SG Aug2015.pdf

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SG Aug 2015 Page 0 Study Guide Taylor’s University Undergraduate Business Programmes BUS1604/ECN60104 Microeconomics August Semester 2015

Transcript of SG Aug2015.pdf

Page 1: SG Aug2015.pdf

SG Aug 2015 Page 0

Study Guide Taylor’s University

Undergraduate Business Programmes

BUS1604/ECN60104 Microeconomics

August Semester 2015

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________________________________________________________ TUTORIAL 1 (WEEK 2): INTRODUCTION - THE NATURE AND METHOD OF

ECONOMICS. THE ECONOMIZING PROBLEM (CHAPTER 1&2)

CLASS ACTIVITIES:

• Recap Lecture 1

• Tutorial exercises: attempt all questions before attending your tutorial session.

LEARNING OUTCOMES:

� Understand the meaning and significance of economics.

� Distinguish between microeconomics and macroeconomics.

� Explain various types of economic choices and to appreciate the concept of opportunity

cost.

� Understand the marginal concepts and how they relate to rational choices.

� Construct, interpret a production possibility curve and understand its significance within

the micro and macro perspectives.

� Describe economic efficiency.

� Understand the importance of ceteris paribus assumption.

� Distinguish between positive and normative statements.

Make sure you are familiar with the following terms:

• Economics

• Microeconomics

• Macroeconomics

• Rational choice

• Marginal decision

• Production possibility frontier

• Opportunity cost

• Ceteris Paribus

• Economic efficiency

• Production efficiency

• Allocative efficiency

• Positive statement

• Normative statement

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.5 on page 82)

Question 2 (Refer to Q2.2 on page 83)

Question 3 (Refer to Q3.9 on page 85)

Question 4 (Refer to Q1.1 on page 124)

Question 5 (Refer to Q1.3 on page 124)

Question 6 (Refer to Q1.7 on page 124)

Key terms

1. An economy in which the government decides how economic resources will be allocated.

___________________.

2. The study of how households and firms make choices, how they interact in markets, and how the

government attempts to influence their choices. ___________________________.

3. The idea that, because of scarcity, producing more of one good or service means producing less of

another good or service. ________________________________.

4. The highest-valued alternative that must be given up to engage in an activity. ________________.

5. A state of the economy in which production is in accordance with consumer preferences; in

particular, every good or service is produced up to the point where the last unit provides a marginal

benefit to society equal to the marginal cost of producing it. ____________________________.

6. A situation in which a good or service is produced at the lowest possible cost. _________________.

7. The study of the choices people make to attain their goals, given their scarce resources. _________.

8. A curve showing the maximum attainable combinations of two products that may be produced with

available resources and current technology. ____________________.

9. The inputs used to make goods and services. ____________________.

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________________________________________________________ TUTORIAL 2 (WEEK 3): BUSINESS IN A MARKET ENVIRONMENT: DEMAND,

SUPPLY AND THE MARKET (CHAPTER 3)

CLASS ACTIVITIES:

• Recap Lecture 2

• Tutorial exercises

LEARNING OUTCOMES:

� Understand how demand curves are constructed and be able to plot a demand curve from a

table.

� Understand the difference between the income and substitution effects of a price change.

� Distinguish the causes of shifts in and movements along the demand curve.

� Express the relationship between the demand for a product and its various determinants in

the form of a demand function.

� Understand how supply curves are constructed and be able to plot a supply curve from a

table.

� Understand why supply curves are generally upward sloping.

� Distinguish the causes of shifts in and movements along the supply curve.

� Express the relationship between the supply of a product and its various determinants in

the form of a supply function.

Make sure you are familiar with the following terms:

• Law of demand

• Income effect

• Substitution effect

• Law of supply

• Change in quantity demanded and quantity supplied

• Change in demand and supply

• Complements/Substitutes

• Normal/Inferior good

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.3 on page 156)

Question 2 (Refer to Q1.4 on page 156)

Question 3 (Refer to Q1.8 on page 156)

Question 4 (Refer to Q1.14 on page 157)

Question 5 (Refer to Q2.4 on page 158)

Question 6 (Refer to Q2.5 on page 158)

Key terms

1. A curve that shows the relationship between the price of a product and the quantity of the product

demanded. _______________________.

2. The amount of a good or service that a consumer is willing and able to purchase at a given price.

________________________.

3. The change in the quantity demanded of a good that results from a change in price making the good

more or less expensive relative to other goods that are substitutes. ___________________.

4. The rule that, holding everything else constant, when the price of a product falls, the quantity

demanded of the product will increase, and when the price of a product rises, the quantity

demanded of the product will decrease. ___________________.

5. The rule that, holding everything else constant, increases in price cause increases in the quantity

supplied, and decreases in price cause decreases in the quantity supplied. __________________.

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________________________________________________________ TUTORIAL 3 (WEEK 4): BUSINESS IN A MARKET ENVIRONMENT: DEMAND,

SUPPLY AND THE MARKET (CHAPTER 3)

CLASS ACTIVITIES:

• Recap Lecture 3

• Tutorial exercises

LEARNING OUTCOMES:

� Understand the concept of equilibrium in a market.

� Explain how demand and supply determine equilibrium prices and quantities.

� Use demand and supply model to make predictions about changes in equilibrium prices and

quantities.

Make sure you are familiar with the following terms:

• Market

• Equilibrium

• Shortage

• Surplus

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q3.3 on page 158)

Question 2 (Refer to Q3.9 on page 159)

Question 3 (Refer to Q4.3 on page 159)

Question 4 (Refer to Q4.14 on page 160)

Question 5 (Refer to Q4.15 on page 161)

Question 6 (Refer to Q4.17 on page 161)

Key terms

1. A situation in which the quantity demanded is greater than the quantity supplied. ______________.

2. A situation in which quantity demanded equals quantity supplied. ____________________.

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________________________________________________________ TUTORIAL 4 (WEEK 5): BUSINESS IN A MARKET ENVIRONMENT: CONCEPT TO

ELASTICITY OF DEMAND AND SUPPLY (CHAPTER 6)

CLASS ACTIVITIES:

• Recap Lecture 3

• Tutorial exercises

• Alert! Online quiz!

LEARNING OUTCOMES:

� Understand the concept of elasticity, in general and why it is measured in proportionate or

percentage terms.

� Measure elasticity by using the mid-point (average) method.

� Measure elasticity the point method.

� Understand the specific concepts of price, income and cross-price elasticities of demand

and price elasticity of supply.

� Identify the determinants of the various elasticities and explain why they affect elasticity

the way they do.

� Understand the relationship between price elasticity of demand and total consumer

expenditure (or firms’ revenue).

� Understand why long-run supply and demand curves are likely to be more elastic than

short-run ones and the implication this has for price and quantity adjustment over time to a

shift in one or both curves.

Make sure you are familiar with the following terms:

• Elastic

• Inelastic

• Arc method

• Point method

• Price elasticity of demand

• Price elasticity of supply

• Income elasticity of demand

• Cross elasticity of demand

• Total expenditure

• Total revenue.

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.8 on page 259)

Question 2 (Refer to Q1.9 on page 259)

Question 3 (Refer to Q2.7 on page 259)

Question 4 (Refer to Q3.2 on page 260)

Question 5 (Refer to Q3.6 on page 260)

Question 6 (Refer to Q4.3 on page 261)

Key terms

1. The case where the quantity demanded is completely unresponsive to price, and the price elasticity

of demand equals zero. ______________________________.

2. The case where the quantity demanded is infinitely responsive to price and the price elasticity of

demand equals infinity. _________________________________.

3. The percentage change in quantity demanded of one good divided by the percentage change in the

price of another good. ______________________________________.

4. The total amount of funds received by a seller of a good or service, calculated by multiplying price

per unit by the number of units sold. ___________________________.

5. A measure of the responsiveness of the quantity demanded to changes in income, measured by the

percentage change in quantity demanded divided by the percentage change in income.

__________________________.

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________________________________________________________ TUTORIAL 5 (WEEK 6): GOVERNMENT INTERVENTION IN THE MARKET (CHAPTER

4)

CLASS ACTIVITIES:

• Recap Lecture 4

• Tutorial exercises

LEARNING OUTCOMES:

� Understand how the ‘rational’ economic behavior of the equating of marginal benefits and

marginal costs by all people, in all situations, could lead to social efficient general

equilibrium.

� Describe the concept of consumer surplus and producer surplus.

� Identify the various types of market failure and how they lead to production and

consumption being either above or below the social optimum.

� Understand the concept of deadweight welfare loss and demonstrate it graphically.

� Identify the various forms of intervention open to a government.

� Explain how price ceiling and price floor affect the market equilibrium.

� Describe the effects of a tax and its connection with the price elasticity of demand.

� Identify the possible disadvantages of taxes and subsidies as a means of reallocating

resources.

Make sure you are familiar with the following terms:

• Social optimum

• Market Failure

• Underproduction/Overproduction

• Consumer surplus

• Producer surplus

• Marginal benefits/Marginal costs

• Price ceiling/Price floor

• Deadweight loss

• Black markets

• Tax/ Subsidies incidence

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.9 on page 186)

Question 2 (Refer to Q2.5 on page 187)

Question 3 (Refer to Q2.8 on page 188)

Question 4 (Refer to Q3.7 on page 189)

Question 5 (Refer to Q3.15 on page 190)

Question 6 (Refer to Q4.5 on page 191)

Key terms

1. The difference between the highest price a consumer is willing to pay for a good or service and the

actual price the consumer pays. __________________________________.

2. A market outcome in which the marginal benefit to consumers of the last unit produced is equal to

its marginal cost of production and in which the sum of consumer surplus and producer surplus is at

a maximum. __________________________________.

3. A legally determined maximum price that sellers may charge. ______________________________.

4. A legally determined minimum price that sellers may receive. ______________________________.

5. The difference between the lowest price a firm would be willing to accept for a good or service and

the price it actually receives. _______________________________.

6. The actual division of the burden of a tax between buyers and sellers in a market.

_________________.

7. The reduction in economic surplus resulting from a market not being in competitive equilibrium.

________________________________

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________________________________________________________ TUTORIAL 6 (WEEK 7): BACKGROUND TO DEMAND – THEORY OF CONSUMER

BEHAVIOUR (CHAPTER 10)

CLASS ACTIVITIES:

• Recap Lecture 5

• Tutorial exercises

• Discuss media review article

LEARNING OUTCOMES:

� Understand the distinction between total and marginal utility and be able to derive

marginal utility from a total utility table and graph.

� Understand the principle of diminishing marginal utility and how it underlies the downward-

sloping nature of the demand curve.

� Understand the relationship between marginal utility and the demand curve for a good.

� Understand the optimum combination of goods consumed or the equi-marginal principle.

� Derive indifference curves from a table.

� Explain the shape of indifference curves and understand the reason for a diminishing

marginal rate of substitution.

� Derive a budget line from a table and how it is affected by changes in income and changes

in relative prices.

� Derive the optimum consumption point and relate it to the equi-marginal principle.

� Derive an income–consumption curve.

� Use income–consumption curves to distinguish between normal and inferior goods.

� Demonstrate the effect of changes in price and use this to derive the individual’s demand

curve.

� Show the difference between the income and substitution effects in the three cases of a

normal good, an inferior (non-Giffen) good and a Giffen good.

Make sure you are familiar with the following terms:

• Utility

• Marginal utility

• Principle of diminishing marginal utility

• Equi-marginal principle

• Indifference curve

• Marginal rate of substitution

• Income effect

• Substitution effect

• Normal/Inferior/Giffen good

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.2 on page 392)

Question 2 (Refer to Q1.3 on page 392)

Question 3 (Refer to Q1.8 on page 393)

Question 4 (Refer to Q10A.4 on page 409)

Question 5 (Refer to Q10A.7 on page 409)

Key terms

1. The limited amount of income available to consumers to spend on goods and services.

________________________

2. The change in the quantity demanded of a good that results from the effect of a change in price on

consumer purchasing power, holding all other factors constant. __________________________.

3. The principle that consumers experience diminishing additional satisfaction as they consume more

of a good or service during a given period of time. ______________________________.

4. The enjoyment or satisfaction people receive from consuming goods and services.

________________.

5. The change in total utility a person receives from consuming one additional unit of a good or service.

___________________________________________.

6. The change in the quantity demanded of a good that results from a change in price making the good

more or less expensive relative to other goods, holding constant the effect of the price change on

consumer purchasing power. ________________________________________.

7. A curve that shows the combinations of consumption bundles that give the consumer the same

utility. ____________________________________________.

8. The rate at which a consumer would be willing to trade off one good for another.

_______________.

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________________________________________________________ TUTORIAL 7 (WEEK 8): MANAGING BUSINESSS PRODUCTION AND COSTS

(CHAPTER 11)

CLASS ACTIVITIES:

• Recap Lecture 6

• Tutorial exercises

• Discuss media review article

LEARNING OUTCOMES:

� Distinguish between fixed and variable factors of production.

� Distinguish between short-run and long-run production.

� Understand the meaning of a production function.

� Describe the law of diminishing returns and give examples from the real world.

� Construct total, average and marginal physical product curves from a table and show

how various points on one curve relate to points on the other two curves and to

the law of diminishing returns.

� Understand the concepts of explicit and implicit costs and opportunity costs.

� Distinguish between fixed and variable costs and between total, average and marginal costs

and understand the relationships between each of them.

� Calculate and graph each of the various types of costs from a schedule of just one of them.

� Understand the relationships between costs and product and how the law of diminishing

returns affects the shape of the cost curves.

Make sure you are familiar with the following terms:

• Fixed factor

• Variable factor

• Short run production

• Long run production.

• Law of diminishing marginal returns

• Implicit/Explicit cost

• Total product/Total cost

• Average product/Average cost

• Marginal product/Marginal cost

• Total/Average fixed cost

• Total/Average variable cost

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q2.7 on page 435)

Question 2 (Refer to Q2.9 on page 435)

Question 3 (Refer to Q3.6 on page 436)

Question 4 (Refer to Q3.10 on page 436)

Question 5 (Refer to Q5.3 on page 438)

Question 6 (Refer to Q5.7 on page 438)

Key terms

1. The principle that, at some point, adding more of a variable input, such as labor, to the same

amount of a fixed input, such as capital, will cause the marginal product of the variable input to

decline. ________________________________.

2. The period of time in which a firm can vary all its inputs, adopt new technology, and increase or

decrease the size of its physical plant. _______________________________.

3. The period of time during which at least one of a firm’s inputs is fixed. _______________________.

4. The change in a firm’s total cost from producing one more unit of a good or service.

_____________________.

5. The additional output a firm produces as a result of hiring one more worker. _______________.

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________________________________________________________ TUTORIAL 8 (WEEK 9): MANAGING BUSINESS PRODUCTION AND COSTS

(CHAPTER 11)

CLASS ACTIVITIES:

• Recap Lecture 7

• Tutorial exercises

• Discuss media review article

LEARNING OUTCOMES:

� Distinguish between constant, increasing and decreasing returns to scale.

� Distinguish between economies (internal and external) and diseconomies of scale.

� Construct, interpret and understand isoquants and isocosts.

� Demonstrate the least-cost combination of factors to produce a given output.

� Demonstrate the maximum output for a given cost of production.

� Distinguish between the four time periods: immediate, short run, long run and very long

run.

� Understand the shape of the long-run average cost curve.

� Understand the relationship between short-run and long-run average cost curves and

between long-run average and marginal cost curves.

Make sure you are familiar with the following terms:

• Increasing/decreasing/constant returns to scale

• Economies of scale

• Diseconomies of scale

• Minimum efficient scale

• Isoquant

• Isocosts

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q6.7 on page 439)

Question 2 (Refer to Q6.8 on page 439)

Question 3 (Refer to Q11A.4 on page 450)

Question 4 (Refer to Q11A.5 on page 450)

Question 5 (Refer to Q11A.10 on page 450)

Question 6 (Refer to Q11A.15 on page 450)

Key terms

Long-run production

1. A curve that shows the lowest cost at which a firm is able to produce a given quantity of output in

the long run, when no inputs are fixed. _____________________________.

2. The level of output at which all economies of scale are exhausted. ___________________________.

3. The situation in which a firm’s long-run average costs remain unchanged as it increases output.

________________________________.

4. The situation in which a firm’s long-run average costs rise as the firm increases output.

___________.

5. The situation when a firm’s long-run average costs fall as it increases the quantity of output it

produces. __________________________.

Use of isoquants and isocost lines

1. A curve that shows a firm’s cost-minimizing combination of inputs for every level of output.

_______________________________.

2. All the combinations of two inputs, such as capital and labor, that have the same total cost.

3. A curve that shows all the combinations of two inputs, such as capital and labor, that will produce

the same level of output. __________________________.

4. The rate at which a firm is able to substitute one input for another while keeping the level of output

constant. __________________________________.

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________________________________________________________ TUTORIAL 9 (WEEK 10): MARKET STRUCTURE AND PRICING - PERFECT

COMPETITION (CHAPTER 12)

CLASS ACTIVITIES:

• Recap Lecture 8

• Tutorial exercises

LEARNING OUTCOMES:

� Distinguish the various features of the four market structures and give examples of each.

� Understand the difference between price taking and the ability to choose price and

also understand that even firms facing a downward-sloping demand curve cannot

choose both price and quantity.

� Understand that market structure constrains firms’ behaviour, and that firms’ behavior

affects the performance of the industry (the link between structure, conduct and

performance).

� Demonstrate the level of output at which a perfectly competitive firm will maximise profit

(or minimise loss) in the short run. Prove that this represents the maximum profit point.

� Illustrate the amount of normal/supernormal profit or loss the perfectly competitive firm

makes in the short run.

� Determine whether the firm should shut down or continue the production in both the short

and long run.

� Show how the firm’s and the industry’s short-run supply curves are derived.

� Show how the perfectly competitive industry adjusts to profits and losses in the long run

and explain the importance of industry entry and exit.

� Demonstrate how long-run perfectly competitive equilibrium is reached and describe the

various features of this equilibrium.

� Evaluate the strengths and weaknesses of perfect competition from the point of view of the

consumer.

Make sure you are familiar with the following terms:

• Total/average/marginal revenue

• Total/average/marginal cost

• Profit-maximising output

• Perfect competitive firm/market

• Short-run/Long-run equilibrium

• Efficiency

• Loss-minimising

• Supernormal/Normal profit

• Shut-down point

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.4 on page 478)

Question 2 (Refer to Q2.4 on page 479)

Question 3 (Refer to Q3.8 on page 480)

Question 4 (Refer to Q4.1 on page 480)

Question 5 (Refer to Q4.5 on page 481)

Question 6 (Refer to Q6.3 on page 483)

Key terms

1. A state of the economy in which production represents consumer preferences; in particular, every

good or service is produced up to the point where the last unit provides a marginal benefit to

consumers equal to the marginal cost of producing it. ____________________________.

2. The situation in which a firm’s total revenue is less than its total cost, including all implicit costs.

_____________________________.

3. A firm’s revenues minus all its costs, implicit and explicit. ___________________________.

4. The situation in which the entry and exit of firms has resulted in the typical firm breaking even.

_______________________________.

5. The change in total revenue from selling one more unit of a product. ______________________.

6. A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical

products, and (3) no barriers to new firms entering the market.

_______________________________.

7. A buyer or seller that is unable to affect the market price. _____________________________.

8. The situation in which a good or service is produced at the lowest possible cost.

___________________.

9. The minimum point on a firm’s average variable cost curve; if the price falls below this point, the

firm shuts down production in the short run. ____________________________.

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________________________________________________________ TUTORIAL 10 (WEEK 11): MARKET STRUCTURE AND PRICING - MONOPOLY

(CHAPTER 15 & 16)

CLASS ACTIVITIES:

• Recap Lecture 9

• Tutorial exercises

LEARNING OUTCOMES:

� Understand the difficulties in defining and identifying monopolies.

� Identify the various barriers to entry and how they protect a monopoly’s position.

� Understand the nature of the monopolist’s demand curve and the relationship between

average and marginal revenue.

� Demonstrate the price and output at which a monopolist will maximise profits and show the

amount of supernormal profit made.

� Compare the short-run profit maximizing positions of a perfectly competitive industry and a

monopoly, given identical and different industry cost curves.

� Distinguish between a single-price monopoly and a price-discriminating monopoly.

� Distinguish between first-degree, second-degree and third-degree price discrimination.

� Describe the conditions necessary for price discrimination to exist.

� Show the profit-maximising position for a firm practising price discrimination.

� Use the analysis of this and the previous section to compare how well or badly monopoly

and perfect competition serve the public interest.

� Understand the concept of natural monopoly and relate it to the firm’s long-run average

cost curve.

Make sure you are familiar with the following terms:

• Monopolist

• Barriers to entry

• Short-run equilibrium

• Long-run equilibrium

• Efficiency

• Profit-maximising output

• Natural monopoly

• Average/marginal revenue

• Single-price monopoly

• Price-discriminating monopoly

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q2.1 on page 562)

Question 2 (Refer to Q3.1 on page 563)

Question 3 (Refer to Q3.3 on page 563)

Question 4 (Refer to Q3.4 on page 563)

Question 5 (Refer to Q4.8 on page 565)

Question 6 (Refer to Q5.4 on page 566)

Question 7 (Refer to Q2.1 on page 589)

Question 8 (Refer to Q2.15 on page 590)

Key terms

1. The ability of a firm to charge a price greater than marginal cost. __________________________.

2. A firm that is the only seller of a good or service that does not have a close substitute.

____________.

3. A situation in which economies of scale are so large that one firm can supply the entire market at a

lower average total cost than can two or more firms. ___________________________.

4. A government-granted exclusive right to produce and sell a creation.

___________________________.

5. Charging different prices to different customers for the same product when the price differences are

not due to differences in cost. __________________________________.

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________________________________________________________ TUTORIAL 11 (WEEK 12): MARKET STRUCTURE AND PRICING - MONOPOLISTIC

COMPETITION (CHAPTER 13)

CLASS ACTIVITIES:

• Recap Lecture 10

• Tutorial exercises

LEARNING OUTCOMES:

� Specify the assumptions of monopolistic competition.

� Demonstrate the equilibrium of the firm in the short and long run.

� Explain why the firm will operate in the long run at a level of output below the point where

average cost is at the minimum and the sense, therefore, in which long-run

equilibrium represents a position of excess capacity.

� Compare monopolistic competition with both perfect competition and monopoly with

respect to price, output, costs and profit

� Understand why non-price competition is vital in this market structure.

Make sure you are familiar with the following terms:

• Monopolistic firm/market

• Differentiated products

• Non-price competition

• Short-run equilibrium

• Long-run equilibrium

• Profit-maximising output

• Efficiency

• Excess capacity

• Markup

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.1 on page 504)

Question 2 (Refer to Q1.5 on page 504)

Question 3 (Refer to Q2.4 on page 505)

Question 4 (Refer to Q2.9 on page 506)

Question 5 (Refer to Q3.2 on page 507)

Question 6 (Refer to Q4.9 on page 509)

Key terms

1. The actions of a firm intended to maintain the differentiation of a product over time.

_____________.

2. A market structure in which barriers to entry are low and many firms compete by selling similar, but

not identical, products. __________________________.

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________________________________________________________ TUTORIAL 12 (WEEK 13): MARKET STRUCTURE AND PRICING - OLIGOPOLY

(CHAPTER 14)

CLASS ACTIVITIES:

• Recap Lecture 11

• Tutorial exercises

LEARNING OUTCOMES:

� Understand the significance of the recognition of mutual dependence in determining

oligopoly behaviour.

� Understand the conflict between the objectives of maximising an individual firm’s profits

and maximising the joint profits of the whole industry.

� Describe the circumstances under which firms are likely to collude and the circumstances

under which collusion is likely to break down.

� Demonstrate the profit-maximising output for a cartel and the importance of being able to

enforce quotas or some other restrictive practice.

� Understand the notion of Nash equilibrium.

� State the assumptions of the kinked demand curve model and demonstrate, using the

model, why price and output are likely to be stable at the kink.

� Discuss the potential advantages and disadvantages of oligopoly to the consumer.

� Understand the prisoners’ dilemma game and why it is a dominant strategy game.

� Distinguish maximax and maximin strategies and possible compromise strategies in

non- dominant strategy games.

� Explain the importance of credible threats and promises in determining the response of

rivals.

Make sure you are familiar with the following terms:

• Oligopolist

• Mutual dependence

• Collusive/non-collusive oligopolists

• Cartel

• Nash equilibrium

• Kinked demand curve.

• Dominant firm oligopoly.

• Game theory.

• Prisoner’s dilemma.

• Antitrust laws.

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.1 on page 532)

Question 2 (Refer to Q1.2 on page 532)

Question 3 (Refer to Q2.2 on page 533)

Question 4 (Refer to Q2.11 on page 534)

Question 5 (Refer to Q2.12 on page 534)

Key terms

1. A group of firms that collude by agreeing to restrict output to increase prices and profits.

___________.

2. An agreement among firms to charge the same price or otherwise not to compete.

______________.

3. The study of how people make decisions in situations in which attaining their goals depends on their

interactions with others; in economics, the study of the decisions of firms in industries where the

profits of a firm depend on its interactions with other firms. ______________________.

4. A strategy that is the best for a firm, no matter what strategies other firms use. ________________.

5. A situation in which each firm chooses the best strategy, given the strategies chosen by other firms.

______________________________.

6. A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse

off. ______________________________.

7. A market structure in which a small number of interdependent firms compete.

_________________.

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________________________________________________________ TUTORIAL 13 (WEEK 14): MARKET FAILURES AND THE NEED FOR GOVERNMENT

INTERVENTION (CHAPTER 5)

CLASS ACTIVITIES:

• Recap Lecture 12

• Tutorial exercises

LEARNING OUTCOMES:

� Externality and how it arises

� Identify the various types of externality and how they lead to production and

consumption being either above or below the social optimum.

� Understand how negative externalities lead to inefficient overproduction.

� Understand how property rights, emission charges, marketable permits, and taxes can be

used to achieve a more efficient outcome.

� Explain how positive externalities lead to inefficient underproduction.

� Explain how public provision, subsidies, vouchers and patents can increase economic

efficiency.

Make sure you are familiar with the following terms:

• Externality

• Social optimum

• Negative externality

• Positive externality

• Private cost/Social cost

• Property rights

• Coarse theorem

• Marketable permits

• Private benefits/Social benefits.

• Public provisions

• Copyrights

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Tutorial Exercises:

End of Chapter Questions

Question 1 (Refer to Q1.1 on page 224)

Question 2 (Refer to Q1.9 on page 224)

Question 3 (Refer to Q1.12 on page 225)

Question 4 (Refer to Q1.13 on page 225)

Key terms

1. A benefit or cost that affects someone who is not directly involved in the production or consumption

of a good or service. ___________________________.

2. The total benefit from consuming a good or service, including both the private benefit and any

external benefit. _____________________________.

3. The total cost of producing a good or service, including both the private cost and any external cost.

____________________________.

4. The benefit received by the consumer of a good or service. ___________________________.

5. The cost borne by the producer of a good or service. ____________________________.

6. A situation in which the market fails to produce the efficient level of output.

_____________________.