ECON 201: Microeconomics, Week 11
ECON 201: Microeconomics, Week 11 Econ 201
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This 7 page Class Notes was uploaded by Jensine Bonner on Thursday April 21, 2016. The Class Notes belongs to Econ 201 at Towson University taught by Dr. Leppo II in Winter 2016. Since its upload, it has received 30 views. For similar materials see Microeconomic Principles in Economcs at Towson University.
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Date Created: 04/21/16
ECON: Microeconomics Notes taken, interpreted, and formatted by: Jensine Bonner Terms to Know: ^ (HH) - Household (BF) - Business Firm (G) – Government (D)- Demand ^ (s) - services (g) – goods (l) - labor (S) - supply (P) - price ^ (QS) - Quantity Supply (QD) – Quantity Demand (Es)- Elasticity Supply ^ (K) - Capital (Ed)- Elasticity Demand (PD)- Price Demanded (TR)- Total Revenue ^ (MC) - Marginal Cost (MP) - Marginal Principle (MB) - Marginal Benefit ^ (DWL)- Dead Weight Loss (QR)- Quantity Restriction (MRS)- Marginal Rate of Substitution ^ NEW (AVC)-Average Variable Cost ^NEW (FC)- Fixed Cost Week 8 notes have not been uploaded since that week was mostly review. Also, since there was not a great amount of material covered during week 9, this set of notes will be week 9 & 10 combined. For Week 11 there were not many notes, so similarly to last week’s notes, the notes have been combined. Skip to the very end of this document to access the notes from the week of 4/18. 4/4/16 Perfect Competition A market where there are many buyers and sellers. There will be no one person (BF) who has central control of the market Characteristics - More buyers & sellers - Free entry & exit - Homogeneous product (All of the products are essentially the same) - Perfect knowledge - No collusion - Price Takers (Solve shortage, meet demand, and solve innovative requirements) MB > MC: increase in activity MB < MC: decrease in activity MB = MC: No change, production will continue as normal Important! Price is based off of demand MB = MC MB is equivalent to MR which means that MR= MC This is the starting point. When you start reading the graph at MR=MC, you will be able to find the quantity When you are not working with a perfectly competitive market, MR=MC at the demand (Where it meets demand) 4/6/16 A BF will continue to operate even if it’s losing $$ If P> AVC: Operate, if P< AVC: Shut Down; This basically means that if the Price is greater than the Average Variable Cost that a BF will still operate, and if Price is less than the Average Variable Cost, the BF will have to shut down. If the variable cost is covered then the fixed cost can be offset Terms Shut Down Price The price at which a business firm is indifferent between operating and shutting down Sunk Cost The cost the BF’s have already paid or agreed to pay in the future which is a FC 4/7/16 Chp. 10: Monopoly: Market served by (1) BF Characteristics - Many buyers - (1) seller - Imperfect market knowledge is from the HH Reasons why monopolies arise: 1) Franchising (licensing schemes) The government picks which BF will provide a specific good/service 2) Patents An exclusive right to produce a good or service for a specific period of time. Current patent laws are good for 20 years (not including medical patents which are (7) years) 3) Natural Monopoly (Ex. Banks) Large monopoly scale. Fewer people producing in that industry, so not as many people are producing. At this point the government should interfere (watch/prevent companies from merging and developing into monopolies) 4) Natural Resources (Ex. The Diamond Market) If you own the resource (a majority of the resource), then you own control whether it’s scarce/rare or not Remember: Identify where MR=MC is, and then take the price based off of the demand Competition becomes destructive when fraud &/or force are applied. Gov. Power being used is rent seeking which is an example of force 4/11/16 Perfectly competitive long run is supply and demand For anything else, equilibrium is where MR=MC When a monopoly is not efficient, there is a loss in surplus Will not be efficient because they’re selling a small Q at a high price, the market as a whole will suffer a loss There are (2) equilibriums (1) for a perfectly competitive market and another for a monopoly Rent-seeking behavior Definition: A BF will spend $ to persuade gov to enact barriers to entry If any reg. person were to do this, it would be deemed illegal The company who is better at rent-seeking will often get the deal, not necessarily those who are experts- the best in their field Rent-seeking-> Trying to get $$ (lobbying), and the result of this is barriers Price discrimination The practice of selling a good at a different price to different consumers (this is completely legal & a form of marketing) The differences are based on: age, race, gender, & religious presentation Chapter 11: Monopolistic Competition A Market served by many BF’s selling slightly diff products Buyers and sellers are independent (no barriers) rel. easy entry & exit Ex. Clothing & textiles Business’ in this particular industry tend to be pretty competitive 4/13/16 Product Differentiation Product or strategy used by a BF to differentiate their product from another Types of Product Differentiation 1) Product is Different Based on size, shape, or color 2) Location Easy access, Appealing names that may not reference the city or state 3) Service Customer service makes a difference 4) Aura or Image Their products will make a difference, but only if you wear (or similarly endorse) their product The image of exclusivity if you endorse this, this will happen MR=MC More business firms enter, & the price will go down Producing less, AC increase Highly competitive market (The product decreases because the quantity and price decrease , and the average cost increases) 4/15/16 Chapter 12 Oligopoly A market served by: Few BF’s, many buyers, few sellers, heterogeneous product, imperfect market knowledge Most Competitive Market 1. Perf. Competitive 2. Monopolistically Competitive 3 .Oligopoly 4. Monopoly Criteria is based on.. Concentration Ratio % of Market output produced by largest BFs (4) Firm Ratio If the percentage is >40% then, it is an Oligopoly %< 40%- Monopolistically Competitive (% greater than 40= Oligopoly, % less than 40= Monopolistically Competitive) Ex.1 1,2,3,4,5,6 1,10,15,5,8,12 Add their highest percentages together so, (15+10+18+12= 55%; Oligopoly) Ex.2 1,2,3,4,5,6 2,19,19,5,3,12 Add so, (10+10+5+12= 37%; Monopolistically Competition) Ex.3 1,2,3,4,5,6 5,22,30,1,3,4 = 61%; Oligopoly , It will be a duopoly, but still an oligopoly. 22, & 30 are both the highest Duopoly: (2) firms that control more than 40% Auto industry: Oligopoly Oligopolies tend to make a lot of $$ This market, there is the potential to violate anti-trust laws which are laws against monopolies (3) Reasons they make a lot of $$ w/ little – no competition 1) Gov. Barriers 2) Economics to scale: Almost as if they have a self-contained infrastructure 3) Advertising (2) Duopolies work together: A cartel 2 or more business firms coordinating prices &/or quantities In essence, you now have a monopoly This week there were not very many notes, so I combined this week’s notes with those from last week. 4/20 was in-class review, and 4/22 is test #3 4/18/16 Gaming Tree A graphical rep. of diff. strategies Prisoner’s Dilemma Take the Dominant Strategy Which is an illustration that demonstrates the best choice under the worst case scenario Nash Equilibrium The outcome of a game in which each player is doing the best they can, given the actions of the other players Duopolists Dilemma Both would be better off charging a higher price, but charge a lower price based off of the dominant strategy Sherman Anti-Trust Pact A law passed in 1890, it made price fixing illegal, monopolistic songs are based off of it Price Leadership (1) BF sets the price high, and the others agree to follow This is implicit agreement, but it is still illegal. Will ultimately have to be able to prove intent, if you cannot then will deemed be illegal Guaranteed Price Matching A BF will match a competitor’s lower price. This is a legal form of Price Leadership. It is legal because prices are decreasing, and it is still a form of competition. End of this week’s notes. I hope that they were helpful to you. Notes will be uploaded weekly, so be sure to come back again! - Jensine
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