PRINCIPLES OF MICROECONOMICS
PRINCIPLES OF MICROECONOMICS ECON 2106
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This 18 page Class Notes was uploaded by Amelia Reynolds on Monday September 21, 2015. The Class Notes belongs to ECON 2106 at Georgia State University taught by Jon Mansfield in Fall. Since its upload, it has received 18 views. For similar materials see /class/209823/econ-2106-georgia-state-university in Economcs at Georgia State University.
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Date Created: 09/21/15
Market Structu re Econ 2106 Principles of Microeconomics Dr Jon Mansfield Micro Lecture 4 1 General Types of Market Structure Market Structure Perfect Competition Monopolistic Oligopoly Monopoly Competition of firms availability of substitutes product type barriers to entry firm Demand 2 Perfect Competition 0 Large number of buyers and sellers no one individual can influence the price firms are price takers o Homogeneous Products Within Industries 0 Freedom of Entry and Exit No Barriers to Entry 0 Perfect Information Supply and Demand for the Market and representative firm Market Firm SO D0 1000 Q q Market Structure Perfectly competitive short run and long run responses to changes in market demand Market Firm P P 50 A 10 10 D0 1000 Q Econ 2106 Principles of Microeconomics Dr Jon Mans eld Market Structure 3 Monopoly A single seller of a good or service with no close substitutes no supply curve price searchers Note the relationships between 0 Marginal Revenue amp Marginal Cost 0 Price amp Average Total Cost Sources of Monopoly or Market Power Barriers to Entry Economies of Scale NH Barriers Created by Government a Licenses b Franchises c Patents d Copyrights U Input Barriers a Control Over Raw Materials b Financial Capital Markets 9 Brand Loyalties Short run MR Q Long run MR Q Econ 2106 Principles of Microeconomics Dr Jon Mans eld Market Structure 4 f 39 of in the f r quotquot and quot 39 Models longrun 0 economic pro t Perfect Competition Monopoly P L P L Q Q 5 Monopolistic Competition Product differentiation 0 Large number of firms in the product group 0 No interdependence o Relatively easy entry Short Run and Long Run Equilibrium in Monopolistic Competition Short run Long run L L Econ 2106 Principles of Microeconomics Dr Jon Mans eld Market Structure 6 Oligopoly Characteristics Common Differing Models describing Behavior 0 Mutual o Homogeneous vs Kinked Demand Curve interdependence Differing products Game Theory 0 Market power 0 Cooperative vs Non cooperative behavior Strategic Entry Deterrence Barriers to entry Collusion Cartels 7 Cartel one market 2 firms Collusive behavior when firms have different cost structures similar to multi plant problem single firm with one management structure Q MR MCT MCl MCZ MCT MCI 100 100 100 D MR 150 100 50 Cartel Firm 1 Firm 2 Firm Plant 1 Plant 2 joint profit maximization treating one car tel as a collection rather than individuals 0 each member has an incentive to cut deals 0 also tacit collusion price leadership Econ 2106 Principles of Microeconomics Dr Jon Mans eld Market Structure 8 Multiple Markets Price discrimination one firm 2 markets Charge a lower price in the market with the more sensitive more elastic demand if en gt Iepz then P1 lt P2 Q MRT MR1 MR2 MC Firm Market 1 Market 2 P1 D1 D2 Q1 Q2 0 need market power to influence price 0 ability to separate markets with different elasticities prevent resale Econ 2106 Principles of Microeconomics Dr Jon Mans eld Elasticity Econ 2106 Principles of Microeconomics Dr Jon Mansfield N Elasticity sensitivity responsiveness Examples Price Income Advertising etc De nition ep AQ AP Arc Elasticity Discrete Range epQZQ1QP2P1P ep Q2 Q1Q1 Q222 P2 P1 P1 P2 epQ2 Q1Q1 Q2JP2P1P1 P2 Values ep gt 1 Elastic ep lt 1 Inelastic ep 1 Unit Elastic Micro Lecture 2 Can Be Calculated for Any Variable in the Demand Function Compare Percentage Changes to Avoid a Units Problem in Measurement AQQAPP AQAPHPQ Point Elasticity Point on the Demand Curve epAQAPPQ Linear demand curve price form P a bQ bAPAQand1b AQAP epAQAPPQ ep1bPPabJPPaJ AQgtAP AQltAP AQAP You should be able to work through the derivation of both elasticity formulas Elasticity 2 Downwardsloping Linear Demand Curve Demand Function P 12 Q or Q 12 P Total Revenue Function TR TR PQ 12 QQ 12Q Q2 Average Revenue Function AR AR TR Q PQ Q P Marginal Revenue Function MR MR ATR AQ TR2 TR1 Q2 Q1 MR using calculus MRc MRc ATR AQ 12 2Q Calculate the elasticities using the formulas Q P TR MR MRc Arc elasticity Point elasticity epQ2Q1Q1Q2JP2P1 ep PPaJ P1 P2 o 12 o 12 1 11 11 11 1o 23 11 2 1o 20 9 8 3 9 27 7 6 4 8 32 5 4 5 7 35 3 2 6 6 36 1 o 7 5 35 1 2 8 4 32 3 4 9 3 27 5 6 1o 2 20 7 8 As the price decreases from 12 what happens with both types of elasticities Econ 2106 Principles of Microeconomics Dr Jon Mans eld Elasticity Based on the information and table above graph the Demand and Marginal Revenue functions on one diagram and the Total Revenue function directly beneath P 12 TR P12 Q MR12 2Q D Q 12 TR12QQ2 Q 12 Econ 2106 Principles of Microeconomics Dr Jon Mans eld Elasticity 3 Price Elasticity and Total Revenue The Price Effect and Quantity Effect ofa Price Change Q1 Q2 Q 4 What is the significance of vertical and horizontal demand curves Econ 2106 Principles of Microeconomics Dr Jon Mans eld Elasticity 5 How sensitive is the amount demanded to a change in price This is primarily determined by number of substitute goods importance in consumer39s budget product durability 0 time period under consideration 9 Other Elasticities Income Elasticity of Demand ezAQxAI AQxA1IQx eI gt 0 Normal Good e lt 0 Inferior Good Elastic Cross Elasticity of Demand 8c A QX A PY A Qx A PY PY Qx eC gt 0 Substitute Goods ec lt 0 Complementary Goods Econ 2106 Principles of Microeconomics Dr Jon Mans eld Production amp Cost Econ 2106 Principles of Microeconomics Dr Jon Mansfield Micro Lecture 3 1 Shortrun Production Function For a representative firm the production function relates resources to output It describes the underlying production process or the technically efficient way to produce given a level of technology Assume there are two resources used in production labor and capital Q f L K In the short run or production period the production function describes the maximum amount that can be produced using the existing technology assuming one input is fixed usually capital and one input is variable usually labor In the long run or the planning horizon all resources are variable Total Product Average Product Marginal Product TPorQfL K APTPL MPATPAL Q L Q Production amp Cost 2 Short Run Cost Function Based on the short run production function and resource prices PL PK Cost Average Cost Marginal Cost Fixed TFC PK K AFC TFC Q 0 Variable TVC PL L AVC TVC Q Total TC TFC TVC Using the production function graph the following in the top graph 0 Total Cost 0 Total Variable Cost 0 Total Fixed Cost Graph the associated average cost curves total variable and fixed and the marginal cost curve Econ 2106 Principles of Microeconomics Dr Jon Mans eld ATCAFCAVC TCQ MCATCAQATVCAQ MCATCAQATVCAQ Production amp Cost 3 Relationship between Shortrun Production and Cost MC ATVC AQ PL AL AQ AVC TVC Q PL L Q MCPLAQALPLMPL AvcPLQLPLAPL MP AP when MPL is increasing gt MC is decreasing when MPL is gt MC is increasing decreasing when APL is increasing gt AVC is decreasing when APL is gt AVC is increasing decreasing For increasing MP Each additional worker adds more and more to output Each worker adds the same amount to variable costs So for the same increase in total costs output increases by more and more The additional marginal cost of each unit of output is lower and lower Econ 2106 Principles of Microeconomics Dr Jon Mans eld Production amp Cost 4 Production With Two or More Variable Inputs Input Substitution is it technically feasible what are the incentives a good example is the article Workers aren t included in lights out factories 5 Long Run Average Cost LRAC the minimum average cost of producing any level of output when all inputs are variable increase scale of operations 0 Economies of Scale Specialization and Division of Labor Technological or Financial Factors 0 Diseconomies of Scale limitations to efficient management 0 Qquot minimum efficient scale LRAC Economies of Diseconomies cale of scale Q Q a good example is the article Bumpy road As Toyota closes in on GM Economic Profit TR explicit implicit or opportunity costs includes a normal rate of return 0 includes normal rate of return on investment 0 measures payments to all factors of production including borrowed capital Econ 2106 Principles of Microeconomics Dr Jon Mans eld The Basics of Demand Supply amp Markets Econ 2106 Principles of Microeconomics BLC Dr Jon Mansfield Micro Lecture 1 Behavior of buyers 39 Individual and Market Demand Functions Relationship shows the quantities of a good or service that buyers are willing and able to buy at various prices holding everything else constant ceteris paribus General Demand Function Q f P T Ps Pc E N demand shift parameters P The amount demanded quantity demanded depends on o P price of the good or service A B o T tastes and preferences P0 l income normal good inferior good Ps price of substitute goods Pc price of complementary goods D0 D1 E expectations of future prices N number of consumers in the market Q5 Qb Qd A change in price causes a movement along a given demand curve A change in any other variable in the general demand function causes a shift of a demand curve For example when income increases for a normal good everything else held constant the demand curve will shift out Another way of stating this is an increase in Qd at every price moving from A to B at P0 and also at every other price The Basics of Demand Supply amp Markets Behavior of Firms producers sellers suppliers Individual and Market Supply Functions Relationship shows the quantities of a good or service that firms are willing and able to produce at various prices holding everything else constant ceteris paribus General Supply Function Qs f P Tx Pi E N supply shift parameters P So 51 The amount supplied quantity supplied depends on A B o P price of the good or service P T technology Pi prices of inputs resources E expectations of future prices N number of producers in the market Qa Qb Q A change in price causes a movement along a given supply curve A change in any other variable in the general supply function causes a shift of a supply curve For example when resource prices decrease everything else held constant the supply curve will shift out Another way of stating this is an increase in Qs at every price moving from A to B at P0 and also at every other price Econ 2106 Principles of Microeconomics Dr Jon Mans eld The Basics of Demand Supply amp Markets Market Equilibrium Changes in Equilibrium a state of balance between opposing economic forces the behavior of consumers is consistent with the behavior of firms intersection of Demand and Supply curves QdQs P C so P1 A B P0 D1 D0 100 150 200 Q P D0 5 51 A B P0 c 1 P 100 150 200 SO D0 100 Q Increase Income for a normal good At each price the quantity demanded increases the demand curve shifts out to D At the original equilibrium price there is now excess demand Qs 100 and Qd 200 Consumers start to bid up the price As the price rises Qs increases moving up along the supply curve from A to C and Qd decreases moving up anngthe new demand curve from B to C Equilibrium is restored at a higher price and a higher than the original quantity Increase in Technology At each price the quantity supplied increases the supply curve shifts out to 81 At the original equilibrium price there is now excess supply Qd 100 and Qs 200 Firms start to lower the price As the price falls Qd increases moving down along the demand curve from A to C and Qs decreases moving down anngthe new supply curve from B to C Equilibrium is restored at a lower price and a higher than the original quantity Econ 2106 Principles of Microeconomics Dr Jon Mans eld
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