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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): shortrun marginal costs; AVC(y) = cv (y) : average variable costs (only in the shortrun); y AFC(y) = F : average ﬁxed costs (only in the shortrun); y SAC(y) =
C(y) y = AVC(y) + AFC: shortrun average costs. Long run: C(y) satisﬁes C(0) = 0
No ﬁxed costs in the long run; LMC(y) = C (y): longrun marginal costs; LAC(y) = C(y) : longrun 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 Shortrun 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); Ushaped 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 Shortrun 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 Longrun cost curves Can always “choose” x1 = ¯1 . x
LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the longrun;
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 Longrun cost curves Can always “choose” x1 = ¯1 . x
LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the longrun;
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 Longrun cost curves Can always “choose” x1 = ¯1 . x
LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the longrun;
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 Longrun cost curves Can always “choose” x1 = ¯1 . x
LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the longrun;
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 Longrun cost curves Can always “choose” x1 = ¯1 . x
LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the longrun;
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 Longrun cost curves Can always “choose” x1 = ¯1 . x
LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the longrun;
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 Longrun cost curves Can always “choose” x1 = ¯1 . x
LAC lies below SACs; For any y, choose optimal x1 (y), x2 (y) in the longrun;
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 Longrun 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 Longrun 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 Longrun 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 pricequantity schedule at the ﬁrm level; Industry supply: the pricequantity 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 pricequantity schedule at the ﬁrm level; Industry supply: the pricequantity 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 pricequantity schedule at the ﬁrm level; Industry supply: the pricequantity 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); Shortrun shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce?
Proﬁt maximization condition: p = SMC In the shortrun, ﬁrm’s supply curve is the (upwardsloping) 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); Shortrun shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce?
Proﬁt maximization condition: p = SMC In the shortrun, ﬁrm’s supply curve is the (upwardsloping) 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); Shortrun shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce?
Proﬁt maximization condition: p = SMC In the shortrun, ﬁrm’s supply curve is the (upwardsloping) 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); Shortrun shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce?
Proﬁt maximization condition: p = SMC In the shortrun, ﬁrm’s supply curve is the (upwardsloping) 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); Shortrun shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce?
Proﬁt maximization condition: p = SMC In the shortrun, ﬁrm’s supply curve is the (upwardsloping) 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); Shortrun shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce?
Proﬁt maximization condition: p = SMC In the shortrun, ﬁrm’s supply curve is the (upwardsloping) 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); Shortrun shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce?
Proﬁt maximization condition: p = SMC In the shortrun, ﬁrm’s supply curve is the (upwardsloping) 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); Shortrun shutdown condition: p < AVC(y); Could have π < 0. Intensive margin: how much to produce?
Proﬁt maximization condition: p = SMC In the shortrun, ﬁrm’s supply curve is the (upwardsloping) 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 shortrun 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 ⇒ longrun proﬁts ≥ 0; Extensive margin: py ≥ C(y) or p ≥ AC(y); Longrun shutdown condition: p < AC(y). Intensive margin: how much to produce?
Proﬁt maximization condition: p = LMC In the longrun, 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 longrun 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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 longrun 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 ⇒ Ushaped 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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:
Proﬁtmaximizing 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 abovemarketrate 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 shortrun
n ﬁrms: i = 1, 2, · · · , n; Si (p): ﬁrm i’s shortrun supply function; Shortrun industry supply = horizontal sum of ﬁrm’s shortrun supply:
n S(p) =
i=1 Si (p) S(p) is upward sloping. Shortrun 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 shortrun
n ﬁrms: i = 1, 2, · · · , n; Si (p): ﬁrm i’s shortrun supply function; Shortrun industry supply = horizontal sum of ﬁrm’s shortrun supply:
n S(p) =
i=1 Si (p) S(p) is upward sloping. Shortrun 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 shortrun
n ﬁrms: i = 1, 2, · · · , n; Si (p): ﬁrm i’s shortrun supply function; Shortrun industry supply = horizontal sum of ﬁrm’s shortrun supply:
n S(p) =
i=1 Si (p) S(p) is upward sloping. Shortrun 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 shortrun
n ﬁrms: i = 1, 2, · · · , n; Si (p): ﬁrm i’s shortrun supply function; Shortrun industry supply = horizontal sum of ﬁrm’s shortrun supply:
n S(p) =
i=1 Si (p) S(p) is upward sloping. Shortrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 longrun cost functions. Longrun 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). Longrun efﬁciency:
Efﬁcient scale: all ﬁrms operate at the lowest point of LAC. Longrun industry supply: p = min(LAC).
Competitive industry’s longrun supply is a ﬂat line. Longrun market equilibrium:
p∗ = min(LAC), q∗ = D(p∗ ); Supply decides price and demand decides quantity; Longrun 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 markup 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 markup above its marginal cost of the last unit it can sell; Markup =
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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Firstdegree 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 Seconddegree price discrimination Suppose monopolist can only offer quantity discounts;
Same nonlinear pricing for all customers; Pricing strategy: pricequantity 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 Seconddegree price discrimination Suppose monopolist can only offer quantity discounts;
Same nonlinear pricing for all customers; Pricing strategy: pricequantity 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 Thirddegree price discrimination Monopolist can divide the market into several submarkets and post different prices in them.
Example: student discounts, senior discounts. No resale between submarkets. Pricing strategy: charge different markups in different submarkets. 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 Thirddegree price discrimination Monopolist can divide the market into several submarkets and post different prices in them.
Example: student discounts, senior discounts. No resale between submarkets. Pricing strategy: charge different markups in different submarkets. 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 Thirddegree price discrimination Monopolist can divide the market into several submarkets and post different prices in them.
Example: student discounts, senior discounts. No resale between submarkets. Pricing strategy: charge different markups in different submarkets. 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 Thirddegree price discrimination Monopolist can divide the market into several submarkets and post different prices in them.
Example: student discounts, senior discounts. No resale between submarkets. Pricing strategy: charge different markups in different submarkets. 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 Thirddegree 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 Thirddegree 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 ; Markup in market i = ; More elastic market has a lower markup 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 Thirddegree 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 ; Markup in market i = ; More elastic market has a lower markup 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 Thirddegree 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 ; Markup in market i = ; More elastic market has a lower markup 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 Thirddegree 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 ; Markup in market i = ; More elastic market has a lower markup 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 Thirddegree 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 selfidentify 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 selfidentify 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 selfidentify 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 selfidentify 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 selfidentify 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 selfidentify 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 selfidentify 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 ...
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 Spring '08
 DANNICATAMBAY
 Microeconomics

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