penn101_09s6

penn101_09s6 - Describing Producer’s Problem Solving...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Econ 101: Intermediate Microeconomics Producer Theory I: Competitive Market Jing Li Department of Economics University of Pennsylvania March 25, 2009 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Overview Producer’s problem: < p, w1 , w2 , f > p: price of the final product (output) w1 : price of input x1 w2 : price of input x2 f : technology. A function mapping combinations of inputs to amounts of output The producer buys inputs x1 , x2 at prices w1 , w2 , turn them into output using technology f , and sell the output at price p. Goal: maximizes profits. max π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 revenue costs Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Overview Producer’s problem: < p, w1 , w2 , f > p: price of the final product (output) w1 : price of input x1 w2 : price of input x2 f : technology. A function mapping combinations of inputs to amounts of output The producer buys inputs x1 , x2 at prices w1 , w2 , turn them into output using technology f , and sell the output at price p. Goal: maximizes profits. max π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 revenue costs Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Overview Producer’s problem: < p, w1 , w2 , f > p: price of the final product (output) w1 : price of input x1 w2 : price of input x2 f : technology. A function mapping combinations of inputs to amounts of output The producer buys inputs x1 , x2 at prices w1 , w2 , turn them into output using technology f , and sell the output at price p. Goal: maximizes profits. max π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 revenue costs Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Overview Producer’s problem: < p, w1 , w2 , f > p: price of the final product (output) w1 : price of input x1 w2 : price of input x2 f : technology. A function mapping combinations of inputs to amounts of output The producer buys inputs x1 , x2 at prices w1 , w2 , turn them into output using technology f , and sell the output at price p. Goal: maximizes profits. max π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 revenue costs Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Overview Producer’s problem: < p, w1 , w2 , f > p: price of the final product (output) w1 : price of input x1 w2 : price of input x2 f : technology. A function mapping combinations of inputs to amounts of output The producer buys inputs x1 , x2 at prices w1 , w2 , turn them into output using technology f , and sell the output at price p. Goal: maximizes profits. max π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 revenue costs Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Overview Producer’s problem: < p, w1 , w2 , f > p: price of the final product (output) w1 : price of input x1 w2 : price of input x2 f : technology. A function mapping combinations of inputs to amounts of output The producer buys inputs x1 , x2 at prices w1 , w2 , turn them into output using technology f , and sell the output at price p. Goal: maximizes profits. max π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 revenue costs Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Overview Producer’s problem: < p, w1 , w2 , f > p: price of the final product (output) w1 : price of input x1 w2 : price of input x2 f : technology. A function mapping combinations of inputs to amounts of output The producer buys inputs x1 , x2 at prices w1 , w2 , turn them into output using technology f , and sell the output at price p. Goal: maximizes profits. max π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 revenue costs Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Overview Producer’s problem: < p, w1 , w2 , f > p: price of the final product (output) w1 : price of input x1 w2 : price of input x2 f : technology. A function mapping combinations of inputs to amounts of output The producer buys inputs x1 , x2 at prices w1 , w2 , turn them into output using technology f , and sell the output at price p. Goal: maximizes profits. max π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 revenue costs Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Describing the technology Production function f (x1 , x2 ) Technology f turns inputs x1 , x2 into at most f (x1 , x2 ) units of output. Graph: isoquants All points on the same isoquant are combinations of inputs that produce the same amount of output. Special cases. (graphs) Useful concepts: ∂f Marginal product of factor i, i = 1, 2: MPi = ∂ xi Technical rate of substitution (TRS): TRS = − MP1 MP2 TRS measures tradeoff between inputs in technology f . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Common assumptions on technology Monotonicity: free disposal MPi ≥ 0, i = 1, 2; (or TRS < 0) Isoquants are downward sloping; Diminishing marginal products. Input i has diminishing MP if MPi decreases in xi ; Convexity: diminishing TRS. The technology f is convex if |TRS| decreases in x1 . Shape of isoquants. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Common assumptions on technology Monotonicity: free disposal MPi ≥ 0, i = 1, 2; (or TRS < 0) Isoquants are downward sloping; Diminishing marginal products. Input i has diminishing MP if MPi decreases in xi ; Convexity: diminishing TRS. The technology f is convex if |TRS| decreases in x1 . Shape of isoquants. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Common assumptions on technology Monotonicity: free disposal MPi ≥ 0, i = 1, 2; (or TRS < 0) Isoquants are downward sloping; Diminishing marginal products. Input i has diminishing MP if MPi decreases in xi ; Convexity: diminishing TRS. The technology f is convex if |TRS| decreases in x1 . Shape of isoquants. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Common assumptions on technology Monotonicity: free disposal MPi ≥ 0, i = 1, 2; (or TRS < 0) Isoquants are downward sloping; Diminishing marginal products. Input i has diminishing MP if MPi decreases in xi ; Convexity: diminishing TRS. The technology f is convex if |TRS| decreases in x1 . Shape of isoquants. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Common assumptions on technology Monotonicity: free disposal MPi ≥ 0, i = 1, 2; (or TRS < 0) Isoquants are downward sloping; Diminishing marginal products. Input i has diminishing MP if MPi decreases in xi ; Convexity: diminishing TRS. The technology f is convex if |TRS| decreases in x1 . Shape of isoquants. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Common assumptions on technology Monotonicity: free disposal MPi ≥ 0, i = 1, 2; (or TRS < 0) Isoquants are downward sloping; Diminishing marginal products. Input i has diminishing MP if MPi decreases in xi ; Convexity: diminishing TRS. The technology f is convex if |TRS| decreases in x1 . Shape of isoquants. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Common assumptions on technology Monotonicity: free disposal MPi ≥ 0, i = 1, 2; (or TRS < 0) Isoquants are downward sloping; Diminishing marginal products. Input i has diminishing MP if MPi decreases in xi ; Convexity: diminishing TRS. The technology f is convex if |TRS| decreases in x1 . Shape of isoquants. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Common assumptions on technology Monotonicity: free disposal MPi ≥ 0, i = 1, 2; (or TRS < 0) Isoquants are downward sloping; Diminishing marginal products. Input i has diminishing MP if MPi decreases in xi ; Convexity: diminishing TRS. The technology f is convex if |TRS| decreases in x1 . Shape of isoquants. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Returns to scale Question: how does output change when we increase both inputs simultaneously? Compare f (tx1 , tx2 ) with tf (x1 , x2 ), t > 1. f (tx1 , tx2 ) > tf (x1 , x2 ): increasing returns to scale f (tx1 , tx2 ) = tf (x1 , x2 ): constant returns to scale f (tx1 , tx2 ) < tf (x1 , x2 ): decreasing returns to scale The special cases. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Returns to scale Question: how does output change when we increase both inputs simultaneously? Compare f (tx1 , tx2 ) with tf (x1 , x2 ), t > 1. f (tx1 , tx2 ) > tf (x1 , x2 ): increasing returns to scale f (tx1 , tx2 ) = tf (x1 , x2 ): constant returns to scale f (tx1 , tx2 ) < tf (x1 , x2 ): decreasing returns to scale The special cases. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Returns to scale Question: how does output change when we increase both inputs simultaneously? Compare f (tx1 , tx2 ) with tf (x1 , x2 ), t > 1. f (tx1 , tx2 ) > tf (x1 , x2 ): increasing returns to scale f (tx1 , tx2 ) = tf (x1 , x2 ): constant returns to scale f (tx1 , tx2 ) < tf (x1 , x2 ): decreasing returns to scale The special cases. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Returns to scale Question: how does output change when we increase both inputs simultaneously? Compare f (tx1 , tx2 ) with tf (x1 , x2 ), t > 1. f (tx1 , tx2 ) > tf (x1 , x2 ): increasing returns to scale f (tx1 , tx2 ) = tf (x1 , x2 ): constant returns to scale f (tx1 , tx2 ) < tf (x1 , x2 ): decreasing returns to scale The special cases. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Returns to scale Question: how does output change when we increase both inputs simultaneously? Compare f (tx1 , tx2 ) with tf (x1 , x2 ), t > 1. f (tx1 , tx2 ) > tf (x1 , x2 ): increasing returns to scale f (tx1 , tx2 ) = tf (x1 , x2 ): constant returns to scale f (tx1 , tx2 ) < tf (x1 , x2 ): decreasing returns to scale The special cases. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Technology Returns to scale Question: how does output change when we increase both inputs simultaneously? Compare f (tx1 , tx2 ) with tf (x1 , x2 ), t > 1. f (tx1 , tx2 ) > tf (x1 , x2 ): increasing returns to scale f (tx1 , tx2 ) = tf (x1 , x2 ): constant returns to scale f (tx1 , tx2 ) < tf (x1 , x2 ): decreasing returns to scale The special cases. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Overview Approach 1: maximize profits Profit function: π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) Choose inputs to maximize π ⇒ solve for optimal quantities of inputs x1 (p, w1 , w2 ), x2 (p, w1 , w2 ) – factor demand function; Optimal output level: f (x1 (p, w1 , w2 ), x2 (p, w1 , w2 )). Approach 2: separate the output market and the input market Derive a cost function in the input market, taking output level as given ⇒ C(w1 , w2 , y); Take the cost function to the output market, and choose an optimal output level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Overview Approach 1: maximize profits Profit function: π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) Choose inputs to maximize π ⇒ solve for optimal quantities of inputs x1 (p, w1 , w2 ), x2 (p, w1 , w2 ) – factor demand function; Optimal output level: f (x1 (p, w1 , w2 ), x2 (p, w1 , w2 )). Approach 2: separate the output market and the input market Derive a cost function in the input market, taking output level as given ⇒ C(w1 , w2 , y); Take the cost function to the output market, and choose an optimal output level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Overview Approach 1: maximize profits Profit function: π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) Choose inputs to maximize π ⇒ solve for optimal quantities of inputs x1 (p, w1 , w2 ), x2 (p, w1 , w2 ) – factor demand function; Optimal output level: f (x1 (p, w1 , w2 ), x2 (p, w1 , w2 )). Approach 2: separate the output market and the input market Derive a cost function in the input market, taking output level as given ⇒ C(w1 , w2 , y); Take the cost function to the output market, and choose an optimal output level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Overview Approach 1: maximize profits Profit function: π = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) Choose inputs to maximize π ⇒ solve for optimal quantities of inputs x1 (p, w1 , w2 ), x2 (p, w1 , w2 ) – factor demand function; Optimal output level: f (x1 (p, w1 , w2 ), x2 (p, w1 , w2 )). Approach 2: separate the output market and the input market Derive a cost function in the input market, taking output level as given ⇒ C(w1 , w2 , y); Take the cost function to the output market, and choose an optimal output level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Solving the profit maximization problem Producer’s problem: max π (x1 , x2 ) = pf (x1 , x2 ) − (w1 x1 + w2 x2 ) x1 ,x2 ∂π ∂ x1 = 0 ∂π ∂ x2 = 0 ∂ p ∂ xf1 − w1 ∂ p ∂ xf2 − w2 FOC: ⇒ ⇒ =0 =0 pMP1 = w1 pMP2 = w2 Interpretation: marginal benefit = marginal cost for each factor ∗ ∗ Solve for factor demand functions x1 (p, w1 , w2 ), x2 (p, w1 , w2 ); ∗∗ Optimal output level (supply function): y∗ = f (x1 , x2 ) Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Example 1 1 33 Production function f (x1 , x2 ) = 27x1 x2 , w1 = 9, w2 = 4. Derive the supply function. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Deriving the cost function Producer’s problem I: given the output level y, what is the most cost effective way to produce it? ⇒ cost minimization problem min x 1 ,x 2 w1 x1 + w2 x2 f (x1 , x2 ) = y Subject to: The Lagrangian: L(x1 , x2 , λ) = w1 x1 + w2 x2 − λ(f (x1 , x2 ) − y) ∂L ∂ ∂ x1 = w1 − λ ∂ xf1 = 0 ⇒ w1 = λMP1 ∂ ∂L FOC: = w2 − λ ∂ xf2 = 0 ⇒ w2 = λMP2 ∂ x2 ∂L ∂λ = f (x1 , x2 ) − y = 0 ⇒ w1 w2 = |TRS| f (x1 , x2 ) = y Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Deriving the cost function Producer’s problem I: given the output level y, what is the most cost effective way to produce it? ⇒ cost minimization problem min x 1 ,x 2 w1 x1 + w2 x2 f (x1 , x2 ) = y Subject to: The Lagrangian: L(x1 , x2 , λ) = w1 x1 + w2 x2 − λ(f (x1 , x2 ) − y) ∂L ∂ ∂ x1 = w1 − λ ∂ xf1 = 0 ⇒ w1 = λMP1 ∂ ∂L FOC: = w2 − λ ∂ xf2 = 0 ⇒ w2 = λMP2 ∂ x2 ∂L ∂λ = f (x1 , x2 ) − y = 0 ⇒ w1 w2 = |TRS| f (x1 , x2 ) = y Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Deriving the cost function Interpretation: marginal substitution rate required by the technology f equals the market exchange rate for the factor Solve for conditional factor demand functions: ∗ ∗ x1 (w1 , w2 , y), x2 (w1 , w2 , y); ∗ ∗ Cost function: C(w1 , w2 , y) = w1 x1 (w1 , w2 , y) + w2 x2 (w1 , w2 , y). Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Deriving the cost function Interpretation: marginal substitution rate required by the technology f equals the market exchange rate for the factor Solve for conditional factor demand functions: ∗ ∗ x1 (w1 , w2 , y), x2 (w1 , w2 , y); ∗ ∗ Cost function: C(w1 , w2 , y) = w1 x1 (w1 , w2 , y) + w2 x2 (w1 , w2 , y). Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Deriving the supply function Producer’s problem II: given cost function C(w1 , w2 , y), what is the most profitable production schedule in a competitive market? ⇒ profit maximization problem max y py − C(w1 , w2 , y) p− ∂C ∂y marginal cost = MC FOC: =0 ⇒ P = MC Interpretation: marginal benefit = marginal cost of production Solve for optimal output level (supply function) y∗ . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Profit Maximization From Cost Function to Supply Function Deriving the supply function Producer’s problem II: given cost function C(w1 , w2 , y), what is the most profitable production schedule in a competitive market? ⇒ profit maximization problem max y py − C(w1 , w2 , y) p− ∂C ∂y marginal cost = MC FOC: =0 ⇒ P = MC Interpretation: marginal benefit = marginal cost of production Solve for optimal output level (supply function) y∗ . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Issues on the production side Analysis analogous to the demand side: Supply curve, factor demand curve, inverse .... curve; Elasticity? Substitution/income effects in factor demand? Cost analysis; Profitability; Market control. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Issues on the production side Analysis analogous to the demand side: Supply curve, factor demand curve, inverse .... curve; Elasticity? Substitution/income effects in factor demand? Cost analysis; Profitability; Market control. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Issues on the production side Analysis analogous to the demand side: Supply curve, factor demand curve, inverse .... curve; Elasticity? Substitution/income effects in factor demand? Cost analysis; Profitability; Market control. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Issues on the production side Analysis analogous to the demand side: Supply curve, factor demand curve, inverse .... curve; Elasticity? Substitution/income effects in factor demand? Cost analysis; Profitability; Market control. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Issues on the production side Analysis analogous to the demand side: Supply curve, factor demand curve, inverse .... curve; Elasticity? Substitution/income effects in factor demand? Cost analysis; Profitability; Market control. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Issues on the production side Analysis analogous to the demand side: Supply curve, factor demand curve, inverse .... curve; Elasticity? Substitution/income effects in factor demand? Cost analysis; Profitability; Market control. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long run and short run in economics Long run: freely choose levels of all inputs. Choose x1 , x2 Short run: some factors are fixed and cannot be adjusted. Additional constraint: x1 = ¯1 x Only “choose” x2 Example revisited: suppose x1 = 27. Economics concept not temporal concept. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long run and short run in economics Long run: freely choose levels of all inputs. Choose x1 , x2 Short run: some factors are fixed and cannot be adjusted. Additional constraint: x1 = ¯1 x Only “choose” x2 Example revisited: suppose x1 = 27. Economics concept not temporal concept. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long run and short run in economics Long run: freely choose levels of all inputs. Choose x1 , x2 Short run: some factors are fixed and cannot be adjusted. Additional constraint: x1 = ¯1 x Only “choose” x2 Example revisited: suppose x1 = 27. Economics concept not temporal concept. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long run and short run in economics Long run: freely choose levels of all inputs. Choose x1 , x2 Short run: some factors are fixed and cannot be adjusted. Additional constraint: x1 = ¯1 x Only “choose” x2 Example revisited: suppose x1 = 27. Economics concept not temporal concept. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long run and short run in economics Long run: freely choose levels of all inputs. Choose x1 , x2 Short run: some factors are fixed and cannot be adjusted. Additional constraint: x1 = ¯1 x Only “choose” x2 Example revisited: suppose x1 = 27. Economics concept not temporal concept. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long run and short run in economics Long run: freely choose levels of all inputs. Choose x1 , x2 Short run: some factors are fixed and cannot be adjusted. Additional constraint: x1 = ¯1 x Only “choose” x2 Example revisited: suppose x1 = 27. Economics concept not temporal concept. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long run and short run in economics Long run: freely choose levels of all inputs. Choose x1 , x2 Short run: some factors are fixed and cannot be adjusted. Additional constraint: x1 = ¯1 x Only “choose” x2 Example revisited: suppose x1 = 27. Economics concept not temporal concept. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Many costs Cost function: C(y; w1 , w2 ). Short run: C(y) = cv (y) + F , (F > 0) F : fixed costs; cv (y) = VC(y): variable costs; (typically convex) SMC(y) = C (y) = cv (y): short-run marginal costs; AVC(y) = cv (y) : average variable costs (only in the short-run); y AFC(y) = F : average fixed costs (only in the short-run); y SAC(y) = C(y) y = AVC(y) + AFC: short-run average costs. Long run: C(y) satisfies C(0) = 0 No fixed costs in the long run; LMC(y) = C (y): long-run marginal costs; LAC(y) = C(y) : long-run average costs. y Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Short-run cost curves Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Marginal costs and average costs in the short run SMC(1)=AVC(1)<SAC(1); U-shaped SAC cost curves: behavior of fixed costs and variable costs; SMC passes through the lowest points of AVC and SAC from below; SMC and AVC may slope down first and then slope up: marginal product of the variable factor may increase first and then decrease. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Short-run cost curves Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run cost curves Can always “choose” x1 = ¯1 . x LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the long-run; At y, LAC = SAC with x1 = x1 (y); At y, LMC = SMC with x1 = x1 (y). LAC is the lower envelope of SACs, tangent with each SAC at one point; LMC combines segments/points from SMCs; LMC passes through the minimum of LAC from below. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run cost curves Can always “choose” x1 = ¯1 . x LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the long-run; At y, LAC = SAC with x1 = x1 (y); At y, LMC = SMC with x1 = x1 (y). LAC is the lower envelope of SACs, tangent with each SAC at one point; LMC combines segments/points from SMCs; LMC passes through the minimum of LAC from below. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run cost curves Can always “choose” x1 = ¯1 . x LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the long-run; At y, LAC = SAC with x1 = x1 (y); At y, LMC = SMC with x1 = x1 (y). LAC is the lower envelope of SACs, tangent with each SAC at one point; LMC combines segments/points from SMCs; LMC passes through the minimum of LAC from below. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run cost curves Can always “choose” x1 = ¯1 . x LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the long-run; At y, LAC = SAC with x1 = x1 (y); At y, LMC = SMC with x1 = x1 (y). LAC is the lower envelope of SACs, tangent with each SAC at one point; LMC combines segments/points from SMCs; LMC passes through the minimum of LAC from below. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run cost curves Can always “choose” x1 = ¯1 . x LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the long-run; At y, LAC = SAC with x1 = x1 (y); At y, LMC = SMC with x1 = x1 (y). LAC is the lower envelope of SACs, tangent with each SAC at one point; LMC combines segments/points from SMCs; LMC passes through the minimum of LAC from below. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run cost curves Can always “choose” x1 = ¯1 . x LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the long-run; At y, LAC = SAC with x1 = x1 (y); At y, LMC = SMC with x1 = x1 (y). LAC is the lower envelope of SACs, tangent with each SAC at one point; LMC combines segments/points from SMCs; LMC passes through the minimum of LAC from below. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run cost curves Can always “choose” x1 = ¯1 . x LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the long-run; At y, LAC = SAC with x1 = x1 (y); At y, LMC = SMC with x1 = x1 (y). LAC is the lower envelope of SACs, tangent with each SAC at one point; LMC combines segments/points from SMCs; LMC passes through the minimum of LAC from below. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run average cost curve Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run marginal cost curve Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Long-run marginal cost curve Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Competitive market Competitive firm: price taker; set quantity (q) given fixed price (p); Competitive firm supply: the optimal price-quantity schedule at the firm level; Industry supply: the price-quantity schedule at the industry level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Competitive market Competitive firm: price taker; set quantity (q) given fixed price (p); Competitive firm supply: the optimal price-quantity schedule at the firm level; Industry supply: the price-quantity schedule at the industry level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Competitive market Competitive firm: price taker; set quantity (q) given fixed price (p); Competitive firm supply: the optimal price-quantity schedule at the firm level; Industry supply: the price-quantity schedule at the industry level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the short run No control over F ; Compare VC and revenue: Extensive margin: py ≥ VC(y) or p ≥ AVC(y); Short-run shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce? Profit maximization condition: p = SMC In the short-run, firm’s supply curve is the (upward-sloping) portion of SMC curve that lies above SAVC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the short run No control over F ; Compare VC and revenue: Extensive margin: py ≥ VC(y) or p ≥ AVC(y); Short-run shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce? Profit maximization condition: p = SMC In the short-run, firm’s supply curve is the (upward-sloping) portion of SMC curve that lies above SAVC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the short run No control over F ; Compare VC and revenue: Extensive margin: py ≥ VC(y) or p ≥ AVC(y); Short-run shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce? Profit maximization condition: p = SMC In the short-run, firm’s supply curve is the (upward-sloping) portion of SMC curve that lies above SAVC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the short run No control over F ; Compare VC and revenue: Extensive margin: py ≥ VC(y) or p ≥ AVC(y); Short-run shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce? Profit maximization condition: p = SMC In the short-run, firm’s supply curve is the (upward-sloping) portion of SMC curve that lies above SAVC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the short run No control over F ; Compare VC and revenue: Extensive margin: py ≥ VC(y) or p ≥ AVC(y); Short-run shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce? Profit maximization condition: p = SMC In the short-run, firm’s supply curve is the (upward-sloping) portion of SMC curve that lies above SAVC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the short run No control over F ; Compare VC and revenue: Extensive margin: py ≥ VC(y) or p ≥ AVC(y); Short-run shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce? Profit maximization condition: p = SMC In the short-run, firm’s supply curve is the (upward-sloping) portion of SMC curve that lies above SAVC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the short run No control over F ; Compare VC and revenue: Extensive margin: py ≥ VC(y) or p ≥ AVC(y); Short-run shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce? Profit maximization condition: p = SMC In the short-run, firm’s supply curve is the (upward-sloping) portion of SMC curve that lies above SAVC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the short run No control over F ; Compare VC and revenue: Extensive margin: py ≥ VC(y) or p ≥ AVC(y); Short-run shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce? Profit maximization condition: p = SMC In the short-run, firm’s supply curve is the (upward-sloping) portion of SMC curve that lies above SAVC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm’s short-run supply curve Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm supply: profits in the long run Full control over inputs; Compare total cost and revenue: Can always close shop if π < 0 ⇒ long-run profits ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Long-run shutdown condition: p < AC(y). Intensive margin: how much to produce? Profit maximization condition: p = LMC In the long-run, firm’s supply curve is the portion of LMC curve that lies above LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Firm’s long-run supply curve Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and long-run costs Increasing Returns to Scale: f (tx1 , tx2 ) > tf (x1 , x2 ); C(ty) < tC(y) ⇒ LAC decreases in y; Constant Returns to Scale: f (tx1 , tx2 ) = tf (x1 , x2 ); C(ty) = tC(y) ⇒ LAC is constant; Decreasing Returns to Scale: f (tx1 , tx2 ) < tf (x1 , x2 ); C(ty) > tC(y) ⇒ LAC increases in y; The logical puzzle of DRS. Technology can go through phases of IRS, CRS, DRS ⇒ U-shaped LAC. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Returns to scale and profitability Increasing returns to scale: Profit-maximizing firms will not produce at the IRS region; IRS implies AC decreases in y, and hence the firm will expand until it hits the CRS region; IRS at all y is inconsistent with a competitive market. Constant returns to scale: If producing at CRS region then must have π = 0; π : Economic profits: All factors are to be evaluated at the market value. Economic rent: the above-market-rate value of limited resources. May have many optimal output levels – firm size may vary; Decreasing returns to scale: Can have positive profits. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the short-run n firms: i = 1, 2, · · · , n; Si (p): firm i’s short-run supply function; Short-run industry supply = horizontal sum of firm’s short-run supply: n S(p) = i=1 Si (p) S(p) is upward sloping. Short-run market equilibrium: S(p∗ ) = D(p∗ ); Firms can be making positive, 0, or negative profits. Efficient production level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the short-run n firms: i = 1, 2, · · · , n; Si (p): firm i’s short-run supply function; Short-run industry supply = horizontal sum of firm’s short-run supply: n S(p) = i=1 Si (p) S(p) is upward sloping. Short-run market equilibrium: S(p∗ ) = D(p∗ ); Firms can be making positive, 0, or negative profits. Efficient production level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the short-run n firms: i = 1, 2, · · · , n; Si (p): firm i’s short-run supply function; Short-run industry supply = horizontal sum of firm’s short-run supply: n S(p) = i=1 Si (p) S(p) is upward sloping. Short-run market equilibrium: S(p∗ ) = D(p∗ ); Firms can be making positive, 0, or negative profits. Efficient production level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the short-run n firms: i = 1, 2, · · · , n; Si (p): firm i’s short-run supply function; Short-run industry supply = horizontal sum of firm’s short-run supply: n S(p) = i=1 Si (p) S(p) is upward sloping. Short-run market equilibrium: S(p∗ ) = D(p∗ ); Firms can be making positive, 0, or negative profits. Efficient production level. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry’s short run supply curve Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Industry supply in the long run Suppose all firms have identical long-run cost functions. Long-run phenomena: entry and exit. Enter if p > AC(π > 0), driving p down until p ≤ AC(π ≤ 0). Exit if p < AC(π < 0), driving p up until p ≥ AC(π ≥ 0). Long-run efficiency: Efficient scale: all firms operate at the lowest point of LAC. Long-run industry supply: p = min(LAC). Competitive industry’s long-run supply is a flat line. Long-run market equilibrium: p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Long-run profits: π = 0. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Monopoly Monopoly: the only firm in an industry; Influence price through quantity supplied; Facing the inverse demand curve p(y) instead of fixed price p. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Monopoly’s problem Given market inverse demand p(y), choose quantity supplied y to maximize profits. max p(y)y − C(y) = R(y) − C(y) y FOC: ⇒ R (y) − C (y) = 0 MR = MC. Interpretation: marginal revenue = marginal cost Monopolist must operate at the elastic region of demand. MR(y) = p(y)(1 + MR = MC > 0 ⇒ 1 p p (y) ); < −1; Monopolist has no supply curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Example Market demand is D(p) = 10 − p and the monopoly’s cost function is given by C(y) = y2 . What is the optimal output level for the monopoly? The market price? The monopoly profits? The economy is in a recession and the market demand became D(p) = 8 − p. How does this affect the price of the product? Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Monopoly facing linear demand Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Monopoly mark-up pricing MR = MC 1 ) = MC(y∗ ) p(y∗ )(1 + ∗ p (y ) p(y∗ ) = MC(y∗ ) 1 (1 + 1 p (y ∗) ) Monopolist’s pricing strategy is to charge a mark-up above its marginal cost of the last unit it can sell; Mark-up = 1 (1+ 1 ) p (y∗ ) . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Inefficiency of monopoly Monopoly production is not Pareto optimal: The marginal cost to produce one extra unit is less than what the demand side is willing to pay for it: MC(y∗ ) < p(y∗ ); There are mutual gains from extra trade. Comparing with a competitive market (p = MC): Consumer surplus loses by A + B; Producer surplus loses by C and gains by A; A: transfers from consumer side to producer side; Deadweight loss of a monopoly market: B + C. Deadweight loss measures the inefficiency of monopoly. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Inefficiency of monopoly Monopoly production is not Pareto optimal: The marginal cost to produce one extra unit is less than what the demand side is willing to pay for it: MC(y∗ ) < p(y∗ ); There are mutual gains from extra trade. Comparing with a competitive market (p = MC): Consumer surplus loses by A + B; Producer surplus loses by C and gains by A; A: transfers from consumer side to producer side; Deadweight loss of a monopoly market: B + C. Deadweight loss measures the inefficiency of monopoly. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Inefficiency of monopoly Monopoly production is not Pareto optimal: The marginal cost to produce one extra unit is less than what the demand side is willing to pay for it: MC(y∗ ) < p(y∗ ); There are mutual gains from extra trade. Comparing with a competitive market (p = MC): Consumer surplus loses by A + B; Producer surplus loses by C and gains by A; A: transfers from consumer side to producer side; Deadweight loss of a monopoly market: B + C. Deadweight loss measures the inefficiency of monopoly. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Inefficiency of monopoly Monopoly production is not Pareto optimal: The marginal cost to produce one extra unit is less than what the demand side is willing to pay for it: MC(y∗ ) < p(y∗ ); There are mutual gains from extra trade. Comparing with a competitive market (p = MC): Consumer surplus loses by A + B; Producer surplus loses by C and gains by A; A: transfers from consumer side to producer side; Deadweight loss of a monopoly market: B + C. Deadweight loss measures the inefficiency of monopoly. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Deadweight loss of monopoly Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market First-degree price discrimination Suppose monopolist can price each unit separately. Pricing strategy: always sell at the marginal willingness to pay. Customer i = 1, 2, · · · , n; Inverse demand function of i: pi (y); Price of unit y sold to customer i is set at pi (y); Market equilibrium condition: p(y∗ ) = MC(y∗ ) y∗ : production level; p(y): inverse demand function for the market; marginal willingness to pay for the last unit = its marginal cost. Equilibrium characteristics: Pareto efficient: all gains from trade are realized; Consumers’ surplus = 0; Producers’ surplus: entire area between the market demand curve and monopoly’s marginal cost curve. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Second-degree price discrimination Suppose monopolist can only offer quantity discounts; Same non-linear pricing for all customers; Pricing strategy: price-quantity schedule p1 for q ≤ q∗ ; p2 (< p1 ) for q∗ < q ≤ q∗ , · · · ; 1 1 2 Monopolist can capture some consumers’ surplus but not all. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Second-degree price discrimination Suppose monopolist can only offer quantity discounts; Same non-linear pricing for all customers; Pricing strategy: price-quantity schedule p1 for q ≤ q∗ ; p2 (< p1 ) for q∗ < q ≤ q∗ , · · · ; 1 1 2 Monopolist can capture some consumers’ surplus but not all. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination Monopolist can divide the market into several sub-markets and post different prices in them. Example: student discounts, senior discounts. No resale between sub-markets. Pricing strategy: charge different mark-ups in different sub-markets. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination Monopolist can divide the market into several sub-markets and post different prices in them. Example: student discounts, senior discounts. No resale between sub-markets. Pricing strategy: charge different mark-ups in different sub-markets. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination Monopolist can divide the market into several sub-markets and post different prices in them. Example: student discounts, senior discounts. No resale between sub-markets. Pricing strategy: charge different mark-ups in different sub-markets. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination Monopolist can divide the market into several sub-markets and post different prices in them. Example: student discounts, senior discounts. No resale between sub-markets. Pricing strategy: charge different mark-ups in different sub-markets. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination n markets: i = 1, 2, · · · , n; pi (y): market i’s inverse demand function; i: p market i’s price elasticity of demand; Monopolist sells yi units at price pi (yi ) in market i; Monopolist’s problem: n y1 ,··· ,yn n max pi (yi )yi − C( i=1 i=1 n yi ) yi ) FOC: MRi (yi ) = MC( i=1 Interpretation: marginal revenue in market i = marginal cost Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination All markets have the same marginal revenue; pi (y∗ ) = MC( i n 1 ∗ i=1 yi ) (1+ 1 1 (1+ 1 i (y∗ ) ) pi i (y∗ ) ) pi ; Mark-up in market i = ; More elastic market has a lower mark-up and a lower price. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination All markets have the same marginal revenue; pi (y∗ ) = MC( i n 1 ∗ i=1 yi ) (1+ 1 1 (1+ 1 i (y∗ ) ) pi i (y∗ ) ) pi ; Mark-up in market i = ; More elastic market has a lower mark-up and a lower price. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination All markets have the same marginal revenue; pi (y∗ ) = MC( i n 1 ∗ i=1 yi ) (1+ 1 1 (1+ 1 i (y∗ ) ) pi i (y∗ ) ) pi ; Mark-up in market i = ; More elastic market has a lower mark-up and a lower price. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination All markets have the same marginal revenue; pi (y∗ ) = MC( i n 1 ∗ i=1 yi ) (1+ 1 1 (1+ 1 i (y∗ ) ) pi i (y∗ ) ) pi ; Mark-up in market i = ; More elastic market has a lower mark-up and a lower price. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Third-degree price discrimination Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price discrimination by the hurdle Suppose monopolist does not observe demand elasticity information; Question: can the seller make the buyers to tell him about their demand elasticity? Yes if high elasticity buyers are willing to pay in other forms. A hurdle is a scheme to induce the consumers to self-identify themselves: Examples: coupons, rebates, wait, etc.; Available to everyone but imposes a “claim” cost, often in terms of time and/or effort. The social cost of a hurdle. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price discrimination by the hurdle Suppose monopolist does not observe demand elasticity information; Question: can the seller make the buyers to tell him about their demand elasticity? Yes if high elasticity buyers are willing to pay in other forms. A hurdle is a scheme to induce the consumers to self-identify themselves: Examples: coupons, rebates, wait, etc.; Available to everyone but imposes a “claim” cost, often in terms of time and/or effort. The social cost of a hurdle. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price discrimination by the hurdle Suppose monopolist does not observe demand elasticity information; Question: can the seller make the buyers to tell him about their demand elasticity? Yes if high elasticity buyers are willing to pay in other forms. A hurdle is a scheme to induce the consumers to self-identify themselves: Examples: coupons, rebates, wait, etc.; Available to everyone but imposes a “claim” cost, often in terms of time and/or effort. The social cost of a hurdle. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price discrimination by the hurdle Suppose monopolist does not observe demand elasticity information; Question: can the seller make the buyers to tell him about their demand elasticity? Yes if high elasticity buyers are willing to pay in other forms. A hurdle is a scheme to induce the consumers to self-identify themselves: Examples: coupons, rebates, wait, etc.; Available to everyone but imposes a “claim” cost, often in terms of time and/or effort. The social cost of a hurdle. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price discrimination by the hurdle Suppose monopolist does not observe demand elasticity information; Question: can the seller make the buyers to tell him about their demand elasticity? Yes if high elasticity buyers are willing to pay in other forms. A hurdle is a scheme to induce the consumers to self-identify themselves: Examples: coupons, rebates, wait, etc.; Available to everyone but imposes a “claim” cost, often in terms of time and/or effort. The social cost of a hurdle. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price discrimination by the hurdle Suppose monopolist does not observe demand elasticity information; Question: can the seller make the buyers to tell him about their demand elasticity? Yes if high elasticity buyers are willing to pay in other forms. A hurdle is a scheme to induce the consumers to self-identify themselves: Examples: coupons, rebates, wait, etc.; Available to everyone but imposes a “claim” cost, often in terms of time and/or effort. The social cost of a hurdle. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price discrimination by the hurdle Suppose monopolist does not observe demand elasticity information; Question: can the seller make the buyers to tell him about their demand elasticity? Yes if high elasticity buyers are willing to pay in other forms. A hurdle is a scheme to induce the consumers to self-identify themselves: Examples: coupons, rebates, wait, etc.; Available to everyone but imposes a “claim” cost, often in terms of time and/or effort. The social cost of a hurdle. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Oligopoly market A more realistic market is somewhere in between competitive market and monopoly market. Oligopoly market: several firms, each of whom can exert some influence on the market price. Duopoly: two firms, each influencing the market given what the other firm does. Rules of the game: who gets to make what decision knowing what? Four variations: quantity or price? sequential or simultaneous? Assume identical cost function for both firms. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Oligopoly market A more realistic market is somewhere in between competitive market and monopoly market. Oligopoly market: several firms, each of whom can exert some influence on the market price. Duopoly: two firms, each influencing the market given what the other firm does. Rules of the game: who gets to make what decision knowing what? Four variations: quantity or price? sequential or simultaneous? Assume identical cost function for both firms. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Oligopoly market A more realistic market is somewhere in between competitive market and monopoly market. Oligopoly market: several firms, each of whom can exert some influence on the market price. Duopoly: two firms, each influencing the market given what the other firm does. Rules of the game: who gets to make what decision knowing what? Four variations: quantity or price? sequential or simultaneous? Assume identical cost function for both firms. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Oligopoly market A more realistic market is somewhere in between competitive market and monopoly market. Oligopoly market: several firms, each of whom can exert some influence on the market price. Duopoly: two firms, each influencing the market given what the other firm does. Rules of the game: who gets to make what decision knowing what? Four variations: quantity or price? sequential or simultaneous? Assume identical cost function for both firms. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Oligopoly market A more realistic market is somewhere in between competitive market and monopoly market. Oligopoly market: several firms, each of whom can exert some influence on the market price. Duopoly: two firms, each influencing the market given what the other firm does. Rules of the game: who gets to make what decision knowing what? Four variations: quantity or price? sequential or simultaneous? Assume identical cost function for both firms. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Oligopoly market A more realistic market is somewhere in between competitive market and monopoly market. Oligopoly market: several firms, each of whom can exert some influence on the market price. Duopoly: two firms, each influencing the market given what the other firm does. Rules of the game: who gets to make what decision knowing what? Four variations: quantity or price? sequential or simultaneous? Assume identical cost function for both firms. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Quantity leadership (Stackleberg) The Stackleberg game: Firm 1 is a Stackleberg leader: decides y1 ; Firm 2 is a Stackleberg follower: decides y2 after seeing y1 ; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Firm 2 chooses y2 to maximize his profits, given firm 1’s y1 and the inverse demand p(y); Firm 1’s optimal decision depends on how firm 2 responds to y1 . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Quantity leadership (Stackleberg) The Stackleberg game: Firm 1 is a Stackleberg leader: decides y1 ; Firm 2 is a Stackleberg follower: decides y2 after seeing y1 ; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Firm 2 chooses y2 to maximize his profits, given firm 1’s y1 and the inverse demand p(y); Firm 1’s optimal decision depends on how firm 2 responds to y1 . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Quantity leadership (Stackleberg) The Stackleberg game: Firm 1 is a Stackleberg leader: decides y1 ; Firm 2 is a Stackleberg follower: decides y2 after seeing y1 ; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Firm 2 chooses y2 to maximize his profits, given firm 1’s y1 and the inverse demand p(y); Firm 1’s optimal decision depends on how firm 2 responds to y1 . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Quantity leadership (Stackleberg) The Stackleberg game: Firm 1 is a Stackleberg leader: decides y1 ; Firm 2 is a Stackleberg follower: decides y2 after seeing y1 ; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Firm 2 chooses y2 to maximize his profits, given firm 1’s y1 and the inverse demand p(y); Firm 1’s optimal decision depends on how firm 2 responds to y1 . Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Stackleberg follower’s problem Suppose firm 1 has chosen y1 . max y2 p(y1 + y2 )y2 − C2 (y2 ) = R2 (y1 , y2 ) − C2 (y2 ) ∂ R2 = C2 (y2 ) ∂ y2 MR2 = MC2 . FOC: ⇒ Note: marginal revenue of firm 2 = marginal cost of firm 2 Firm 1’s choice y1 affects marginal revenue of firm 2; Solve for y2 as a function of y1 . y∗ (y1 ): firm 2’s best response function. 2 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Stackleberg leader’s problem Suppose firm 1 has chosen y1 . max y1 p(y1 + y∗ (y1 ))y1 − C1 (y1 ) = R1 (y1 ) − C1 (y1 ) 2 dR1 = C1 (y1 ) dy1 MR1 = MC1 . FOC: ⇒ Note: marginal revenue of firm 1 = marginal cost of firm 1 R1 incorporates the impact of firm 2’s choice as a result of firm 1’s own choice; Solve for y∗ : firm 1’s optimal choice; 1 y∗ (y∗ ): firm 2’s optimal choice. 21 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Solve the Strackleberg game Step 1: solve for firm 2’s optimal choice as a function of y1 ; Step 2: take firm 2’s choice rule to firm 1’s problem and solve for the optimal y∗ . 1 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price leadership The game: Firm 1 is the price leader: sets p1 ; Firm 2 is the price follower: sets p2 after seeing p1 ; Given the prices p1 , p2 , consumers decide how much to buy from each firm: y1 , y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Consumers will only buy from the cheaper firm: ⇒ p2 ≤ p1 ⇒ p2 = p1 ; Firm 2 behaves as a price taker (competitive firm’s problem): supply curve S2 (p); Firm 1 behaves as a monopolist facing the residual demand D(p) − S2 (p) (monopolist’s problem). Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price leadership The game: Firm 1 is the price leader: sets p1 ; Firm 2 is the price follower: sets p2 after seeing p1 ; Given the prices p1 , p2 , consumers decide how much to buy from each firm: y1 , y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Consumers will only buy from the cheaper firm: ⇒ p2 ≤ p1 ⇒ p2 = p1 ; Firm 2 behaves as a price taker (competitive firm’s problem): supply curve S2 (p); Firm 1 behaves as a monopolist facing the residual demand D(p) − S2 (p) (monopolist’s problem). Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price leadership The game: Firm 1 is the price leader: sets p1 ; Firm 2 is the price follower: sets p2 after seeing p1 ; Given the prices p1 , p2 , consumers decide how much to buy from each firm: y1 , y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Consumers will only buy from the cheaper firm: ⇒ p2 ≤ p1 ⇒ p2 = p1 ; Firm 2 behaves as a price taker (competitive firm’s problem): supply curve S2 (p); Firm 1 behaves as a monopolist facing the residual demand D(p) − S2 (p) (monopolist’s problem). Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price leadership The game: Firm 1 is the price leader: sets p1 ; Firm 2 is the price follower: sets p2 after seeing p1 ; Given the prices p1 , p2 , consumers decide how much to buy from each firm: y1 , y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Consumers will only buy from the cheaper firm: ⇒ p2 ≤ p1 ⇒ p2 = p1 ; Firm 2 behaves as a price taker (competitive firm’s problem): supply curve S2 (p); Firm 1 behaves as a monopolist facing the residual demand D(p) − S2 (p) (monopolist’s problem). Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price leadership The game: Firm 1 is the price leader: sets p1 ; Firm 2 is the price follower: sets p2 after seeing p1 ; Given the prices p1 , p2 , consumers decide how much to buy from each firm: y1 , y2 . Firms maximize profits, given the other firm’s decision and the demand side. Analysis: Consumers will only buy from the cheaper firm: ⇒ p2 ≤ p1 ⇒ p2 = p1 ; Firm 2 behaves as a price taker (competitive firm’s problem): supply curve S2 (p); Firm 1 behaves as a monopolist facing the residual demand D(p) − S2 (p) (monopolist’s problem). Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Price leadership Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Solve the price leadership problem Step 1: solve for firm 2’s supply function S2 (p); Step 2: use firm 2’s supply function S2 (p) to get residual demand function D(p) − S2 (p); Step 3: solve for firm 1’s optimal y∗ and hence price 1 (monopolist’s problem facing residual demand). Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous quantity setting (Cournot) The Cournot game: Two firms simultaneously decide their quantities y1 , y2 , respectively, in isolation; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (y∗ , y∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Suppose firm 2 produces y2 , then firm 1 chooses y1 to maximizes his profits ⇒ a schedule of optimal y1 ’s given y2 ⇒ y1 (y2 ); Same with firm 2 ⇒ y2 (y1 ); Equilibrium condition: y∗ = y1 (y∗ ) = y1 (y2 (y∗ )). 1 2 1 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous quantity setting (Cournot) The Cournot game: Two firms simultaneously decide their quantities y1 , y2 , respectively, in isolation; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (y∗ , y∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Suppose firm 2 produces y2 , then firm 1 chooses y1 to maximizes his profits ⇒ a schedule of optimal y1 ’s given y2 ⇒ y1 (y2 ); Same with firm 2 ⇒ y2 (y1 ); Equilibrium condition: y∗ = y1 (y∗ ) = y1 (y2 (y∗ )). 1 2 1 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous quantity setting (Cournot) The Cournot game: Two firms simultaneously decide their quantities y1 , y2 , respectively, in isolation; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (y∗ , y∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Suppose firm 2 produces y2 , then firm 1 chooses y1 to maximizes his profits ⇒ a schedule of optimal y1 ’s given y2 ⇒ y1 (y2 ); Same with firm 2 ⇒ y2 (y1 ); Equilibrium condition: y∗ = y1 (y∗ ) = y1 (y2 (y∗ )). 1 2 1 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous quantity setting (Cournot) The Cournot game: Two firms simultaneously decide their quantities y1 , y2 , respectively, in isolation; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (y∗ , y∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Suppose firm 2 produces y2 , then firm 1 chooses y1 to maximizes his profits ⇒ a schedule of optimal y1 ’s given y2 ⇒ y1 (y2 ); Same with firm 2 ⇒ y2 (y1 ); Equilibrium condition: y∗ = y1 (y∗ ) = y1 (y2 (y∗ )). 1 2 1 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous quantity setting (Cournot) The Cournot game: Two firms simultaneously decide their quantities y1 , y2 , respectively, in isolation; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (y∗ , y∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Suppose firm 2 produces y2 , then firm 1 chooses y1 to maximizes his profits ⇒ a schedule of optimal y1 ’s given y2 ⇒ y1 (y2 ); Same with firm 2 ⇒ y2 (y1 ); Equilibrium condition: y∗ = y1 (y∗ ) = y1 (y2 (y∗ )). 1 2 1 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous quantity setting (Cournot) The Cournot game: Two firms simultaneously decide their quantities y1 , y2 , respectively, in isolation; Price is decided by the inverse demand function p(y) where y = y1 + y2 . Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (y∗ , y∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Suppose firm 2 produces y2 , then firm 1 chooses y1 to maximizes his profits ⇒ a schedule of optimal y1 ’s given y2 ⇒ y1 (y2 ); Same with firm 2 ⇒ y2 (y1 ); Equilibrium condition: y∗ = y1 (y∗ ) = y1 (y2 (y∗ )). 1 2 1 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Solve the Cournot game Step 1: solve for firm 1’s best response function y1 (y2 ) (monopolist’s problem); Step 2: solve for firm 2’s best response function y2 (y1 ) (monopolist’s problem); Step 3: solve for y∗ , y∗ using the equilibrium condition. 12 Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous price setting (Bertrand) The Bertrand game: Two firms simultaneously decide their prices p1 , p2 , respectively, in isolation; Consumers decide how much to buy from each firm; Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (p∗ , p∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Consumers only buy from the cheaper firm: p1 = p2 = p; Firms cannot make a loss: p ≥ MC; Cannot have p > MC: firms will want to undercut each other. Equilibrium: p1 = p2 = MC. Bertrand competition results in competitive market equilibrium outcome. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous price setting (Bertrand) The Bertrand game: Two firms simultaneously decide their prices p1 , p2 , respectively, in isolation; Consumers decide how much to buy from each firm; Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (p∗ , p∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Consumers only buy from the cheaper firm: p1 = p2 = p; Firms cannot make a loss: p ≥ MC; Cannot have p > MC: firms will want to undercut each other. Equilibrium: p1 = p2 = MC. Bertrand competition results in competitive market equilibrium outcome. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous price setting (Bertrand) The Bertrand game: Two firms simultaneously decide their prices p1 , p2 , respectively, in isolation; Consumers decide how much to buy from each firm; Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (p∗ , p∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Consumers only buy from the cheaper firm: p1 = p2 = p; Firms cannot make a loss: p ≥ MC; Cannot have p > MC: firms will want to undercut each other. Equilibrium: p1 = p2 = MC. Bertrand competition results in competitive market equilibrium outcome. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous price setting (Bertrand) The Bertrand game: Two firms simultaneously decide their prices p1 , p2 , respectively, in isolation; Consumers decide how much to buy from each firm; Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (p∗ , p∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Consumers only buy from the cheaper firm: p1 = p2 = p; Firms cannot make a loss: p ≥ MC; Cannot have p > MC: firms will want to undercut each other. Equilibrium: p1 = p2 = MC. Bertrand competition results in competitive market equilibrium outcome. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous price setting (Bertrand) The Bertrand game: Two firms simultaneously decide their prices p1 , p2 , respectively, in isolation; Consumers decide how much to buy from each firm; Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (p∗ , p∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Consumers only buy from the cheaper firm: p1 = p2 = p; Firms cannot make a loss: p ≥ MC; Cannot have p > MC: firms will want to undercut each other. Equilibrium: p1 = p2 = MC. Bertrand competition results in competitive market equilibrium outcome. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous price setting (Bertrand) The Bertrand game: Two firms simultaneously decide their prices p1 , p2 , respectively, in isolation; Consumers decide how much to buy from each firm; Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (p∗ , p∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Consumers only buy from the cheaper firm: p1 = p2 = p; Firms cannot make a loss: p ≥ MC; Cannot have p > MC: firms will want to undercut each other. Equilibrium: p1 = p2 = MC. Bertrand competition results in competitive market equilibrium outcome. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous price setting (Bertrand) The Bertrand game: Two firms simultaneously decide their prices p1 , p2 , respectively, in isolation; Consumers decide how much to buy from each firm; Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (p∗ , p∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Consumers only buy from the cheaper firm: p1 = p2 = p; Firms cannot make a loss: p ≥ MC; Cannot have p > MC: firms will want to undercut each other. Equilibrium: p1 = p2 = MC. Bertrand competition results in competitive market equilibrium outcome. Jing Li Intermediate Microeconomics Describing Producer’s Problem Solving Producer’s Problem Supply Analysis Cost Analysis Market Supply in a Competitive Market Monopoly Market Duopoly Market Simultaneous price setting (Bertrand) The Bertrand game: Two firms simultaneously decide their prices p1 , p2 , respectively, in isolation; Consumers decide how much to buy from each firm; Firms maximize profits, given the other firm’s decision and the demand side. Equilibrium: a pair (p∗ , p∗ ) such that none of the firms would 12 want to change it unilaterally. Analysis: Consumers only buy from the cheaper firm: p1 = p2 = p; Firms cannot make a loss: p ≥ MC; Cannot have p > MC: firms will want to undercut each other. Equilibrium: p1 = p2 = MC. Bertrand competition results in competitive market equilibrium outcome. Jing Li Intermediate Microeconomics ...
View Full Document

Ask a homework question - tutors are online