Section 06 _Firms II_

Section 06 _Firms II_ - Firms Part II (Section 6) Table of...

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1 Firms Part II (Section 6) Table of Contents I. Perfect competition revisited II. Monopoly III. Monopsony IV. Oligopoly & Duopoly V. Monopolistic Competition VI. Bilateral Monopoly VII. Acquiring Market Power
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2 I. Perfect competition (pure-competition) (price-takers) revisited PC firms face a horizontal demand curve. Other firms face a downward sloping demand curve All firms set MR=MC. Why? What is the special case of this rule for PC firms? Intuitively? Calculus?
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3 A. PC firms and costs 1. Examine a constant cost industry What happens if demand increases? Graphs: What happens to prices in the short-run? What happens to profits in short-run? What will the above do to the number of firms? Why will the (short-run) supply curve shift? You should be able to do a demand decrease Constant-cost Industry - An industry where factor (input) prices & costs of production are constant (as market output increases or decreases) Market (LR) supply curve is horizontal
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4 2. Examine a increasing cost industry What happens if demand increases? Graph: What happens to prices in the short-run? What happens to profits in short-run? What will the above do to the number of firms? What will the number of firms entering do to the ATC of the individual firm? You should be able to do a demand decrease What does the long-run supply curve look like? 3. What is your intuition about the supply curve for a decreasing cost industry?
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5 II. Monopoly What is a monopoly? Landsburg’s definition is non-standard… but maybe not so bad Do monopolies exist? Have they ever existed? A. A graph from introductory microeconomics Where do they produce? What price do they charge? Why?
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6 B. The “calculus” of a monopoly 1. General problem: ( ) ( ) ( ) ( ) ( ) ( ) 0 : d : Foc q of function a as cost q C q of function a as revenue = - Π - - - Π q C q R dq q R q C q R Max Max q q What does this say in words: ( ) ( ) ( ) ( ) q C q R or q C q R dq < < - Π 0 : d : SOC 2 2
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7 2. Specific example Spse the (inverse) demand curve facing the monopoly is: p=100-4q and cost function is: c=50+20q [ ] ( ) [ ] [ ] [ ] : : 20 50 4 100 20 50 4 100 20 50 4 100 20 50 2 2 SOC FOC q q q Max q q q q q q q pq q - - - - - - = - - - = - - = Π
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8 C. Elasticity of demand and production decision of a monopoly Spse you want to sell one more unit how much do you have to lower price? Depends on the demand curve Recall: P Q Q P D P Δ Δ = ε Solve for P Δ : D P Q Q P P Δ = Δ One more unit 1 = Δ Q D P Q P P 1 = Δ - Why is P Δ negative? D P Q P P = Δ (1) This shows how much the price you can charge changes Now show how much revenue changes when you P Remember two effects: 1. Sell more items TR 2. Sell items were already selling at a lower price TR Net effect: Q P P TR Δ - = Δ (2)
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9 Substitute into (2) from (1) = Δ TR What is TR Δ called? (3)
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Section 06 _Firms II_ - Firms Part II (Section 6) Table of...

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