Chapters 8 - 10 Study Guide
Chapters 8 - 10 Study Guide ECO 106
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This 11 page Study Guide was uploaded by Sidney Hong on Monday November 23, 2015. The Study Guide belongs to ECO 106 at Pace University taught by Cesar Castope in Fall 2015. Since its upload, it has received 53 views. For similar materials see Principles of Economics: Macroeconomics in Economcs at Pace University.
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Date Created: 11/23/15
Fall 2015 Principles of Economics Micro EC0106 CRN 72490 MondayWednesday 900 AM 1025 AM Professor Cesar Castope Course Text O39sullivan Sheffrin Perez Microeconomics Principles Applications and Tools Eighth Edition PearsonPrentice Hall 2013 ISBN0l33403 87 Chapter 8 Production Technology amp Costs Pro t 7 0 Pro t TRTC 0 Pro t Total Revenue Total Costs 0 TRPxQ 0 Total Revenue Price x Quantity 1 Accounting Pro t a Explicit costs ignoring opportunity costs b Monetary expenditure c Cost of production d Accounting 71 Total revenue explicit costs 1 Economic Pro t a Explicit and implicit costs b Implicit costs are the opportunity costs of monetary expenditure c Economic 71 Total revenue explicit costs implicit costs Accounting 71 gt Economic 71 Production Function 0 Y F k L 0 Where costs Y are made up of variable labor L and xed capital k Est TE WE TFC utput Costs Revenue Pro t Equation Pro t 7 TR TC Total Revenue TR P X Q Total Cost TC TFC TVC Average Fixed Cost TFC Q AFC Average Variable Cost TVC Q Average Total Cost TC Q Marginal Cost A TC A Q Fall 2015 Principles of Economics Micro EC0106 CRN 72490 MondayWednesday 900 AM 1025 AM Professor Cesar Castope Course Text O39sullivan Sheffrin Perez Microeconomics Principles Applications and Tools Eighth Edition PearsonPrentice Hall 2013 ISBN0l33403 87 Chapter 9 Perfect Competition Perfectly Competitive Markets U PJN Hundreds or even thousands of rms sell a homogeneous product Each rm is such a small part of the market that it takes the market price as give 0 Each rm is a price taker There are many sellers There are many buyers The product is homogeneous There are no barriers to market entry Both buyers and sellers are price takers Total Revenue Variable Cost and the Shutdown Decision The decision to operate or shut down is a shortrun decision a daytoday decision to temporarily halt production in response to market conditions Suppose our shirt factory hires workers by the day so it makes the decision at the beginning of each day operate if total revenuegtvariable cost shut down if total revenueltvariable cost ShortRun Supply Curve Prim Mgr ahi Price per min L mm I mm Ehii lsa Engiquot 39I39iiimntn Shij li ij 39 mwn ILA Firflf Supply Curryi I EH in HEW Eupp iy u Fla E LongRun Supply Curve Fl i pm 2min Mungan s um l curve 3 Hit 1 I E 2 i Shirta par mim e Fall 2015 Principles of Economics Micro EC0106 CRN 72490 MondayWednesday 900 AM 1025 AM Professor Cesar Castope Course Text O39sullivan Sheffrin Perez Microeconomics Principles Applications and Tools Eighth Edition PearsonPrentice Hall 2013 ISBN0l33403 87 Chapter 10 Monopoly Monopoly 0 One supplier and many buyers Heterogeneous good Market power Price setter Barriers to entry 0 Legal barriers patents and copyrights 0 High start up cost 0 Control over all resources 0 Large economies of Scale Production Natural Monopoly 0 Where it makes more sense for only one rm to eXist in the market 0 Lowering average cost and price 0 A market in which the economies of scale in production are so large that only a single large rm can earn a pro t Maximize Pro ts 0 P gt MR MC Examples of Monopolies o DeBeers diamonds 0 Controls 80 of the market for diamonds Market power 0 The ability of a rm to affect the price of its product Barrier to entry 0 Something that prevents rms from entering a pro table market Patent 0 The exclusive right to sell a new good for some period of time Network externalities O The value of a product to a consumer increases With the number of other consumers Who use it Price Quantity Total Revenue Marginal Revenue 33 16 O O 14 1 14 14 12 2 24 10 10 3 3O 6 8 4 32 2 6 5 30 2 4 6 24 6 Monopoly Revenue Curve 35 30 a 25 20 E 15 a P riee 16 E m 7 Tetal Revenue 3 5 iMarginal Revenue 3 i V 0 5 10 V Quantity Demanded Maximize Pro ts 0 P gt MR 0 Quantity Where MR MC 0 Pro t Q X P ATC Ceste E Revenue e quotF MR Elutput Ereuniterile ht viva emnemieeenline mule Economic Loss gt When P lt ATC Normal Pro t gt When P ATC Economic Pro t gt When P gt ATC Tetei Revenue and Marginal Revenue i u u i fliGUHE 1 u1 The ernend Eurve end the MarinerRevenue Eurve Merginei revenue eeueie the priee tr the tiret unit eei hut ie ieee then the price ter editinei unite ereireTeeeii en erieriitinei unit the tirrneutethe priee end reeeivee ieee revenue the unitethet if L um eeulie have been eeiri etthe higher priee The mer ginei revenue ie p eeitve fer the iiret iur unite en negative ter iereer euentitiee Marginal revenue new price slope of demand curve gtlt old quantity 0 The rst part of the formula is the good news the money received for the extra unit sold The second part is the bad news from selling one more unit the revenue lost by cutting the price for the original customers The revenue change equals the price change required to sell one more unit the slope of the demand curve Which is a negative number times the number of original customers Who get a price cut Deadweight Loss of a Monopoly Consumer surplus Price Deadweight loss Pml Producer surplus PC D Qm QC Quantity Price Discrimination Price discrimination39 is a pricing strategy Where identical or largely similar goods or services are transacted at different prices by the same provider in different markets consequence of market power lst Degree Price Discrimination 0 follows the definition above but is charging a different price based on the customer 2nd Degree Price Discrimination O charging a different price based on quantity sold 3rd Degree Price Discrimination O charging a different price based on location of customer segment lst Degree Price Discrimination p1 l 2 First degree price discrimination 2nd Degree Price Discrimination Price 90 80 70 60 50 40 3 07 20 10 5 Potential additionai revenues with a highv end version Mainsteam or middiecground version Midas Potentiai additional revenues with a lowvenci version 6 50 1 2 0 3 o 0 500 550 600 Quantity 3rd Degree Price Discrimination Third Degree Price Discrimination r50 p Q2 Q1 Oligopoly 0 Where there are few sellers and many buyers 0 Mix between perfect competition and monopoly 0 Formation of a cartel 0 Higher barriers to entry than perfect competition less than a monopoly 0 Patents and licenses 0 Still has limitedarket 0 Market power 0 Economies of Scale in production 0 Investment in advertising marketing and branding 0 Game Theory Tree 0 The DuopolistPrisoner s Dilemma Firm A Higher Price Firm A Lower Price Firm B Higher Price A Higher Pro ts A Higher Pro ts B Higher Pro ts B Lower Pro ts Firm B Lower Price A Lower Pro ts A Lower Pro ts B Higher Pro ts B Lower Pro ts 0 When rms form cartels and X prices they will always feel an incentive to cheat and lower prices to be more competitive and gain higher pro ts 0 Dominant strategy is to pick lower prices O Largest change to be more well off 0 Nash s equilibrium 0 Marketing strategies to combat cartels O Lowprice guarantee 0 Repetition I Picking low price next time when cheated on Grim Trigger Pricing 0 Going lower than the previous lower price when cheated on to be more competitive Tit for Tat Strategy 0 Waitingobserving for competitors pricing strategy EXAM DATES 0 Exam III will be on 1130 0 Final Exam ReView will be on 1202 0 Final Exam will be on 1216
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