Exchange Economies (revisited)
No production, only endowments, so no
description of how resources are converted to
General equilibrium: all markets clear
1st and 2nd Fundamental Theorems of
How Should a Monopoly Price?
So far a monopoly has been thought of as a
firm which has to sell its product at the same
price to every customer. This is uniform
Can price-discrimination earn a monopoly
(x1, x2, , xn).
Commodity prices are p1, p2, , pn
Affordable p1x1 + + pnxn m
(m = consumers income)
The consumers budget set is the set of all
The budget line is the upper boundar
A firm uses inputs j = 1,m to make
products i = 1,n.
Output levels are y1,yn.
Input levels are x1,xm.
Product prices are p1,pn.
Input prices are w1,wm.
The Competitive Firm
The competitive firm takes al
and future values
Intertemporal budget constraint
Preferences for intertemporal
Present and Future Values
periods 1 and 2.
r - in
Supply From A Competitive Industry
How are the supply decisions of the many
individual firms in a competitive industry to be
combined to discover the market supply curve
for the entire industry?
Supply From A Competitive Indust
Information in Competitive Markets
In purely competitive markets all agents are
fully informed about traded commodities and
other aspects of the market.
What about markets for medical services, or
insurance, or used car
Game theory helps to model strategic
behavior by agents who understand that
their actions affect the actions of other
Some Applications of Game Theory
The study of oligopolies (industries
containing only a few
statics analysis of
How ordinary demands x1*(p1,p2,y)
and x2*(p1,p2,y) change as price and
- price p1 changes
- price p2 changes
- income y changes
(other factors do not change)
How does a firm decide how much product to
supply? This depends upon the firms
Are there many other firms, or just a few?
Do other firms de
An externality is a cost or a benefit imposed
upon someone by actions taken by others.
The cost or benefit is thus generated externally
to that somebody.
An externally imposed benefit is a positive
We in this class consider a general
equilibrium model with two consumers and
too goods (or two markets).
Two consumers, A and B.
Their endowments of goods 1 and 2 are
A firm is a cost-minimizer if it produces any
given output level y 0 at smallest possible
c(y) denotes the firms smallest possible total
cost for producing y units of output.
c(y) is the firms
A monopoly is an industry consisting a single
A duopoly is an industry consisting of two
An oligopoly is an industry consisting of a few
firms. Particularly, each firms own price or
output decisions affect it
Types of Cost Curves
A total cost curve is the graph of a firms total
A variable cost curve is the graph of a firms
variable cost function.
An average total cost curve is the graph of a
firms average total cost fun
A technology is a process by which inputs are
converted to an output.
E.g. labor, a computer, a projector, electricity,
and software are being combined to produce
Usually several technologie
contingent consumption (
Preferences under uncertainty
Expected utility function
Demand for insurance
Diversification and risk spreading
Uncertainty is Pervasive
Examples of utility functions and their
Marginal rate of substitution
MRS after monotonic transformation
A monopolized market has a single seller.
The monopolists demand curve is the
(downward sloping) market demand curve.
So the monopolist can alter the market
price by adjusting its output level.
Public Goods - Definition
A good is purely public if it is both
nonexcludable and nonrival in consumption.
Nonexcludable - all consumers can consume the
Nonrival - each consumer can consume all of the
Public Goods -
Individual to Market Demand
Revenue and own-price elasticity of
Marginal revenue and price elasticity
From Individual to Market
economy containing n consumers,
denoted by i = 1, ,n.
Different economic states will be preferred by
How can individual preferences be
aggregated into a social preference over all
possible economic states?
x, y, z denote diffe