Intro - Introduction How do firms behave? Pricing Scale:...

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Unformatted text preview: Introduction How do firms behave? Pricing Scale: capacity and output choice Entry/exit to markets Product choices Advertising Investment and R&D Other strategic choices: Mergers Tying Vertical restraints (e.g. exclusive dealing) Interaction between firms and market outcomes Models of interaction: Perfect competition Monopoly Oligopoly Market structure: Market size How many firms Concentration Market power Welfare: economic surplus Methods Economic analysis Microeconomics Game theory Focus on profit maximizing behavior of firms Take as given the market demand curve Equation: P = A - B.Q linear demand Inverse demand function: willingness to pay Maximum willingness to pay $/unit Quantity A A/B Demand P 1 Q 1 Constant slope At price P 1 a consumer will buy quantity Q 1 Perfect Competition Firms and consumers are price-takers Firm can sell as much as it likes at the ruling market price do not need many firms do need the idea that firms believe that their actions will not affect the market price Therefore, marginal revenue equals price To maximize profit a firm of any type must equate marginal revenue with marginal cost So in perfect competition price equals marginal cost MR = MC Profit is (q) = R(q) - C(q) Profit maximization: d /dq = 0 This implies dR(q)/dq - dC(q)/dq = 0 But dR(q)/dq = marginal revenue dC(q)/dq = marginal cost So profit maximization implies MR = MC Perfect competition: an illustration $/unit...
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Intro - Introduction How do firms behave? Pricing Scale:...

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