Pf/Pc 45

46 7.3 Cost in long run NB If Tot Cost are the same along isocost, we can READ out Total Cost at any point along the line If we are given TC and costs of K, we can work out costs of L We can also work out the most efficient mix of inputs, given the isoquant map (tangent pt) Also given 2 isocosts & one isoquant, firm can choose 2 different efficient pts associated with the two isocosts (next slide) 46

47 7.3 COST IN THE LONG RUN Choosing Inputs Figure 7.4 When prices of either K or L change the isocost curve will change slope Then different combination K & L will be bought to produce same output (q1) Cause: COST MINIMISATION requires that MRTS=MPL/MPK=w/r 47

48 7.3 COST IN THE LONG RUN Cost Minimization with Varying Output Levels expansion or growth path Curve passing through equilibrium points The Expansion Path and Long-Run Costs To move from the expansion path to the cost curve, we follow three steps: 1. Basically work out the TC associated with each equilibrium point 2. Plot this TC against each output level Next slide 48

49 7.3 COST IN THE LONG RUN Cost Minimization with Varying Output Levels Figure 7.6 A Firm s Expansion Path and Long-Run Total Cost Curve In (b), the corresponding LR total cost curve (from the origin through points D, E, and F) measures the least cost of producing each level of output. Work out that r = 20 & w = 10 Rem: TC = rk + wl Isocost = same costs Hint: \$2000= rk 49

50 7.4 LONG-RUN VERSUS SHORT-RUN COST CURVES **** The Inflexibility of Short-Run Production: K is not variable Figure 7.7 The Inflexibility of Short-Run Production Output is initially at level q 1. In SR q can be expanded only by increasing L K is fixed at K 1. In LR, q can be expanded cheaply by increasing L & K. 50

51 End of 1 st part Now we know the relationship between TC and q in SR and LR (expansion paths) We can get ATC = TC/q And get MC = dtc/dq 51

52 7.4 LONG-RUN VERSUS SHORT-RUN COST CURVES Long-Run Average Cost The we can reproduce our familiar costs curves Where we have increasing returns to scale we also have economies of scale AC > MC Falling AC 52

53 7.4 LONG-RUN VERSUS SHORT-RUN COST CURVES Economies and Diseconomies of Scale At some point AC of production will begin to increase with output. There are three reasons for this shift: 1. In the short run, factory space and machinery may make it more difficult for workers to do their jobs effectively. 2. Managing a larger firm may become more complex 3. The advantages of buying in bulk may have disappeared 53

54 7.4 LONG-RUN VERSUS SHORT-RUN COST CURVES The Relationship Between Short-Run and Long-Run Cost The LAC is the envelope of the SAC 1, SAC 2, and SAC 3. Only at q2 we have minima of SR & LR corresponding This is because of economies/diseconomies of scale 54

55 7.5 PRODUCTION WITH TWO OUTPUTS ECONOMIES OF SCOPE JUST SO YOU KNOW Economies and Diseconomies of Scope economies of scope Cooperation among firms to produce output is > indiv. sum. diseconomies of scope Cooperating firms output is less than sum of individuals 55

56 Lets go to general equilibrium Slide 89 56

57 But the beauty of competitive markets is only ideal Lets look at Monopoly, Monopsony, Oligopolies and their inefficiencies monopoly Market with only one seller. monopsony Market with only one buyer. market power Ability of a seller or buyer to affect the price of a good. 57

58 10.1 MONOPOLY Average Revenue and Marginal Revenue marginal revenue Change in revenue resulting from a one-unit increase in output. To see the relationship among total, average, and marginal revenue, consider a firm facing the following demand curve: P = 6 Q: From the table info we can draw the AR & MR graphs TABLE 10.1 Total, Marginal, and Average Revenue (see P = AR) Total Marginal Average Price (P) Quantity (Q) Revenue (R) Revenue (MR) Revenue (AR) \$6 0 \$ \$5 \$

59 10.1 MONOPOLY Demand: P vs. Q this is same as AR vs. Q Figure 10.1 Average and marginal revenue are shown for the demand curve P = 6 Q. MR cuts x-axis into two equal parts 59

60 10.1 MONOPOLY The Monopolist s Output Decision Figure 10.2 Profit Is Maximized When MR=MC for the firm Q* is the output level at which MR = MC. & then P = AR At Q1, lower profit made, P too high for Q1 At Q2 profit is lost P too low for Q2 Proof coming 60

61 10.1 MONOPOLY The Monopolist s Output Decision- algebraic proof Profit π is the difference between revenue and cost, both of which depend on Q: As Q is increased from zero, profit will increase until it reaches a maximum (i.e., Δπ /ΔQ = 0). Then ΔR/ΔQ = MR and ΔC/ΔQ =MC Thus the profit-maximizing condition is that, or 61

62 10.2MONOPOLY POWER ***** Figure 10.7 The Demand for Toothbrushes For as long as a firm s P is above MC, it has some monopoly power This is represented by its sloping Demand The steeper the demand, the more power as P>>MC 62

63 10.3 SOURCES OF MONOPOLY POWER Three factors determine a firm s elasticity of demand. 1. The elasticity of market demand. Determines how far P can be set above MC 2. The number of firms in the market. If there are many firms, each has limited power. Barriers to entry gives resident firms power 3. The interaction among firms. Collusion creates more power 63

64 10.4 THE SOCIAL COSTS OF MONOPOLY POWER Figure Deadweight Loss from Monopoly Power Pc is competitive Pm is monopoly Moving from Pc to Pm consumers lose A + B surplus, producer gains A but lose C. So B + C surplus go into waste Rent seeking has similar effects 64

65 10.5 MONOPSONY- focus on buyer power oligopsony Market with only a few buyers. monopsony power price of a good. Buyer s ability to affect the marginal value Additional benefit derived from purchasing one more unit of a good. (~ MB) marginal expenditure Additional cost of buying one more unit of a good. (~ MC) average expenditure good. (~ AC) Price paid per unit of a 65

66 CHAPTER 11 Price discrimination 11.1 Aim of monopolists is to capture more of and more of Consumer Surplus 11.2 To do this they can charge different prices to markets with different demand (Price Discrimination) 66

67 11.1 CAPTURING CONSUMER SURPLUS Figure 11.1 Capturing Consumer Surplus If a monopolist can charge only one price for all customers, that price will be P* and the quantity produced will be Q*. Ideally, the firm would like capture all consumer surplus in A, by charging higher price to consumers WTP above P*. The firm would also like to sell to consumers willing to pay prices lower than P*, and capture Triangle B. price discrimination Practice of charging different prices to different consumer markets 67

68 11.2 PRICE DISCRIMINATION First-Degree Price Discrimination Figure 11.2 reservation price good. Max P a customer is WTP for a first-degree price discrimination Practice of charging each customer her reservation P. Additional Profit from Perfect First-Degree Price Discrimination Because the firm charges each consumer her reservation P, it is profitable to expand output to Q** at Pc. When only a single price, P*, is charged, the firm s variable profit is the yellow area between the MR and MC curves. With perfect price discrimination, this profit expands by the area between AR (demand) and MC (additional blue) 68

69 11.2 PRICE DISCRIMINATION First-Degree Price Discrimination Perfect Price Discrimination Additional profit now comes from difference between AR (demand) and MC. Imperfect Price Discrimination Figure 11.3 First-Degree Price Discrimination in Practice Firms usually don t know the reservation price of each & every consumer, but sometimes reservation prices can be roughly identified. And we get imperfect price discrimination: Geography, age, occupation, etc Airlines, movie tickets, etc Study other discriminations, eg based 69

70 CHAPTER 12: Monopolistic competition & oligopoly 1.Monopolistic Competition 12.2 Oligopoly 12.3 Quantity & Price Competition 12.4 Competition versus Collusion: 70

71 Monopolistic Competition and Oligopoly monopolistic competition Market in which firms can enter freely, each producing its own brand of a differentiated product. (demand slope is? oligopoly Market in which only a few firms compete with one another, entry by new firms is impeded. (demand curve is?) cartel Market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits. 71

72 12.1 MONOPOLISTIC COMPETITION A monopolistically competitive market has two key characteristics: 1. Firms compete by selling differentiated products that are highly substitutable for one another but not perfect substitutes. 2. There is free entry and exit: it is relatively easy for new firms to enter and for old to leave the market 72

73 12.1 MONOPOLISTIC COMPETITION Equilibrium in the Short Run and the Long Run Figure 12.1 Because the firm is the only producer of its brand, it faces a downward-sloping demand curve. Price exceeds MC and the firm has some monopoly power. In the SR, P > AC, firm earns economic profits. In the LR, P = AC; Only normal profits 73

74 12.1 MONOPOLISTIC COMPETITION Monopolistic Competition vs. Competition & Efficiency Figure 12.2 (continued) Under monopolistic competition, P>MC Thus again there is a deadweight loss, yellow-area. Like we showed with monopoly. BUT product differentiation is absent in competitive markets, so that is the benefit against dead weight loss 74

75 12.2 OLIGOPOLY In oligopolistic markets, products may not even be differentiated. What matters: a few firms account for most production. In some oligopolistic markets: some or all firms earn economic profits in LR because barriers to entry Oligopoly is a prevalent market structure. Examples: include automobiles, computers, aircraft manufactures (boeing & airbus) 75

76 12.2 OLIGOPOLY- definitions **** Equilibrium in an Oligopolistic Market Market equilibrium: firms are doing the best they can and have no reason to change their price or output. Nash Equilibrium: Equilibrium in oligopoly markets means that each firm will want to do the best it can given what its competitors are doing Following are illustrations of Cournot (output), Bertrand (price) and Stackelberg (first movers) models 76

77 Cournot model (output) Assumptions: 2 firms, homogenous good Both know mkt demand curve Must decide how much to produce (simultaneously!!!) P will depend on mkt Q Each firm treats competitor s q as fixed then decides on its own If firm thinks competitor will product q=0, it produces Q at MR=MC on market Demand curve Otherwise: Firms 1 s Profit-max q decreases according to other player s q (see q vs. Q) 77

78 12.2 OLIGOPOLY The Cournot Model Figure 12.3 Firm 1 s Output Decision 1) If Firm thinks Firm 2 will produce nothing, its demand curve is D 1 (0), the market demand. The corresponding MR 1 (0), intersects Firm 1 s marginal cost curve MC 1 at an output of 50 units. 2) If Firm 1 thinks that Firm 2 will produce 50 units, its demand curve, D 1 (50), is shifted by 50 units inward. Profit maximization now implies an output of 25 units. 3) If Firm 1 thinks that Firm 2 will produce 75 units, Firm 1 will produce only 12.5 units. From these hypothetical Q results we draw the reaction curve of the firms 78

79 12.2 The Cournot Model Figure 12.4 OLIGOPOLY reaction curve Relationship between a firm s profit-maximizing output and the amount it thinks its competitor will produce. Reaction Curves and Cournot Equilibrium Firm 1 s reaction curve comes from previous slide Same applies to Firm 2. And get it s reaction curve Where the 2 curves collide we have Cournot Equilibrium Quantities associated with own price & revenues That s the Q we want to calculate

80 Cournot model (output) NB! Note criticism of Cournot Model: Mute about adjustment process to equilibrium Assumes competitor s Q stays fixed Compare: cournot equilibrium VS. collusion (cooperation) equilibrium outcomes Example Assume: MC1 = MC2 = 0 Given: Demand curve P = 30 - Q...(1) & Q = Q1 + Q2...(2) Determine reaction curves Firm 1 & 2 to solve for Q equilibrium Firm 1: To max profit : MR = MC & TR1 = P. Q1...(3) Subst (1) into (3) : TR1 = (30-Q). Q1 = 30Q1 - QQ1 Subst (2) for Q = 30Q1 - [(Q1+ Q2) Q1] = 30 Q1- Q1² - Q2Q1 Also remember :MR is a gradient of TR: i.e. MR1 = dtr1/dq1 = 30 2Q1 Q2 (profit max: MR1 = MC1 = 0 (assumed) 30 2Q1-Q2 = 0 i.e. Q1 = 15-1/2 Q2 (Reaction curve for Firm 1)...(4) Using same steps find Firm 2 reaction curve: Q2 = 15-1/2 Q1...(5) 80

81 Cournot model (output) To find cournot equilibrium Q solve reaction curves: Subs (5) into (4) Q1 = 15 ½ (15 - ½ Q1) Q1 = 15-15/2 + 1/4 Q1 Q1 ¼Q1 = 7½ ¾ Q1 = 7½ ( i.e. Q1 = 10) Now sub Q1 = 10 into equation (5, prev slide) to find Q2=10 This is the Cournot Equilibrium in fig 12.5 So: Q (mkt) = Q1 + Q2 = = 20 And using demand curve: P = = 10 TR1 = Q1 * P = 10 * 10 = R100 = TR2 81

82 (keep fig 12.5 open, pg454) What are the outcomes if they collude? They work as ONE monopoly i.e. restriction of Q (mkt) for higher P Again: Same mkt demand: P = 30 Q... (6) MR= MC = 0 (prof-max) TR = P.Q (for the 2 firms) Subs (6): TR = (30 Q) Q = 30Q - Q² MR = dtr/dq = 30 2Q (MR=MC=0) 30-2Q = 0 therefore Q = 15 Market P: P = = 15 Divide total Q into 2 for the firms (Q1 = Q2 = 7½) TR1 = Q1*P = 7½ * 15 = R112.5 TR2 = Q2* P = R112.5 also Conclusion: Cournot TR 1 & 2 < Collusion TR 1 & 2 R100 < R112.5 Collusion pays more than cournot equilibrium!!! 82

83 12.2 The Linear Demand Curve An Example Cournot vs. collusion vs competition Figure 12.5 Duopoly Example Collusion has more profits With reduced output and higher prices Cournot has less profits with higher output and lower prices Competition has no economic profits with P = MC

84 Bertrand Model (price) Compare price competition vs. price collusion Assumptions: Homogenous product Decision made simultaneously Assume MC1= MC2 = 3 Same demand curve: P = 30 Q Q = Q1 + Q2 If you charge a price higher than MC in competition, you lose all market! So at Nash Equilibrium P must be 3 (=MC) Then: 3 = P = 30 Q So: Q = 27 i.e. Q1 = 13½ = Q2 Remember: profit= TR TC & TR = P. Q and TC = MC.Q (with MC = P =3) So: profit = (3 x 27) (3 x 27) = zero In Bertrand model equilibrium, zero profits are made!!!!! Unlike in quantity cournot equilibrium, in bertrand equilibrium, profit = 0 84

85 Bertrand Model (price) Exercise: Apply the same data to a Cournot model P= 30-Q and MC= 3 Do it now, last exercise! (time check) 85

86 working In Cournot model you must find the following: From: P= 30-Q & Q = Q1+Q2 TR1 = PxQ1 = (30-Q) xq1 = 30Q1-QQ1 = 30Q1 [(Q1+Q2) Q1] = 30Q1-[Q1sq +Q1Q2] MR1 = 30 2Q1 Q2 = 3 (= MC) Q1 = 9 = Q2 [total Q = 18] Therefore: TC1 = MC1 x Q1 = 3x 9 =27 But because Q = 18 so P = = 12 Hence: TR1 = Q1 x P = 9 x 12 = 108 So profit= TR1 TC1 = = 81 (not zero) When firms adjust quantity they make profits! 86

87 Bertrand Model (price) last slide with exam emphasis Criticism of Bertrand: If firms produce homogeneous goods, they d most likely compete by Q, not P Even if they set same P, how is market share divided? Model is NB in showing us what kind of outcome is reached depending on chosen variable of competition 87

88 CHAPTER 16: General Equilibrium & Economic efficiency 16.1 General Equilibrium Analysis 16.2 Efficiency in consumption or exchange 16.4 Efficiency in Production Study the rest according to study guide 88

89 16.1 GENERAL EQUILIBRIUM ANALYSIS partial equilibrium analysis Determination of equilibrium prices and quantities in a market independent of effects from other markets. general equilibrium analysis Simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account. We put consumption & production together! 89

90 16.2 EFFICIENCY IN EXCHANGE exchange economy Market in which two or more consumers trade two goods among themselves. efficient (Pareto ) allocation Allocation of goods in which no one can be made better off unless someone else is made worse off. Edgeworth box Diagram showing all possible allocations of the 2 goods between 2 consumers and showing their level of utility In production: 2 inputs used to produce 2 products by 2 producers 2x2x2 economy 90

91 16.2 EFFICIENCY IN EXCHANGE The Contract Curve Figure 16.5 James & Karen can be improved by trade They could start off at H and bargain, if K is clever/ more persuasive they d end up at F otherwise at G The pts of tangency between ICs are pareto efficient The pts can joined by a contract curve So, moving ALONG the curve would lead to pareto inefficiency H Why? 91

92 16.2 EFFICIENCY IN EXCHANGE Consumer Equilibrium in a Competitive Market is Efficient Figure 16.6 A competitive market ensures that the consumers reach the contract curve They don t have to bargain & trade each time they meet The prices of the goods determine the terms of exchange (LINE PP ) The line will move consumption from A to C Competitive trade leads to economic efficiency They are both improved not like bargaining 92

93 16.2 EFFICIENCY IN EXCHANGE ***** The Economic Efficiency of Competitive Markets Summary of consumer market s competitive equilibrium: 1. Because the ICs are tangent, all MRS between consumers are equal. 2. Because each IC is tangent to the Price Line, each consumer s MRS of clothing for food is equal to Price Ration This is consumption equilibrium (16.1) 93

94 16.4 EFFICIENCY IN PRODUCTION Input Efficiency technical efficiency Condition under which firms combine inputs to produce output as inexpensively as possible. If producers of food and clothing minimize production costs, they will use L and K so that: But we also showed that MP L / MP K = MRTS LK So: MRTS LK (clothes) = w/r = MRTS LK (food) 94

95 Exercise Draw an edgeworth box where you illustrate 2 producers (A and B), who compete for the use of 2 limited inputs (K and L) to produce 2 outputs (salt and sugar) 95

96 Virtues of competitive market A competitive L & K market (w/r) will also lead the 2 from J to c L Sugar (isoquants) Hullets B K H J C M N K Cerebos A L Salt (isoquants) 96

97 16.4 EFFICIENCY IN PRODUCTION TOP LEVEL EFFICIENCY We can flip the production CC into the PPF, with slope MRT The production possibilities frontier is concave because its slope (the marginal rate of transformation) increases as the level of production of food increases. (showing diminishing returns) Opportunity cost increases!!!! 97

98 16.4 EFFICIENCY IN PRODUCTION When consumption & production markets meet An economy produces output efficiently, if for each consumer, MRS= MRT The efficient combination of outputs is produced when MRT equal Figure 16.9 the consumer s MRS general equilibrium analysis 98

99 16.4 EFFICIENCY IN PRODUCTION - PROOF Efficiency in Output Markets When output markets are perfectly competitive, consumers allocate their budgets so that: At the same time, each profit-maximizing (efficient) firm will produce up to the point at which price is equal to marginal cost: and Because the MRT is equal to the ratio of the marginal costs of production, it follows: (16.5) 99

100 16.4 EFFICIENCY IN PRODUCTION Go to slide 57 Efficiency in Output Markets Figure If initial prices were P1f/P1c Producers want to produce at A, but consumers want to be at B So there excess demand for F (F2>F1) & excess supply for C (C1>C2) Prices will adjust until new ratio of P*f/P*c Where MRS = MRT (efficiency) 100

101 We cant cover all topics, make sure you at least study these in exam preps Chapters Chapter 3 Chapter 4 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 16 Content Consumer theory Very NB Individual and market demand Very NB Production Very NB Cost of production Very NB Profit max Very NB Analysis of competitive markets Very NB Monopoly & its social costs Very NB Pricing Very NB Oligopolies: Very NB General equilibrium theory: Very NB 101

### 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

### 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

### 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

### 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

### 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

### The Behavior of Firms

Chapter 5 The Behavior of Firms This chapter focuses on how producers make decisions regarding supply. Individuals demand goods and services. Firms supply goods and services. An important assumption is

### 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

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

### 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

### 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

### Graded exercise questions. Level (I, ii, iii)

Graded exercise questions Level (I, ii, iii) 248 MICRO ECONOMICS LEVEL 1 GRADED EXERCISE QUESTIONS (LEVEL I, II, III) INTRODUCTION 1. Why does an economic problem arise? 2. What is economics about? 3.

### 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

### Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

### Unit 5. Producer theory: revenues and costs

Unit 5. Producer theory: revenues and costs Learning objectives to understand the concept of the short-run production function, describing the relationship between the quantity of inputs and the quantity

### Eco 300 Intermediate Micro

Eco 300 Intermediate Micro Instructor: Amalia Jerison Office Hours: T 12:00-1:00, Th 12:00-1:00, and by appointment BA 127A, aj4575@albany.edu A. Jerison (BA 127A) Eco 300 Spring 2010 1 / 66 Page 261,

### 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

### 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

### 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

### 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

### Econ Microeconomic Analysis and Policy

ECON 500 Microeconomic Theory Econ 500 - Microeconomic Analysis and Policy Monopoly Monopoly A monopoly is a single firm that serves an entire market and faces the market demand curve for its output. Unlike

### Perfect competition: occurs when none of the individual market participants (ie buyers or sellers) can influence the price of the product.

Perfect Competition In this section of work and the next one we derive the equilibrium positions of firms in order to determine whether or not it is profitable for a firm to produce and, if so, what quantities

### ECON 251 Practice Exam 2 Questions from Fall 2013 Exams

ECON 251 Practice Exam 2 Questions from Exams Gordon spends all his income on spatulas and mixing bowls. Spatulas cost \$4 and mixing bowls cost \$12. Gordon has \$60 of income and considers both spatulas

### 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

### ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION. 4. Is free medicine given to patients in Govt. Hospital a scarce commodity?

ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION 1. What is the Slope of PPC? What does it show? 2. When can PPC be a straight line? 3. Do all attainable combination of two goods that

### 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

### 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

### FINALTERM EXAMINATION FALL 2006

FINALTERM EXAMINATION FALL 2006 QUESTION NO: 1 (MARKS: 1) - PLEASE CHOOSE ONE Compared to the equilibrium price and quantity sold in a competitive market, a monopolist Will charge a price and sell a quantity.

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

### Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good.

McPeak Lecture 10 PAI 723 The competitive model. Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good. As we derived a demand curve for an individual

### 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,

### Microeconomics (Oligopoly & Game, Ch 12)

Microeconomics (Oligopoly & Game, Ch 12) Lecture 17-18, (Minor 2 coverage until Lecture 18) Mar 16 & 20, 2017 CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4

### 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:

### 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

### ECON 311 MICROECONOMICS THEORY I

ECON 311 MICROECONOMICS THEORY I Profit Maximisation & Perfect Competition (Short-Run) Dr. F. Kwame Agyire-Tettey Department of Economics Contact Information: fagyire-tettey@ug.edu.gh Session Overview

### 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

### Contents. Introduction

Contents Chapter 1 Introduction Introduction to Economics... 1 Meaning of Economics... 1 Definitions of Economics... 2 Introduction to Economic Theory... 3 The Structure of Theories... 5 Importance of

### 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

### Practice Final Exam. Write an expression for each of the following cost concepts. [each 5 points]

Practice Final Exam Total : 200 points Exam time: 7:00 9:00. You have 6 questions in 3 pages. Please make your diagrams clear and label it. Good Luck! 1. Amy is currently spending her income to maximize

### 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

### Solutions to Final Exam

Solutions to Final Exam AEC 504 - Summer 2007 Fundamentals of Economics c 2007 Alexander Barinov 1 Veni, vidi, vici (30 points) Two firms with constant marginal costs serve two markets for two different

### Costs: Introduction. Costs 26/09/2017. Managerial Problem. Solution Approach. Take-away

Costs Costs: Introduction Managerial Problem Technology choice at home versus abroad: In western countries, firms use relatively capital-intensive technology. Will that same technology be cost minimizing

### 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.

### Chapter 8 Profit Maximization and Competitive Supply. Read Pindyck and Rubinfeld (2013), Chapter 8

Chapter 8 Profit Maximization and Competitive Supply Read Pindyck and Rubinfeld (2013), Chapter 8 1/29/2017 CHAPTER 8 OUTLINE 8.1 Perfectly Competitive Market 8.2 Profit Maximization 8.3 Marginal Revenue,

### Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 2

Economics 2 Spring 2016 rofessor Christina Romer rofessor David Romer SUGGESTED ANSWERS TO ROBLEM SET 2 1.a. Recall that the price elasticity of supply is the percentage change in quantity supplied divided

### Faculty of Economics, Thammasat University EE 211 Principles of Microeconomics (3 credits)

Faculty of Economics, Thammasat University EE 211 Principles of Microeconomics (3 credits) Semester 1/2014 ----------------------------------------------------------------------------------------------

### Math Recitation #5 October 20, 2009

Math Recitation #5 October 20, 2009 I. Production functions II. Isoquants and isocost lines III. Increasing, decreasing and constant returns to scale IV. Costs (average, marginal, total) V. Perfect competition

### Faculty of Economics, Thammasat University EE 211 Principles of Microeconomics (3 credits)

Lecture Time: Lecture Venue: Instructor: Faculty of Economics, Thammasat University EE 211 Principles of Microeconomics (3 credits) Semester 1/2015 ----------------------------------------------------------------------------------------------

### The Analysis of Competitive Markets

C H A P T E R 12 The Analysis of Competitive Markets Prepared by: Fernando & Yvonn Quijano CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition versus

### Exam 1. Pizzas. (per day) Figure 1

ECONOMICS 10-008 Dr. John Stewart Sept. 30, 2003 Exam 1 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet using a No.2 pencil. Note a)=1, b)=2

### 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

### Chapter 11. Microeconomics. Technology, Production, and Costs. Modified by: Yun Wang Florida International University Spring 2018

Microeconomics Modified by: Yun Wang Florida International University Spring 2018 1 Chapter 11 Technology, Production, and Costs Chapter Outline 11.1 Technology: An Economic Definition 11.2 The Short Run

### 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

### 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

### Econ 001: Midterm 2 (Dr. Stein) Answer Key Nov 13, 2007

Instructions: Econ 001: Midterm 2 (Dr. Stein) Answer Key Nov 13, 2007 This is a 60-minute examination. Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and label

### 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

### Market structures. Why Monopolies Arise. Why Monopolies Arise. Market power. Monopoly. Monopoly resources

Market structures Why Monopolies Arise Market power Alters the relationship between a firm s costs and the selling price Charges a price that exceeds marginal cost A high price reduces the quantity purchased

### 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

### ECON 251 Exam 2 Pink. Fall 2012

ECON 251 Exam 2 Pink Use the table below to answer the following four questions The table below shows Harry s total utility from consuming beer and wine. The price of beer is \$2 per bottle. The price of

### Monopoly. Chapter 15

Monopoly Chapter 15 Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly u A firm is considered a monopoly if... it is the sole seller of its product. its product

### Introduction. Consumer Choice 20/09/2017

Consumer Choice Introduction Managerial Problem Paying employees to relocate: when Google wants to transfer an employee from its Seattle office to its London branch, it has to decide how much compensation

### Tutor2u Economics Essay Plans Summer 2002

Microeconomics Revision Essay (7) Perfect Competition and Monopoly (a) Explain why perfect competition might be expected to result in an allocation of resources which is both productively and allocatively

### 2007 Thomson South-Western

WHAT IS A COMPETITIVE MARKET? A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker. Buyers and sellers must accept the price determined

What is Economics? Economics is the study of how we the people engage ourselves in production, distribution and consumption of goods and services in a society. Normative economics: Normative economics

### 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

### Do not open this exam until told to do so. Solution

Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Fall 003 Final (Version): Intermediate Microeconomics (ECON30) Solution Final (Version

### ECO401 Short Notes Lectures 1 ~ 22 Objective Type By

ECO401 Short Notes Lectures 1 ~ 22 Objective Type By http://vustudents.ning.com What is Economics? Economics is the study of how we the people engage ourselves in production, distribution and consumption

### Econ 410: Micro Theory Monopoly, Monopsony, and Monopolistic Competition

Econ 410: Micro Theory Monopoly, Monopsony, and Monopolistic Competition Wednesday, November 28 th, 2007 Announcement Bennett Harman, Deputy Assistant U.S. Trade Representative, is speaking on campus tomorrow.

### 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

### 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

### Slides and Images, Worth Publishers Inc. 8-1

Perfect Competition Michael J. Murray Slides and Images, Worth Publishers Inc. 8-1 Market Structure Analysis By observing a few industry characteristics, we can predict pricing and output behavior of the

### ECN 3103 INDUSTRIAL ORGANISATION

ECN 3103 INDUSTRIAL ORGANISATION 5. Game Theory Mr. Sydney Armstrong Lecturer 1 The University of Guyana 1 Semester 1, 2016 OUR PLAN Analyze Strategic price and Quantity Competition (Noncooperative Oligopolies)

### T ( P ( ) * FA F D A S

Supply and Demand Basics Law of Supply Law of Demand Equilibrium Key Topics Demand Supply Equilibrium (shortage/surplus) Floor/Ceiling Elasticity Indifference Curves Utility Physical Product (Supply Side)

### Monopolistic Competition

Monopolistic Competition CHAPTER16 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Describe and identify monopolistic competition. 2 Explain how

### Jason Welker 2009 Zurich International School

1 AP Microeconomics: Exam Study Guide Format: 60 MC questions worth 66.67% of total. 70 minutes to answer 20 questions are definitional Example: The unemployment rate measures the percentage of (A) people

### I enjoy teaching this class. Good luck and have a nice Holiday!!

ECON 202-501 Fall 2008 Xiaoyong Cao Final Exam Form A Instructions: The exam consists of 2 parts. Part I has 35 multiple choice problems. You need to fill the answers in the table given in Part II of the

### Notes on Chapter 10 OUTPUT AND COSTS

Notes on Chapter 10 OUTPUT AND COSTS PRODUCTION TIMEFRAME There are many decisions made by the firm. Some decisions are major decisions that are hard to reverse without a big loss while other decisions

### VIII 1 TOPIC VIII: MONOPOLY AND OTHER INDUSTRY STRUCTURES. I. Monopoly - Single Firm With No Threat of Close Competition. Other Industry Structures

TOPIC VIII: MONOPOLY AND OTHER INDUSTRY STRUCTURES I. Monopoly - Single Firm With No Threat of Close Competition II. Other Industry Structures CONCEPTS AND PRINCIPLES MONOPOLY We now consider the opposite

### 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

### 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

### 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

### Multiple choice questions 1-60 ( 1.5 points each)

NAME: STUDENT ID: Final Exam ECON 101, Section 2 summer 2004 Ying Gao Instructions Please read carefully! 1. Print your name and student ID number at the top of this cover sheet. 2. Check that your exam

### 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

### Chapter Summary and Learning Objectives

CHAPTER 11 Firms in Perfectly Competitive Markets Chapter Summary and Learning Objectives 11.1 Perfectly Competitive Markets (pages 369 371) Explain what a perfectly competitive market is and why a perfect

### 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

### 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

### 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

### 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):

### Pricing with Market Power

Chapter 7 Pricing with Market Power 7.1 Motives and objectives Broadly The model of perfect competition is extreme (and hence wonderfully powerful and simple) because of its assumption that each firm believes

### Econ 2113: Principles of Microeconomics. Spring 2009 ECU

Econ 2113: Principles of Microeconomics Spring 2009 ECU Chapter 12 Monopoly Market Power Market power is the ability to influence the market, and in particular the market price, by influencing the total

### 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

### Monopoly CHAPTER 15. Henry Demarest Lloyd. Monopoly is business at the end of its journey. Monopoly 15. McGraw-Hill/Irwin

CHAPTER 15 Monopoly Monopoly is business at the end of its journey. Henry Demarest Lloyd McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. A Monopolistic Market A

### A few firms Imperfect Competition Oligopoly. Figure 8.1: Market structures

8.1 Setup Monopoly is a single firm producing a particular commodity. It can affect the market by changing the quantity; via the (inverse) demand function p (q). The tradeoff: either sell a lot cheaply,

### CHAPTER 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

CHAPTER 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets CHAPTER OUTLINE Perfect competition Demand at the market and firm levels Short-run output decisions Long-run decisions

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

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,

### Total Costs. TC = TFC + TVC TFC = Fixed Costs. TVC = Variable Costs. Constant costs paid regardless of production

AP Microeconomics Total Costs TC = TFC + TVC TFC = Fixed Costs Constant costs paid regardless of production TVC = Variable Costs Costs that vary as production is changed Cost TFC TVC TFC Output Profit

### 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

### Perfect Competition CHAPTER 14. Alfred P. Sloan. There s no resting place for an enterprise in a competitive economy. Perfect Competition 14

CHATER 14 erfect Competition There s no resting place for an enterprise in a competitive economy. Alfred. Sloan McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

### Lecture 22. Oligopoly & Monopolistic Competition

Lecture 22. Oligopoly & Monopolistic Competition Course Evaluations on Thursday: Be sure to bring laptop, smartphone, or tablet with browser, so that you can complete your evaluation in class. Oligopoly

### EconS Perfect Competition and Monopoly

EconS 425 - Perfect Competition and Monopoly Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 47 Introduction

### 29/02/2016. Market structure II- Other types of imperfect competition. What Is Monopolistic Competition? OTHER TYPES OF IMPERFECT COMPETITION

Market structure II- Other types of imperfect competition OTHER TYPES OF IMPERFECT COMPETITION Characteristics of Monopolistic Competition Monopolistic competition is a market structure in which many firms