o few firms
o either homogeneous or differentiated products
o interdependence of firms - policies of one firm affect the other firms
o substantial barriers to entry
o examples: auto industry and cigarette industry
o Collusion and Competition
Calculating Costs I
Analyze the following information regarding # of kitchen tables made and the firms total costs.
# Kitchen Tables
o Why is labor behaviorally interesting?
Important in scale
People sell themselves (identity, appreciation)
Natural social comparison with others
Quality assurance problem + room for rationalization
Firms problem is endogenous sortin
The Consumer Theory
o How Consumers Make Choices under Income Constraints
o Some Questions
What is behind a consumers demand curve?
How do consumers choose from among various consumer goods?
What determines the value of a consumer good?
o Game theoretic notions go back thousands of years
Talmud and Sun Tzu's writings.
o Modern theory credited to John von Neumann and Oskar Morgenstern
Theory of Games and Economic Behavior. In the early 1950s,
o John Nash (A Beautiful
o A measure of the responsiveness of one variable (usually quantity demanded or
supplied) to a change in another variable
o Most commonly used elasticity: price elasticity of demand, defined as:
o Price elasticity of demand
Demand is said to
Demand, Supply, and Market Equilibrium
o The Basic Decision-Making Units
A firm is an organization that transforms resources (inputs) into products
(outputs). Firms are the primary producing units in a market economy.
An entrepreneur is a person who or
Chapter 6:The Economics of Information and Choice Under Uncertainty
o Chapter Outline
The Economics Of Information
Choice Under Uncertainty
Insuring Against Bad Outcomes
Until this chapter, we assumed perfect information but in practice,
o Market structure identifies how a market
is made up in terms of:
The number of firms in the industry
The nature of the product produced
The degree of monopoly power each firm has
The degree to which the firm can influence price
o All economic questions and problems arise from scarcity. Economics assumes
people do not have the resources do satisfy all of their wants. Therefore, we
must make choices about how to allocate those resources. We make decisions
o To include societys value of commodities under alternative resource allocations
directly involves welfare economics
Study of all feasible allocations of resources for a society
Establishment of criteria for selecting
The Theory of Production
o Production in the Long Run (LR)
o Lesson Objectives
Understand the theory that explains the short run
Appreciate that different sized firms have different levels of productive
Understand the theory of long-run cos
o A firm is a monopoly if . . .
it is the only seller of its product, and
its product does not have close substitutes.
o WHY MONOPOLIES ARISE
The fundamental cause of monopoly is the existence of barriers to entry.
o WHY MONOPOLIES ARISE
o The concept of competition is used in two ways in economics.
Competition as a process is a rivalry among firms.
Competition as the perfectly competitive market structure.
o Competition as a Process
Competition involves one firm t
The Costs of Production
o In this chapter, look for the answers to these questions:
What is a production function? What is marginal product? How are they
What are the various costs, and how are they related to each other and to