Microeconomics I Undergraduate Programs Fernando Branco 2006-2007 Second Semester Sessions 5&6.
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Transcript of Microeconomics I Undergraduate Programs Fernando Branco 2006-2007 Second Semester Sessions 5&6.
Microeconomics IUndergraduate Programs
Fernando Branco
2006-2007Second Semester
Sessions 5&6
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Perfect competition
A perfectly competitive market is characterized by:– Many sellers and buyers (“small”);– Products are perfect substitutes (homogeneous);– Agents have perfect information relative do
products and prices;– There are no transaction costs;– There is free entry and exit.
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Market demand and firm demand
Clients will want to buy from the lowest cost seller.
P
Q
P m
D Market
D i
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
How much does a firm want to supply in the market?– It depends on the market price.
The firm chooses the quantity to maximize its profits:
)(Max qCpq )(qCMgp
The second order condition requires that the marginal costs are increasing.
Firm’s supplyand marginal costs
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Firm’s supply:short run and long run
In the short run:– There is supply only if the price exceeds the
average variable cost.
In the long run:– There is supply only if the price exceeds the
average (total) cost.
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
The market equilibrium in the short run results from the intersection of supply and demand:
q
pSSi
D
p*
qi* q*
Market equilibrium: short run
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
The market equilibrium in the long run depends on the productive structure only.
q
C S (MC)
ACp*
qi*
The demand determines the number of active suppliers only.
Market equilibrium:long run
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Properties of the equilibrium
The equilibrium in a competitive market allows for efficient transactions:– P=MC;
– Global surplus is maximized;
– In the long-run, the average cost is minimized.
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Comparative staticsin the equilibrium
What is the impact on the equilibrium if the demand expands?
What is the impact on the equilibrium if the price of an input increases?
What is the impact on the equilibrium if there is a technological innovation that reduces costs?
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Monopoly market
A single firm serves the “relevant market”:– There are no close substitutes;– Monopolies are often “local” monopolies.
The demand of the market is the same as the demand of the firm.
The firm has control over the price:– But the price charged determines the quantity
sold.
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Sources of monopoly
Entry barriers;
Economies of scale;
Economies of scope.
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
How much should the firm sell? The firm chooses a quantity to maximize its
profit:)(Max qCP(q)q )()( qCMgqRMg
The monopolist’s decision
Graphical analysis. The impact of fixed costs. Why not a supply curve?
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Q
P, C
DAC
MR
MC
P*
Q*
The monopolist’s decision: a graph
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Q
P, C
P*
Q*
AC
DMR
MC
Q
P, C
AC
DMR
MC
P*
Q* Q
P, C
AC
DMR
MC
P*
Q*
The fixed costs
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Q
P, C
D1
D2
MCP2*
Q*
P1*
Why not a supply curve?
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Topics in the monopoly
A monopolist with two-plants:
Price discrimination:– Perfect price dicrimination (first-degree);– Second-degree price discrimination;– Third-degree price discrimination:
• The monopolist with two markets.
BA MCMCMR
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
How much to produce in each plant?
)()()(Max BBAABABA qCqCqqqqP
BABA MCMCpqqdQdP
Equalize the marginal cost in each plant. Graphic analysis.
Monopolist with two plants
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Q
P, C
D
RMg
CMgCMg1
CMg2
Q1*Q2* Q*
P*
Monopolist with two plants: graphic
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Perfect price discrimination
What if the monopolist could charge different prices for different transaction?– The monopolist could charge a price per
transaction: • exactly the amount that the buyer would be willing to pay.
The volume of transactions would be maximzied;
The monopolist would get the full surplus.
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Q
P
Q3Q2Q1
P1
P2
P3
CMg
Q
P
P1
P2
P3
P4
P5
P6
P7
Q1 Q2 Q3 Q4 Q5 Q6 Q7
Increasing discrimination
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Second degree price discrimination
Discrimination for several types of buyers.
Examples:– Discounts, two-part tariffs, blocks.
The monopolist increases the profit and the quantity transacted.
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Third-degree price discrimination
Charge different prices in different markets.
Example of a monopolist with two-markets:
– Marginal revenues are equalized.MCMRMR BA
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Many buyers and sellers Firms produce differentiated goods:
– Each has close substitutes. Free entry and exit.
Product demand and entry. In the short-run, behave as a monopolist. In the long-run, demand adjusts and monopolist has zero profit.
Monopolistic competition
Microeconomics I Undergraduate Programs2006-2007 • Second Semester • Session 5&6 ©Fernando Branco
Firms’ decisions Each firm maximizes profits as monopolists do:
)();(Max iiiiii qCqnqP
It is important to distinguish between the short-run (fixed n) and the long-run (n varies).– In the long-run demand adjusts so that:
npqi
iii
iip
qMCp
;,
1)(
ii ACp