Course Revision Final 2

8/8/2019 Course Revision Final 2

1/45

425

1

0011 0010 1010 1101 0001 0100 1011


2/45

425

1

0011 0010 1010 1101 0001 0100 1011 Motives of firm :

o Total cost of production is low

Why?

Why large firms do not exist?

Principal Agent Problem.

Economic Profit Vs Financial Profit


3/45

425

1

0011 0010 1010 1101 0001 0100 1011

Circular Flow of Economic Activity

Product

Market

Factor

Market

Firms

Households

Goods & services Goods & services

EconomicResources

EconomicResources

Income Factor payments


4/45

425

1

0011 0010 1010 1101 0001 0100 1011

Determinants ofDemand Theory.

Demand Function:

Qd = B + ap P

Derive equation forPrice, TR and MR.Total

Revenue

Quantity

Per period

Quantity

Per period

PricePer

Unit(Rs)

TR

D

MR


5/45

425

1

0011 0010 1010 1101 0001 0100 1011

Elasticity

1. Price Elasticity Ep < -1 Elastic

Ep = -1 Unitar y Elastic

-1 < Ep


6/45

425

1

0011 0010 1010 1101 0001 0100 1011

3. Cross Elasticity

Ec < 0 Complements

Ec > 0 Substitutes

Band Wagon Effect

Snob Goods

Veblen Effect


7/45

425

1

0011 0010 1010 1101 0001 0100 1011 Cobb Douglas Production Function:Q = A K L

Production functions

Relation among Production functionsRate of

output

AverageProduct,

marginal

product

Rate of laborinput(L)

Rate of labor

input(L)

Increasing

Marginal

returns

Diminishing

Marginal

returns

Negative

Marginal

returns

L1 L2 L3

TPL

APL

MPL


8/45

425

1

0011 0010 1010 1101 0001 0100 1011

Production Isoquant

Production Isocost Expansion Path

Rate ofCapital

input (A)

Rate of Labor input

(L)

Expansion Path

Equilibrium Point

IsoQuant

Isocost


9/45

425

1

0011 0010 1010 1101 0001 0100 1011

Economies of Scale

hQ = f(K,L) Economies of Scope

FactorProductivity

= Q

rK + wL

K

L

a

b


10/45

425

1

0011 0010 1010 1101 0001 0100 1011 OpportunityCost

Explicit and Implicit Cost

Marginal Cost

Incremental Cost

SunkCost


11/45

425

1

0011 0010 1010 1101 0001 0100 1011

Short Run Cost FunctionCost(Rs)

Rate of output

Rate of output

Cost per

unit(Rs/Q)

Total Cost

Total VariableCost

Total Fixed Cost

Average

variable Cost

Average Cost

Marginal

Cost

TOTALCOST FUNCTIONS

PERUNIT COST FUNCTIONS


12/45

425

1

0011 0010 1010 1101 0001 0100 1011

Long Run Cost Function

Break Even Analysis

Cost per unit

(Rs/Q)

Rate of output(Q)

SAC1

SAC2SAC3 SAC4

SAC5

LAC

LMC

SMC

C

Q

Revenue

Cost

Rate of output(Q)

Total fixed cost

Breakeven

Revenue &

Cost

Breakeven Rate of output

PROFIT

LOSS

TC

TR


13/45

425

1

0011 0010 1010 1101 0001 0100 1011

Operating Leverage

E = % change in Profit

% change in unit Sales

Vertical Integration

Forward

Backward


14/45

425

1

0011 0010 1010 1101 0001 0100 1011Market

Structure

Number andsize distribution

ofSellers

Number andsize distribution

of Buyers

ProductDifferentiation

Condition ofEntry and Exit

Monopoly

Graph

Single seller Unspecified No close

Substitutes

EntryProhibited

Duopoly

Graph

Two Sellers Unspecified Not specific Entr yDifficult

Oligopoly

Graph

Many small

sellers

Unspecified Not specific Entr yDifficult

MonopolisticCompetition

Graph

Many smallSellers

Many smallBuyers

Slightlydifferentiated

product.

Easy Entry andExit

Perfect

Competition

Graph

Many small

sellers

Many small

Buyers

Undifferentiated Easy Entry and

Exit


15/45

425

1

0011 0010 1010 1101 0001 0100 1011

Cartel and Collusion

Advertising

Quantity per period

Price cost

per unit (Rs)

P1

P2

ad

d

D

D

e

b g

Q1 Q2

MC=AC

Price per

unit (Rs)

QuantityPer period

D

D

D

D


16/45

425

1

0011 0010 1010 1101 0001 0100 1011 Pricing of Multiple Products Products with Interdependent demand

Joint Products

No excess production Excess productionPrice cost per unit(Rs)

Quantity per

period

PB

PH

Q0

MCMRT

MRBMRH

DB

DH

Price cost per unit(Rs)

PB

PH

Q0

MC

MRT

MRH

DB

DH

Quantity

per period

MRB

QH


17/45

425

1

0011 0010 1010 1101 0001 0100 1011

FullyDistributed

Incremental cost pricing

RamseyPricingPrice Cost per

unit (Rs)

Quantity perperiod (Q)

PxPx

Q x Q x

MCX

DX

Price Cost per

unit (Rs)

Quantity perperiod (Q)

Py

Q y Q y

MCY

DY

Py


18/45

425

1

0011 0010 1010 1101 0001 0100 1011

Intermediate Products (transfer pricing)

External market

No External market

Pricing Intermediate Goods with no external marketPrice Cost

per unit (Rs)

QuantityPer unit

Pw

Pp

Q w

MC

t

MCp

MCw =MCt + MCp

Dw

MRw


19/45

425

1

0011 0010 1010 1101 0001 0100 1011

Product Bundling

Peak load PricingPrice per unit (Rs)

Capacity

DT

D2

D1

PT

P1

P2

P2 *=B

X X*


20/45

425

1

0011 0010 1010 1101 0001 0100 1011

Cyclical Pricing

Rigid Pricing

Flexible Pricing

Going rate Pricing

Special design

Charm Pricing

Seasonal Pricing

Progressive Pricing

New Product Pricing


21/45

425

1

0011 0010 1010 1101 0001 0100 1011

Market structure 1: Monopolist (Product

Market) Perfect Competitor (Input Market)

Market structure 2: Monopolist (Productmarket) Monopsonist (Input market)

Wage rate,

MRP

Wage rate,

MRP

Rate of Labor

input

Rate of Labor

input

DemandSupply

Supply

Labor

Supply

Marginal

Expenditure on

labor

Marginal

revenue product


22/45

425

1

0011 0010 1010 1101 0001 0100 1011

Economic RentPrice of input

(Rs/unit)

Rate of input use

Supply of input

D2

D1

P2

P1

Q1

Wage & incomedifferentials


23/45

425

1

0011 0010 1010 1101 0001 0100 1011

Labor UnionsWage rate

(Rs/unit)

Rate of labor input

Marginal Exp on input

Supply

Demand

Marginal

revenue

Lm Lu

Wu

Wm

W*

Minimum Wage Laws


24/45

425

1

0011 0010 1010 1101 0001 0100 1011

Payoff Matrix

Nash Equilibrium

Dominant Strategy

Dominated Strategy Maximin Strategy

Minimax Strategy

Mixed Strategy

(x,x) (x,y)

(y,x) (y,y)

FIRM 1

FIRM 2

Cond 1

Cond 2

Cond 1 Cond 2


25/45

425

1

0011 0010 1010 1101 0001 0100 1011

Non-cooperative Games

Cooperative Games

Repeated Games

Sequential Games

Entry Limiting PricingPrice, cost per

unit (Rs)

Quality per period

MC

AC

D

D

MR

Pm

PL

Q e Q L Q m Q x


26/45

425

1

0011 0010 1010 1101 0001 0100 1011

Excise Duties

3 Modes to recover Tax Increase the cost

by the amount of

increased tax.

For price inelastic

product, tax is

beard by buyer.

Keep the price at

pre taxed level.

For price elastic

product, tax is

beard by seller.

Increase the

price partially by

the increased tax

level.D

D

S

S

S

S

D D

S S

SS

P

Q

P

Q


27/45

425

1

0011 0010 1010 1101 0001 0100 1011

Profit Maximization and Profit Taxes

Price, cost

per unit

(Rs)

QuantityPer

period

QuantityPer

period

Total

Profit(Rs)

MC

D

MR

Pretax

profit

After tax

profit

Q m

Q m

Pm


28/45

425

1

0011 0010 1010 1101 0001 0100 1011

Revenue Maximization and Profit Taxes

Price, cost

per unit

(Rs)

QuantityPer

period

QuantityPer

period

Total

Profit(Rs)

MC

D

MR

Pretax

profit

After tax

profit

Q 1

P3

P2

Q 2Q3

Q3

Q2 Q1


29/45

425

1

0011 0010 1010 1101 0001 0100 1011

Effluent Taxes

Taxes on Inputs

Cost Minimization and Input TaxesRate of capital

input

Rate of labor

input

C1

C2

B

A

C2 C1

Q 0K*

K**

L** L*


30/45

425

1

0011 0010 1010 1101 0001 0100 1011

Property Taxes

Fixed Property

Mobile Property

Mobile Capital & Property TaxRate of return(percent) Rate of return

(percent)

Capital

re

re

OA OBK2 K1

DB

DB

DA

DA

DA

DA


31/45

425

1

0011 0010 1010 1101 0001 0100 1011

Tax Preferences

Interest Deduction

Tax Exempt Fringe Benefit

Investment Tax Allowance

Accelerated Depreciation


32/45

425

1

0011 0010 1010 1101 0001 0100 1011

Definition Positive Externalities

Positive Externalities

Price

Quantity

Supply

(private cost)

Equilibrium

Qmarket

Q optimum

Demand

(private value)

Social

value


33/45

425

1

0011 0010 1010 1101 0001 0100 1011

Negative Externalities

Negative Externalities

Quantity

Social Cost

Supply(private cost)

EquilibriumOptimum

Q marketQ optimum

Demand

(private value)


34/45

425

1

0011 0010 1010 1101 0001 0100 1011

Private Solutions

Coase Theorem

Why they do not always work

Public Policies

Regulations

Pigovian tax Pollution PermitsPrice of

Pollution

Price of

Pollution

Quantity of pollution

Quantity of

pollution

Supply of pollution

permits

Demand for

pollution rightsDemand for

pollution rights

Pigovian taxP

Q

P

Q


35/45

425

1

0011 0010 1010 1101 0001 0100 1011

Different kind of Goods

Public Goods

Ice cream cones

Clothing

Congested Toll roads

Natural monopolies

Fire protection

Cable TV

Uncongested toll roads

Common Resources

Fish in the ocean

The environment

Congested non toll roads

Public Goods

Tornado siren

National defense

Uncongested non tollroads

Rival

Excludable

Yes No

Yes

No


36/45

425

1

0011 0010 1010 1101 0001 0100 1011

Public Goods

Free RiderProblem

Examples:National Defense

Basic Research

Fighting Poverty Common Resources

Tragedy ofCommons

Examples: Clean Air and Water

Congested Roads

Wildlife


37/45

425

1

0011 0010 1010 1101 0001 0100 1011 Asymmetric Information Hidden Actions

Principal Agent Problem

Moral Hazards Hidden Characteristics

Adverse Selection

Lemons Problems Signaling and Screening

Public Policy


38/45

425

1

0011 0010 1010 1101 0001 0100 1011

Political Economy

Condorcet Voting ParadoxArrows Impossibility Theorem

Median Voter

Behavioral Economics

Homosapiens

Rationality

Fairness

Inconsistency

Homoeconomicus


39/45

425

1

0011 0010 1010 1101 0001 0100 1011


40/45

425

1

0011 0010 1010 1101 0001 0100 1011

Price. Cost

per unit

Price. Cost

per unit

Quantity per

period

Quantity per

period

MC

AC

D

Pe

q m q c

P

Ps

MC

ATC

AVC

SHORTRUN ProfitMaximizing

Output in PC

Produce or shutdown condition

Consumer SurplusPrice perunit (Rs)

Quantity per period

P1

PeC

S

D

Q e

Back


41/45

425

1

0011 0010 1010 1101 0001 0100 1011

MC

AC

Price, cost per

unit (Rs)

Quantity per

period

Pm

Q m

D

MR

Price, cost

per unit (Rs)

Quantity per

period

MC

AC

AVC

D

MRQ m

Pm

ACm

AVCm

ProfitMaximizing Price

and Output for a

MONOPOLY

Loss Minimizing Price and

Output for a MONOPOLY


42/45

425

1

0011 0010 1010 1101 0001 0100 1011

Evaluation ofMonopolyPrice cost per

unit(Rs)

Quantity per period

Economic Profit

Rent Seeking

Technical

Inefficiency

Deadweight loss

Consumer Surplus

B

C

D MC=MRPC

Pm

QC

Q m MRBack

A


43/45

425

1

0011 0010 1010 1101 0001 0100 1011Price per unit(Rs)

Quantity per

period

P1

P2

Q1 Q2 Q2

D

D

d

d

Demand Curve forOligopolist

Back


44/45

425

1

0011 0010 1010 1101 0001 0100 1011q1

q2

Firm 1

Firm 2

Reaction Function forDuopolies

Back


45/45

425

1

0011 0010 1010 1101 0001 0100 1011Price Cost unit (Rs)Price Cost unit

(Rs)

Quantity per period Quantity per period

MCAC

D

MR

Pc

Q c Q c

Pc

MC

AC

D

MR

Short run profit Maximization Long run profit Minimization

Back

Quasi rent

SupernormalProfit

Course Revision Final 2

Documents

Transcript of Course Revision Final 2