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Transcript of Why are we Speed Reviewing? 1.Having you review on your own wouldnt be effective 2.Lecturing about...
![Page 1: Why are we Speed Reviewing? 1.Having you review on your own wouldnt be effective 2.Lecturing about every concept would be too boring. Speed Reviewing.](https://reader038.fdocuments.net/reader038/viewer/2022110303/55142e46550346d8488b5e54/html5/thumbnails/1.jpg)
Why are we “Speed Reviewing”?1. Having you review on your own wouldn’t be effective2. Lecturing about every concept would be too boring.
“Speed Reviewing” will help you identify what you need to study.
So you must come see me about specific things you don’t understand.
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Unit IV: Unit IV: Imperfect Imperfect
CompetitionCompetition
Half Way
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Imperfect Competition1. The cost curves are the same2. The MR= MC rule still applies3. Shut down rule still applies4. All have a downward sloping
demand curve. To sell more a firm must lower its
price.5. All are inefficient.6. MR < Demand
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Characteristics Characteristics of Monopoliesof Monopolies
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5 Characteristics of a Monopoly5 Characteristics of a Monopoly
3. “Price Maker”2. Unique good with no close substitutes
• The firm can change the price by changing the quantity it produces
• The Firm IS the Industry1. Single Seller
4. High Barriers to Entry•New firms CANNOT enter market•No immediate competitors
5. Some “Nonprice” Competition
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Drawing Drawing MonopoliesMonopolies
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1 2 3 4 5 6
P
Q
$100
80
60
40D
MR
MR is below Demand
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P Qd TR MR
$11 0 0 -
Why is MR less than Demand?
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
Why is MR less than Demand?
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
Why is MR less than Demand?
$9 $9
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
$8 3 24 6
Why is MR less than Demand?
$9 $9
$8 $8 $8
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7 $7
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
$6 5 30 2
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
$6 5 30 2
$5 6 30 0
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
$6 5 30 2
$5 6 30 0
$4 7 28 -2
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
$6 5 30 2
$5 6 30 0
$4 7 28 -2
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
$6 5 30 2
$5 6 30 0
$4 7 28 -2
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
MR IS LESS THAN PRICE
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Elastic vs. Inelastic Elastic vs. Inelastic Range of Demand Range of Demand
CurveCurve
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1 2 3 4 5 6
P
Q
$100
80
60
40D
MR
Elastic and Inelastic Range
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Do
llar
sD
oll
ars
$200
150
100
50
$750
500
250
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Elastic and Inelastic Range
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Elastic and Inelastic Range
Do
llar
sD
oll
ars
$200
150
100
50
$750
500
250
MR
Elastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
DQ
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Q
Total Revenue TestIf price falls and
TR increases then demand is
elastic.
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Q
Do
llar
sD
oll
ars
$200
150
100
50
$750
500
250
TR
MR D
Inelastic Range
Elastic Range
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Elastic and Inelastic Range
Total Revenue TestIf price falls and
TR falls then demand is inelastic.
When MR goes negative, TR will fall
Total Revenue TestIf price falls and
TR increases then demand is
elastic.
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Putting Putting Demand, MR, Demand, MR,
and Cost and Cost TogetherTogether
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D
MC
ATC
MR
Profit =$5
MR = MC Rule Still Applies
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Pri
ce,
cost
s, a
nd
rev
enu
e
$9
8
7
6
5
4
3
2
How much is the TR, TC and Profit or Loss?
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D
MCATC
MR
140 Loss
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Pri
ce,
cost
s, a
nd
rev
enu
e
AVC
Q
How much is the TR, TC, and Profit or Loss?
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Monopolies and Monopolies and EfficiencyEfficiency
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Monopolies are inefficient because they…1. Charge a higher price2. Under produce• Not allocativly efficiency
3. Produce at higher costs • No productive efficiency
4. Have little incentive to innovate
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Q
EFFICIENCY OF PERFECT COMPETITION
P
D
S = MC
Pc
Qc
An industry in pure competition
MB=MC
CS
PS
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Q
INEFFICIENCY OF PURE MONOPOLYP
DMR
S = MC
Pc
Pm
QcQm
At MR=MCA monopolist will sell less units at a
higher price than in competition
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Q
CS and PS of a MonopolyP
DMR
S = MC
Pc
Pm
QcQm
Result is DEADWEIGHT LOSS
to society
CS
PS
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D
MC
MR
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Pri
ce,
cost
s, a
nd
rev
enu
eAre Monopolies Productively Efficient?
Does Price = Min ATC?
ATC
No. They are not producing at the lowest
cost (min ATC)
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D
MC
MR
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Pri
ce,
cost
s, a
nd
rev
enu
eDo Monopolies Have Allocative Efficiency?
Does Price = MC?
ATC
No. Price is greater. The monopoly is under
producing.
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Regulating Regulating MonopoliesMonopolies
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How do they regulate?•Price controls: Price Ceilings
Why Regulate?Why would the government regulate
an monopoly? 1. To keep prices low 2. To make monopolies efficient
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1.Socially Optimal PriceP = MC (Allocative Efficiency)
Where should the government place the price ceiling?
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)NOT THE SAME AS PRODUCTIVE EFFICIENCY
OR
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Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Monopoly PriceMR = MC
Qm
Pm
REGULATED NATURAL MONOPOLY
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Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Fair-Return PriceNormal Profit Only
Qf
Pf
TR = TC
REGULATED NATURAL MONOPOLY
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Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Socially-OptimumPrice
P = MC
Qr
Pr
REGULATED NATURAL MONOPOLY
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Price Price DiscriminationDiscrimination
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Requires the following conditions:•Firm must have monopoly power•Firm must be able to segregate the market •Consumers must not be able to resell product
PRICE DISCRIMINATION
Definition:Practice of selling the same products to different buyers at different prices
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Q
D
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
Q2
A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
MR=D
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Q
D
MC
ATC
P
Pri
ce a
nd
Co
sts
What output do they make? Where is Consumer Surplus?
Q2
MR=D
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Q
D
MC
ATC
P
Pri
ce a
nd
Co
sts
Profit withprice discrimination
Where is the Profit?
Q2
MR=D
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Why does MR equal Demand?
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$10
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 19 9
$8 3 27 8
$7 4 34 7
$6 5 36 6
$5 6 35 5
$4 7 39 4
Why does MR equal Demand?
$10 $9
$10 $9 $8
$10 $9 $8
$10 $9 $8 $7
$7
$6
$5$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5 $4
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What’s the Point?•Perfectly price discriminating firms:
•Make more profit•Produce more •Produce at allocative efficiency
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Monopoly Practice FRQ
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Monopolistic CompetitionMonopolistic Competition
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Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSMonopolistic Competition:
•Relatively Large Number of Sellers•Differentiated Products•Some control over price•Easy Entry and Exit•Non-price competition (Advertising)
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Examples:1. Fast Food Restaurants2. Furniture companies3. Jewelry stores4. Hair Salons5. Clothing Manufacturers
Differentiated Products• Goods are NOT identical.• Firms seek to capture a piece of the
market by making unique goods.• Since these products have substitutes,
firms use NON-PRICE Competition
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Monopolistic Qualities• Control over price of own good due
to differentiated product.• D > MR • Plenty of non-price competition• Not efficient
“Monopolistic” +”Competition”
Perfect Competition Qualities• Large number of smaller firms• Relatively easy entry and exit• Zero Economic Profit in Long-Run
since firms can enter.
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Drawing Drawing Monopolistic Monopolistic CompetitionCompetition
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D
MR
$4
ATCP
rice
an
d C
ost
s
Q1
Short-RunEconomic
Profits
What Happens?
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
$2
MC
Quantity
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$4
$2
D
MR
ATCP
rice
an
d C
ost
s
Q1
New Firms Enter
Quantity
MC
Short-RunEconomic
Profits
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
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D
MR
$4
ATCP
rice
an
d C
ost
s
Q1
Normal Profit
$2
MC
$1
LONG- RUN EQUILIBRIUM
Quantity
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D
MR
$7
Pri
ce a
nd
Co
sts
Q1
Short-RunEconomic
Loss
What happens? MC
$1
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
ATC
Quantity
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D
MR
MC
ATCP
rice
an
d C
ost
s
Q3
Quantity
Long-Run EquilibriumNormalProfitOnly
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
$7
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MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION
AND EFFICIENCYAND EFFICIENCY
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MONOPOLISTIC COMPETITIONAND EFFICIENCY
• Not Productively Efficient Minimum ATC
• Not Allocatively EfficientPrice MC
• Firm has Excess Capacity
Graphically…
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Excess Capacity• The gap between the minimum
ATC output and the profit maximizing output
• Given current resources, the firm can produce at minimum ATC, but they decide not to.
MONOPOLISTIC COMPETITIONAND EFFICIENCY
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D
MR
MC
P3 = A3
ATCP
rice
an
d C
ost
s
Q3
Quantity
Long-Run Equilibrium
Excess Capacity
MONOPOLISTIC COMPETITIONAND EFFICIENCY
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Oligopoly
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Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSOligopoly:•A Few Large Producers•Identical or Differentiated Products•Mutual Interdependence
•Firms use Strategic Pricing•High Entry Barriers•Examples: Cereal Companies, Car Producers
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Oligopolies occur when only a few large firms start to control an industry.
High barriers to entry keep others from entering.
Types of Barriers to Entry• Economies of Scale• High Start-up Costs• Ownership of Raw Materials
HOW DO OLIGOPOLIES OCCUR?
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Game Theory
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What is game theory?
The study of how people behave in strategic situations
A thorough understanding of game theory helps firms in an oligopoly
maximize profit.
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OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
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High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
Greatest Combined Profit if both Sell High
OLIGOPOLY BEHAVIOR
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High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
Each firm recognizes that more profit is made if they lower price
OLIGOPOLY BEHAVIOR
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High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
BUT if both lower price they end up in the Worst Case
OLIGOPOLY BEHAVIOR
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High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
To make more profit, firms may try to cooperate (collude)
OLIGOPOLY BEHAVIOR
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High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
OLIGOPOLY BEHAVIORTo make more profit, firms may try to cooperate (collude)
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High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
But now each firm has the incentive to cheat.
OLIGOPOLY BEHAVIOR
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What did we learn?1. Oligopoly pricing must be
strategic2. Oligopolies have a tendency to
collude to gain profit.(Collusion is the act of cooperating
with rivals in order to “rig” a situation.)
3. Collusion results in the incentive to cheat.
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Oligopoly Graph
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Not one standard model because there are
colluding Oligopolies and noncolluding Oligopolies
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Colluding Oligopoly
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A cartel is a group of producers that create a formal agreement to fix prices high.
Cartel = Colluding Oligopoly
CARTELS AND COLLUSION
1. Cartels set price and output at an agreed upon price
2. Firms require identical or highly similar demand and costs
3. Cartel must have a way to punish cheaters
4. Together they act as a monopoly
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Colluding Oligopolists WillSplit the Monopoly Profits.
D
MC
ATC
MR
EconomicProfit
MR = MC
Pri
ce a
nd
co
sts
Q0
P0
A0
CARTELS AND OTHER COLLUSION
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Non Colluding Oligopoly
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1. Match price-If one firm cuts it’s prices, then the other firms follow suit causing inelastic demand
Kinked Demand Curve Model
Noncollusive firms are likely to react to competitor’s pricing in two ways:
2. Ignore change-If one firm raises prices, others maintain same price causing elastic demand
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D1
MR1Quantity
KINKED DEMAND THEORY:
Pri
ce
The demand and MR curves if other firms match lower pricing
If this firm lowers its price and
others follow, Qd will increase
mildly
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MR2
D2
Quantity
KINKED DEMAND THEORY:
Pri
ce
The demand and MR curves if other firms ignore higher pricing
If this firm increases its price and others ignore it, Qd for this firm will decrease significantly
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MR2D1
D2
MR1Quantity
Two sets of curves based on the pricing decisions of other firms
Pri
ce
The firm’s demand andmarginal revenue curves
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MR2D1
D2
MR1Quantity
Pri
ce
Rivals tend tofollow a price cut
Two sets of curves based on the pricing decisions of other firms
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MR2D1
D2
MR1Quantity
Pri
ce
Rivals tend tofollow a price cut
or ignore aprice increase
Two sets of curves based on the pricing decisions of other firms
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MR2D1
D2
MR1Quantity
Effectively creatinga kinked demand curve
Pri
ce
Two sets of curves based on the pricing decisions of other firms
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D
Quantity
Effectively creatinga kinked demand curve
Pri
ce
Two sets of curves based on the pricing decisions of other firms
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MR2D1
D2
MR1Quantity
What about MR?
Pri
ce
Two sets of curves based on the pricing decisions of other firms
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D
MR1Quantity
Since we use sections of both MR curves, the MR has a
vertical gap. P
rice MR2
Two sets of curves based on the pricing decisions of other firms
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D
Quantity
Profit maximizationMR = MC occurs
at the kink.
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce MR2
MR1
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