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This 9 page Class Notes was uploaded by Sidney Hong on Wednesday November 18, 2015. The Class Notes belongs to ECO 106 at Pace University taught by Cesar Castope in Fall 2015. Since its upload, it has received 10 views. For similar materials see Principles of Economics: Macroeconomics in Economcs at Pace University.
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Date Created: 11/18/15
Fall 2015 Principles of Economics Micro EC0106 CRN 72490 MondayWednesday 900 AM 1025 AM Professor Cesar Castope 1116 Chapter 9 Perfect Competition Perfectly Competitive Markets 0 Hundreds or even thousands of rms sell a homogeneous product 0 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 1 There are many sellers 2 There are many buyers 3 The product is homogeneous 4 There are no barriers to market entry 5 Both buyers and sellers are price takers Total Revenue Variable Cost and the Shutdown Decision 0 The decision to operate or shut down is a shortrun decision a daytoday decision to temporarily halt production in response to market conditions 0 Suppose our shirt factory hires workers by the day so it makes the decision at the beginning of each day 0 operate if total revenuegtvariable cost 0 shut down if total revenueltvariable cost ShortRun Supply Curve 2 wquot x r r quotd EEI quotquotquotquotquotquot39quotquotquot39quot39quotquotquot 39quotquot E Prim pm ahin E I Price palquot Ehirt I I I I i i i I i L i I i I I I i I I I 3 I 3 M1 II mm mm mm mm Ehii m 1E1quot IIiijtI Shij li FEET III39III H A NEWS Supply Emmi HE in u wy Eupp y CumI LongRun Supply Curve L gm ll supply pun1 LFEE Hit Prim per f llil E 1 2 nilm Em Shirta per minute Fall 2015 Principles of Economics Micro EC0106 CRN 72490 MondayWednesday 900 AM 1025 AM Professor Cesar Castope 1118 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 3 O 6 8 4 3 2 2 6 5 30 2 4 6 24 6 Monopoly Revenue Curve P riee 16 39Tetal Revenue 1 Marginel Revenue Price and Revenue 55 1 II Quantity Demanded Maximize Pro ts 0 P gt MR 0 Quantity Where MR MC 0 Pro t Q X P ATC Ceste 3e Revenue he Dutput Economic Loss gt When P lt ATC Normal Pro t gt When P ATC Economic Pro t gt When P gt ATC Tetel Revenue and Marginal Revenue freuee 1m The emehd Euwe end the MarinerRevenue Euree Marginal revenue eeuete the errlee tr the tiret urrtt eel hut e Ileee than the priiee ter editlrrel unite ereEdTeeellll err eeerli39ttrrell urrtt the firm eute the ertee errrl reeehree lleee revenue the urrttethet if L Us ttld have heerr eyetr etthe higher prlee The marginal revenue re eerelitee fer the first tzur unite err rregethre fer larger xeuehttttee 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 b 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 3139 P271 First degree price discrimination 2nd Degree Price Discrimination Price 90 80 70 60 50 40 30 20 10 Potential additionai revenues with a higheend version Mainsteam or middie ground version Midas Potentiai additional revenues with a lowaenci version 6 50 1 2 0 35 c 50 500 550 600 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 limited 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 0 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