MicroEconomics Final UH

Many buyers and sellers
Goods offered for sale are largely the same
firms can freely enter or exit the market
Each buyer and sellers is a "price taker" (takes price as given)
Competitive firm can keep increasing its output without affecting the market price
MR = P on true for firms in competitive markets
MC = MR is equilibrium

- Cost of shutting down: revenue loss = TR
- Benefit of shutting down: cost savings = VC (firm must still pay fixed cost)
- So shut down if TR < VC
- Divide boths sides by Q: TR/Q < VC/Q
- So, firms decision rule is: shut down if P < AVC
- The firms short run supply curve is the portion of its MC curve above AVC

Exit if P < ATC
Enter if P > ATC
The firms long run supply curve is the portion of its MC curve above LRATC

- Long run equilibrium: the process of entry or exit is complete - remaining firms earn zero economic profit
- Zero economic profit occurs when P = ATC
- Since firms produce where P = MR = MC
- The zero profit condition is P = MC = ATC
MC intersects ATC at minimum ATC
- In the long run, price = minimum ATC

- Firm that is the sole seller of a product without close substitutes
- Has market power, the ability to influence the market price of the product it sells

Main cause is barriers to entry - other firms cannot enter the market

1. a single firms owns a key resource
2. the government gives a single firm the exclusive right to produce a good
3. natural monopoly : a single firm can produce the entire market output at a lower cost that could several firms

- A monopolist is only a seller, so it faces market demand curve
- To sell a larger Q, the firm must reduce P
- Thus MR cannot equal P

increasing the output has two effects on revenue:
Output effect: higher output raises revenue
Price Effect: Lower price reduces revenue
- To sell a larger Q, the monopolist must reduce the price on all the unit it sells
- So, MR < P
- MR could even be negative if the price effect exceeds the output effect

(P-ATC) x Q

Competitive firm: takes P as given, has a supply curve that shows its Q depends on P
Monopoly firm: is a "price-maker" not "price-taker"
- Q does not depend on P; Q and P are jointly determined by MC, MR, and the demand curve

- selling the same good at different prices to different buyers
- Characteristic used in price discrimination is willingness to pay (WTP)

Monopolist produces the competitive quantity, but charges each buyer his or her WTP. monopolist captures all CS as profit. There is no DWL (deadweight loss)

- increasing competition with antitrust laws
- regulation
-public ownership
-no policy

many firms sell similar but not identical products

Many firms, identical products

one firm

Between two monopolistic extremes

- Many sellers, product differentiation, free entry and exit
- A monopolistically competitive firm earning profits on the short run
- At each Q, MR < P
- To maximize profit, firm produces Q where MR = MC
The firm uses the D curve to set P

Short Run: firm behavior is very similar to monopoly
Long run: Entry and exit drive economic profit to zero

New firms enter market, taking some demand away from existing firms, prices and profits fall

some firms exit the market, remaining firms enjoy higher demand and prices

a. Excess Capacity
b. Markup over marginal cost
c. Welfare

- The monopolistic competitor operates on the downward sloping part of its ATC curve =, produces less than the cost-minimizing output
- Under perfect competition, firms produce the quantity that minimizes ATC

- under monopolistic competition, P > MC
- under perfect competition, P = MC

- Because P > MC, market quantity, Socially efficient quantity
- Not easy for policymakers to fix this problem: Firms earn zero profits, so cannot require them to reduce prices

- Product differentiation and markup pricing lead to the use of advertising and brand names
- Critics of advertising and brand names argue that firms use them to reduce competition and take advantage of consumer irrationality
- Defenders argue that firms use them to inform consumers and to compete more vigorously on price and product quality

A market structure in which only a few sellers offer similar or identical products. High concentration ratios

The Percentage of the market's total output supplied by its four largest firms

A firms decision about P or Q can affect others firms and cause them to react. Firm will consider these reactions when making decisions

study of how people behave in strategic situations

- Both firms would be better off if both stick to the cartel agreement
- But each firms has incentive to renege on the agreement
- Lesson: it is difficult for oligopoly firms to form cartels and honor their agreements

- When firms in an oligopoly individually choose production to maximize profit
- Oligopoly Q is greater than Monopoly Q but smaller than competitive Q
- Oligopoly P is greater than competitive P but less than monopoly P

situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen

A strategy that is best for a player in a game regardless of the strategies chosen by the others players

A "game" between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial

- the non-cooperative oligopoly equilibrium
- bad for oligopoly firms: prevents them from achieving monopoly profits
- Good for society: Q is closer to the socially efficient output, P is closer to MC
- in other prisoners dilemmas, the inability to cooperate may reduce social welfare

- When the game is repeated many times, cooperation may be possible
- Two strategies may lead to cooperation:
1. If your rival reneges in on round, you renege in all subsequent rounds
2. Tit-for-Tat: whatever your rival does in one round (whether renege or cooperate), you do in the following round

promote competition, prevent cooperation to move the oligopoly outcome closer to the efficient outcome

- Labor
-Land
- Capital

the inputs used to produce goods and services

the equipment and structures used to produce goods and services
- Price and quantities of these inputs are determined by supply and demand in factor markets
- Demand for factor of production is a derived demand- derived from a firms decision to supply a good in another market

1. All markets are competitive
- The typical firm is a price taker
2. Firms care only about maximizing profits

For any competitive, profit maximizing firm:
- to maximize profits, hire workers up to the point where VMPL = W
- The VMPL curve is the labor demand curve
- Anything that increases P or MPL at each L will increase VMPL and shift labor demand curve upward

W/MPL

P x MPL = W
- divide both sides by MPL
P = W / MPL
- substitute MC = W/MPL from pervious slide
P = MC

- Purchase price: the price a person pays to own that factor indefinitely
- Rental price - the price a person pays to use that factor for a limited period of time

- Wage is the rental price of labor
- Price paid to each factor adjusts to balance supply and demand for that factor. In equilibrium, each factor is compensated according to its marginal contribution to production
- Factors of production are used together. A change in the quantity of one factor affects the marginal products and equilibrium earning of all factos