Fourth Exam Study Guide
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This 9 page Study Guide was uploaded by Mike Meng on Saturday April 18, 2015. The Study Guide belongs to ECON 142 at Kansas taught by Dr. Brian Staihr in Spring2015. Since its upload, it has received 139 views.
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Date Created: 04/18/15
First Lecture After The 3rd Exam 04182015 I O lllllllllllllllll llll D D D D D t Perfect competition For a perfect competition rm who has no control over price To determine the output level to make the most pro t When the marginal cost is bigger than the price the pro t starts to go down We look for the point where the marginal cost is smaller and closest o the price which is the point where the rm is making the most pro t Or if the company is losing pro t the lost comes smallest when the utput level is closest to MC For this rm price marginal revenue P396 Marginal revenue the change in total revenuechange in Quantity The change in total revenue by selling one more good In the case of perfect competition P never change so P MR Where the P come close to the MC P397 In the table and the intersection of two curves in the graph Pro t per unit P ATC the vertical distance between the ntersection between P curve and MC curve and the ATC curve Total unit Pro t per unit number of pro ts The area of the rectangle B When a rm is losing pro t due to market price decreasing P401 B When P is above AVC the rm keeps producing B When P drops down AVC the rm should stop the point intersects by P and AVC is called the shut down point D D D D D The MC curve is the competitive rm s supply curve P405 The shift down of the MC is a right shift of the supply curve In the perfect competition market if there is a pro t more and more producers will enter the market and compete the pro t away the supply curve shift right the market price decreases until when P ATC MC no pro t per unit then no pro t D D Zero pro t when pro t is quot0 D In economics we assume the cost calculations contain a reasonable pro t D Zero pro ts mean zero excess pro ts the rm can still run with out those excess pro ts B When P ATC MC P401 D D D D D D equilibrium means rm is breaking even earning no pro ts D D In a perfect competition market P MC gt ATC make most pro t P gt ATC make pro t P ATC break even no pro t P lt ATC the loss increase P lt AVC stop producing Market and competition Get the government out of the marked Adam Smith There are reason to have the government involved Normal marketexcept perfect competition In the table P varies by a and MR will vary by 2a The Marginal Revenue will go down twice as many as the price Marginal Revenue curve starts at the same point with and is always below the demand curve Anything changes the demand curve will change the MR curveP428 D P439 When MR MC the pro ts are maximized D which is the same concept as when P MC in the perfect competitive market There is no MR in the perfect competitive market because the price stays the same D on the graph the price when MR MC is the price a rm should charge when a rm is making the most pro t The quantity when selling at this price is the level of output the rm should produce to make the most pro ts lllllllllllllllllllllllllll D the pro t per unit is still P ATC D Pro ts pro t per unit Q U Firms don t necessary make the most pro ts when the pro t per unit is biggest Firms should maximize their pro ts but not pro t per unit D D D Chapter 13 D Monopolistic Competition D Many rms D Selling products that are substitutes for each other H Easy to enter this market as a seller D Example fast food D B When there is another rm enter the monopolistic competitive market the demand curve of the old rm gets atter and more to the leftshift down D more substitute causes the demand more elastic atter the demand curve will get D D In the short run PCMC earn pro ts pro ts attracts new rms D as rms enter P goes down then PATCMCMR in PC PATCgtMCMR in MC The rms break even earning no pro t P433 graph D in monopolistic competition when P ATC ATC is not minimized there is some inef ciency it s called excess capacity P443 D Ef ciency of MCM Not ef cient Excess capacity P gt MC The more similar products are among rms the more close P is to llllll D Different rm wants to make their product different and better to increase their price for a reason E Market power The ability to change a P gt MC is known as market power Market power is inversely related to elasticity When the products get more inelastic the demand curve of the product get atter The rm produces inelastic product has less market power D Oligopoly Small number of rms 2 12 dif cult to enter the market similar or differentiated product interdependence rms in this market makes their decision base on what other rms will do like price or product llllllllll So few rms Barriers to entry economies of scale P461 ega barriers like patents P462 control over key input to production P462 Game Theory Model the behavior and interdependence of rms as a game Firm 1 and rm 2 make decision at the same time if they take discount on the price without knowing what s the decision of the other rm 2X2 game both rms end up better off if they believe other rm will discount then they discount But they are worse off compares to if both of them don39t discount Both rms take the risk of discounting Prisoner s Dilemma 2 bank robbers are kept apart to separate jail cells confess or nor confess both prisoner are made worse off than not confess because they can39t talk to each other The opposite of the game theory model Example hoarding drugs Nash Equilibrium A situation when a player make the best decision or choose the best strategy A game can has more than one Nash equilibrium A Nash equilibrium is the strategy makes both rms better off there is no reason for them to change strategy anymore Dominated strategy A strategy that a rm never plays It can be eliminated Dominant strategy A strategy that a rm always play Like to confess Exam 4 on next Monday Chapter 12 13 14 and part of 15 P477 493 and P498 Sequential games The game tree The branches of the game tree represent the boxes in the game box Which rm take actions rst is important which rm take actions rst is out on the left side if the game tree Depends on the matching branches and boxes in the game box we can use data from the box to nd out the payoff to solve the game tree we start from the right start to analyze the tree form the rm who didn39t move rm different rm goes rst will give a different Nash equilibrium First mover advantage Which rm have advantage to move rst it s unusual to have two rms end up having rst mover advantage normaly second moving rm will have second moving advantage Oligopoly Bertrand model Cournot model Dominant rm model Cartel model Group of rms that acts as a single rm regarding decisions on pricing and output Price collusion P469 Agreement that rms set price at a same level lllegal in the US If both rms in the oligopoly agree secretly to both charge the same high prices both rms will end up in the lower right box in the game box Then in order to make more pro ts both rms will secretly lower their price to intend to end up better of and make their competitor worse off If both rms do so they will be back to end up in the up left box Monopoly A single rm provide the typical good Not substitute Is any rm really a monopoly Only seller for a product that has no close substitutes Close enough to compete away pro ts For a monopoly the demand curve for the market for the good is the demand curve of the rm Since there is only one rm in the monopoly the pro t the rm is making will stay the same in the long run because no one is coming into the market to compete away the pro t The only rm in the market will make the best decision to maintain the highest pro ts D Barriers to entry P479 D 1economy of scale cheaper for one rm to serve a entire market than a lot of little rm D 2egal barriers like patents D 3contro over the input D D D D Welfare losses of Monopoly Inef cient create dead weight loss when government intervention happens to Monopoly P is set to equal to MC B when the rm in the monopoly makes its most pro t MC MR it creates dead weight loss D D t We are able to calculate the consumer surplus using data from the able B using P when Q 0 and P when Q is the level to produce to gure out the height and the waist is the level of output which Q To calculate the dead weight loss using the difference of P and MC to determine the ef ciency loss P492 any rm has a downward sloping undergoing an ef ciency loss Market power when demand is inelasticsteep demand curve MP is large when demand is elastic MP is small when the P a rm charging is higher than MC the rm has MP whie MP is getting larger the number of substitutes change from many to less the property of the good or service changes from luxury to necessity the elasticity of demand changes from elastic to inelastic llllllllllllllllllll Lerner Index P MCP 1elasticity Natural monopoly P498 Cheaper for one rm to serve a entire market than a lot of little rm Government steps in to regulate the price which normally is setting P MC D But for a natural monopoly of P is set to equal MC the natural monopoly is suffering losses so government set the P ATC in order to keep the natural monopoly from going out of business D llllllllll
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