Chapter 2- Supply and Demand
Chapter 2- Supply and Demand September 8, 2013
10:52 AM
Definitions Demand Curve- shows how much buyers if the product want to buy at each possible price, holding fixed all other factors the affect demand Substitutes- two products are substitutes, if all else equal, an increase in the price of one of the products causes buyers to demand more of the other product Compliments- two products are compliments, if all else equal, an increase in the price of one of the products causes consumers to demand less of the other product Demand Function- describes the amount of the product that is demanded for each possible combination of its price and other factors
Example Formula
Inverse Demand Function- the function for a firm's product describes how much the firm must change to sell any given quantity of its product
Example Formula
Supply Curve- shows how much sellers of a product want to sell at each possible price, holding fixed all other factors that affect supply Supply Function- describes the amount of the product that is supplied for each possible combination of its price and other factors
Example Formula
Inverse Supply Function- Example Formula
Equilibrium Price- the price at which the amounts supplied and demanded are equal Elasticity- the elasticity of Y with respect to X, denoted E equals the percentage change in Y divided by the percentage change in X, or equivalently, the percentage change in Y for each one percent increase in X
Price Elasticity of Demand- denoted Ed, equals the percentage change in the amount ECON2310 Page 1
Price Elasticity of Demand- denoted Ed, equals the percentage change in the amount demanded for each one percent increase in the price Linear Formula
Non-Linear Formula
Elastic- demand is elastic when the elasticity of demand is less than -1 Inelastic- demand is inelastic when the elasticity of demand is greater than -1 (that is between -1 and 0) Perfectly Elastic- demand is perfectly elastic when the demand curve is horizontal so that the elasticity od demand equal negative infinity Perfectly Inelastic- demand is perfectly inelastic when the demand curve is vertical so that the elasticity of demand is zero Constant Elasticity- (or isoelastic) demand curve has the same elasticity at every price Price Elasticity of Supply- denoted Es, equals the percentage change in the amount supplied for each one percent increase in the price Linear Formula
Non-Linear Formula
Perfectly Elastic- supply is perfectly elastic when the supply curve is horizontal so that the price elasticity of supply is infinite Perfectly Inelastic- supply is perfectly inelastic when the supply curve is vertical so the price elasticity of supply is zero Income Elasticity of Demand- equals the percentage change in the amount of demanded for each one percent increase in income
Normal Good- the demand for a product increases when income grows larger Inferior Good- if demand decreases when income grows larger Cross-Price Elasticity of Demand- equals the percentage change in the amount demanded of the product for each one percent increase in the price of the other product
Movements and Shifts in Demand Curve A change in the price of a product causes a movement along its demand curve, resulting in a ECON2310 Page 2
A change in the price of a product causes a movement along its demand curve, resulting in a change in the quantity (or amount) demanded. A change in some other factor (such as consumer tastes or income, or the price of other products) causes a shift of the entire demand curve, known as a change in demand
Movements and Shifts in Supply Curve A change in the price of a product causes a movement along its supply curve, resulting in a change in the quantity (or amount) supplied. A change in some other factor (such as technology or input prices) causes a shift of the entire supply curve, known as a change in supply
Effects on Changes in Demand or Supply Source of Change
Effect on Price Effect on Amount Bought/Sold
Increase in Demand Rises
Rises
Decrease in Demand Falls
Falls
Increase in Supply
Falls
Rises
Decrease in Supply
Rises
Falls
Price Responsiveness of Demand and Supply 1) The demand curve shifts: the steeper the supply curve, (the less responsive the amount supplied is to price), the larger the price change and the smaller the change in the amount bought and sold 2) The Supply curve shifts: the steeper the demand curve (the less responsive the amount demanded is to price), the larger the price change and the smaller the change in the amount bought and sold
Total Expenditure and the Elasticity of Demand A small increase in the price causes total expenditure to increase if demand is inelastic, and decrease if demand is elastic. Total expenditure is largest at a price for which elasticity equals -1
Changes in Market Equilibrium and the Elasticity of Demand and Supply 1) When the demand curve shifts: the less elastic the supply curve at the initial equilibrium price, the larger the price change and the smaller the change in the amount bought and sold 2) When supply curve shifts: the less elastic the demand curve at the initial equilibrium price, the larger the price change and the smaller the change in the amount bought and sold
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Chapter 3- Balancing Benefits and Costs September 11, 2013
12:18 PM
Definitions Opportunity Cost- the cost associated with forgoing the opportunity to employ a resource in its best alternative use Net Benefit- equals total benefit less total cost Marginal Units- the marginal units of an action choice X are the last units, where is the smallest amount you can add or subtract Marginal Cost of an Activity- at an activity level of X units is equal to the extra cost incurred due to the marginal units
Marginal Benefit of an Action- at an activity level of X is equal to the extra benefit produced by the marginal units
Sunk Cost- a cost that the decision maker has already incurred or is committed to pay. It is unavoidable
The Relationship Between Marginal Benefit and the Total Cost Curve When actions are finely divisible, the marginal benefit when choosing action X is equal to the slope of the total benefit curve at X
The Relationship Between Marginal Cost and the Total Cost Curve When actions are finely divisible, the marginal cost when choosing action X is equal to the slope of the total cost curve at X
The No Marginal Improvement Principle (for Finely Divisible Actions) If actions are finely divisible, then marginal benefit equals marginal cost (MB = MC) at any best choice at which it is possible to both increase and decrease the level of activity a little bit
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Chapter 4- Principles and Preferences September 15, 2013
5:08 PM
Definitions Preferences- tells us about a consumer's likes and dislikes Indifferent- a consumer is indifferent between two alternatives when liking (or disliking) them equally Consumption Bundle- the collection of goods that an individual consumes over a given period, such as an hour, a day, a month, a year or a lifetime Indifference Curve- starting with any alternative, an indifference curve shows all the other alternatives that a consumer likes equally well Family of Indifference Curves- a collection of indifference curves that represents the preferences of the same individual Bad- a bad is an object, condition or activity that makes a consumer worse off Marginal Rate of Substitution for X with Y- written is the rate at which a consumer must adjust Y to maintain the same level of well-being when X changes by a tiny amount, from a given starting point
Declining MRS- an indifference curve that has a declining MRS if it becomes flatter moving along the curve from the northwest to the southwest Perfect Substitutes- two products are perfect substitutes if their functions are identical, so that a consumer is willing to swap one for the other at a fixed rate Perfect Compliments- two products are perfect compliments if they are valuable only when used together in fixed proportions Utility- a numeric value indicating the consumer's relative well-bring. Higher utility indicates greater satisfaction than lower utility Utility Function- a mathematical formula that assigns a utility value to each consumption bundle Ordinal- allows to determine only whether one alternative is better or worse than another Cardinal- tells us something about the intensity of those preferences Marginal Utility- the change in the consumer's utility resulting from the addition of a very small amount of some good, divided by the amount added
General Principles of Consumer Decision Making The Ranking Principle A consumer ranks, in order of preference (though possibly with ties), all potentially available alternatives The Choice Principle Among the available alternatives, the consumer selects the one that he ranks the highest
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The More-Is-Better Principle When one consumption bundle contains more of every good than a second bundle, a consumer prefers the first bundle
Properties of Indifference Curves and Families of Indifference Curves 1) Indifference curves are thin 2) Indifference curves do not slope upward 3) The indifference curve that runs through any consumption bundle, call it A, separates all the better than A bundles from all the worse than A bundles 4) Indifference curves from the same family never cross 5) In comparing any two bundles, the consumer prefers the one located on the indifference curve that is furthest from the origin
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Chapter 5- Constraints, Choices, and Demand September 22, 2013
7:48 PM
Definitions Income- a consumers income consists of the money received during some fixed period of time Budget Constraint- identifies all of the consumption bundles a consumer can afford over some period of time Budget Line- shows all of the consumption bundles that just exhaust a consumers income
Rationed- when the government or a supplier limits the amount that each consumer can purchase, we say that the good is rationed Interior Choice- an affordable bundle is an interior choice if, for each good, there are affordable bundles containing a little bit more of that good and affordable bundles containing a little bit less of it. When the best affordable choice is an interior choice, we call it an interior choice Tangency Condition- a bundle on the budget line satisfies the tangency condition if, at that bundle, the budget line lies tangent to the consumer's indifference curve Boundary Choice- at a boundary choice there are no affordable bundles that contain either a little bit more or a little bit less of some good. When the consumer's best choice is a boundary choice, we call it a boundary solution Price-Consumption Curve- shows how the best affordable consumption bundle changes as the price of a good changes, holding everything else fixed (including the consumers income and preferences as well as all other prices) Individual Demand Curve- describes the relationship between the price of a good and the amount a particular consumer purchases, holding everything else fixed Income Effect- the change in the consumption of a good that results from a change in income Income Consumption Curve- shows how the best affordable consumption bundle changes as income changes, holding everything else fixed (including prices and the consumer's preferences) Engel Curve- describes the relationship between income and the amount consumed, holding everything else fixed (including prices and the consumers preferences)
The Properties of a Budget Line 1) The budget line is the boundary that separates the affordable consumption bundles from all other bundles. Choices that do not exhaust the consumer's income lie to the southwest of the budget line 2) The slope of the budget line equals the price time -1 =, with the price of the good measured on the horizontal axis appearing in the numerator, and the price of the good measured on the vertical axis appearing in the denominator 3) The budget line intersects the axis that measures the amount of any particular good, X, at the quantity M/Px, which is the amount of X the consumer can purchase by spending all income on X 4) A change in income shifts the budget line outward for an increase and inward for a decrease without changing its slope 5) A change in the price of a good rotates the budget line outward for a decrease and inward for an increase. The line pivots at the intercept for the good with the unchanged price and changes the slope of the budget line 6) Multiplying all prices by a single constant has the same effect on the budget line as dividing income by the same constant. Changing prices and income by the same ECON2310 Page 7
dividing income by the same constant. Changing prices and income by the same proportion has no effect on the budget line
The No-Overlap Rule The area above the indifference curve that runs through the consumer's best affordable bundle does not overlap with the area below the budget line. The area above the indifference curve that runs through any other affordable bundle does overlap with the area below the budget line
Properties of Best Choices 1) Assuming that more is better, the consumer's best choice lies on the budget line 2) We can recognize the best choices by applying the no-overlap rule 3) Interior solutions always satisfy the tangency condition. Consequently, if a bundle that includes two goods, X and Y, is an interior solution, then At that bundle 4) When indifference curves have declining MRSs, any interior choice that satisfies the tangency condition is a best affordable choice 5) Whenever the consumer purchases good X but not good Y, then
Properties of Normal and Inferior Goods 1) The income elasticity of demand is positive for normal goods and negative for inferior goods 2) We can tell whether goods are normal or inferior by examining the slope of the incomeconsumption curve 3) At least one good must be normal starting from any particular income level 4) No good can be inferior at all levels of income
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Substitution and Income Effect October 24, 2013
9:30 AM
Indifference curves for these preferences have a declining MRS. Therefore you can use the recipe from class to calculate income and substitution effects. Recall that the substitution effect bundle must satisfy 2 conditions: At this bundle, the MRS is equal to the new price ratio. And the utility of this bundle is the same as the utility of the original bundle purchased before the price change. Since numbers are drawn randomly, here is a particular example to show how to solve the question.
Suppose that px=2 and py=1. Income is M=24. Then the price of x increases to px=8. 1) What is the optimal bundle before the price change? a) MRSxy=px/py implies y/x = 2 and therefore y=2x. b) Plug this into the budget constraint: M=24=2x+y=2x+2x. This implies that x=6 and y=12. Btw, the utility at this bundle, which we will need later for the substitution effect bundle, is U=xy=6* 12=72. 2) What is the 'substitution effect bundle'? a) At this bundle, the MRS is equal to the new price ratio, so that MRSxy=y/x=8. Therefore, y=8x. b) This bundle lies on the same indifference curve as the initial bundle. Therefore, the utility of the substitution effect bundle needs to be the same as the utility of the initial bundle. Above, we calculated this utility to be 72. Therefore, for the utility of the substitution effect bundle needs to be 72=xy. Plug the condition from part a into this and you get 72=x*8x. Therefore, x=3 and y=24. This is the substitution effect bundle. 3) What is the optimal bundle after the budget constraint? a) The price ratio is now the new price ratio, so MRSxy=y/x=8. (This is the same as condition a for the substitution effect bundle.) Therefore, y=8x. b) Plug this condition into the budget constraint: M=24=8x+y=8x+8x. Therefore, x=1.5 and y=12. The substitution effect is change in demand from the initial to the substation effect bundle, so 3-6 =-3. The income effect is the change in demand from the substitution effect bundle to the final bundle, so 1.5=3=-1.5.
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Chapter 6- From Demand to Welfare September 29, 2013
12:41 PM
Definitions Uncompensated Price Change- consists of a price change with no change in income Compensated Price Change- consists of a price change and an income change which leave the consumer's wellbeing unaffected
Substitution Effect of a Price Change- the effect on consumption of a compensated price change Income Effect of a Price Change- the effect on consumption of removing compensation after creating a compensated price change Law of Demand- states that demand curves usually slope downward Giffen Good- a product is called a Giffen good if the amount purchased increases as the price rises Compensating Variation- the amount of money that exactly compensates the consumer for a change in circumstances Consumer Surplus- the net benefit a consumer receives from participating in the market for some good Cost of Living Index- measures the relative cost of achieving a fixed standard of living in different situations Nominal Income- the amount of money actually received in a particular period Real Income- the amount of money received in a particular period adjusted for changes in purchasing power that alter the cost of living over time
Fixed Weight Price Index- measures the percentage change in total cost of a fixed consumption bundle Laspeyres Price Index- a fixed weight index that is based on the consumption bundle actually purchased in the base period. It tells us whether the cost of the base-period consumption bundle has risen or fallen, and by how much Substitution Bias- the substitution bias of a Laspeyres price index involves a failure to capture the consumer's tendency to moderate the impact of a price increase by substituting away from goods that have become more expensive. As a result, the index overstates increases in the cost of living Labour Supply- refers to the sale of a consumer's time and effort to an employer
The Direction of Income and Substitution Effects 1) The substitution effect in negative for a price increase and positive for a price reduction 2) If a good is normal, the income effect reinforces the substitution effect. It is negative for a price increase and positive for a price reduction 3) If a good is inferior, the income effect opposes the substitution effect. It is positive for a price increase and negative for a price reduction
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Chapter 7- Technology and Production October 6, 2013
8:19 PM
Definitions Outputs- the physical products or services a firm produces Inputs- the materials, labour, land, or equipment that firms use to produce their outputs Production Technology- a firms production technology summarizes all of its possible methods for producing its output Efficient- a production method it efficient if there is no other way to produce a larger amount of output using the same amounts of inputs Production Possibilities Set- contains all the combinations of inputs and outputs that are possible given the firm's technology Efficient Production Frontier- contains the combinations of inputs and outputs that a firm can achieve using efficient production methods Production Function- a function of the form , giving the amount a firm can produce from given amounts of inputs using efficient production methods Variable Input- can be adjusted over time Fixed Input- cannot be adjusted over time Short Run- a period of time over which one or more inputs is fixed Long Run- a period of time over which all inputs are variable Average Product of Labour- the amount of output divided by the number of workers employed
Marginal Product of Labour- equals the extra output produced due to the of labour, per unit of labour added
marginal united
Marginal Units of Labour- the last units hired, where is the smallest amount of labour an employer can add or subtract Law of Diminishing Returns- states the general tendency for the marginal product of an input to eventual decline as its increased, holding all other inputs equal Isoquant- identifies all the input combinations that efficiently produce a given amount of output Family of Isoquants- consists of a firms isoquants corresponding to all of its possible output levels Marginal Rate of Substitution (MRTS) - the rate at which a firm must replace units of X with units of Y to keep output unchanged starting at a given input combination, when the changes involved are tiny. It equals the slopw of the firm's isoquant at this input combination, times -1
Declining Marginal Rate of Technical Substitution- an isoquant for a production process, using two inputs, X and Y, has a declining marginal rate of technical substitution if MRTS declines as we move along the isoquant, increasing input X and decreasing input Y ECON2310 Page 11
we move along the isoquant, increasing input X and decreasing input Y Perfect Substitutes- two products are perfect substitutes if their functions are identical, so that a consumer is willing to swap one for the other at a fixed rate Fixed Proportions- two inputs are used in fixed proportions when they must be combined in a fixed ration. They are then known as perfect compliments Perfect Compliments- two products are perfect compliments if they are valuable only when used together in fixed proportions Cobb-Douglas Production Function- formula below
Constant Returns to Scale- a firm has constant returns to scale if a proportional change in all inputs produces the same proportional change in outputs Increasing Returns to Scale- a proportional change in all inputs produces a more than proportional change in output Decreasing Returns to Scale- a proportional change in in all inputs produces a less than proportional change in output Technological Change- occurs when a firm's ability to turn inputs into output changes over time Factor-Neutral Technology Change- has no effect on the MRTS at any input combination. It simply changes the output level associated with each of a firm's iosquants
The Relationship Between a Firm's Average and Marginal Product Curves When the marginal product of an input is (larger than/smaller than/the same as) the average product, the marginal units of the input (raise/lower/do not effect) the average product
When labour inputs are finely divisible, the average product of labour curve is (rising/falling/neither rising nor falling) at L if the marginal product is (above/below/equal to) the average product
The Productive Inputs Principle Increasing the amounts of all inputs strictly increases the amount of output the firm can produce (using efficient production methods)
Five Properties of Isoquants and Families of Isoquants 1) Isoquants are thin 2) Isoquants do not slope upward 3) An isoquant is the boundary between input combinations that produce more and less than a given amount of output 4) Isoquants from the same technology do not cross 5) Higher-level isoquants lie farther from the origin
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Chapter 8- Cost October 15, 2013
8:35 PM
Definitions Total Cost- a firm's total cost of producing a given level of output is the expenditure required to produce that output in the most economical way possible Variable Costs- the costs of inputs that vary with the firm's output level Fixed Costs- the costs of inputs whose use does not vary as the firm's level of output changes, with the possible exception that the cost might not be incurred if the firm decides to produce nothing Avoidable- a fixed cost is avoidable if it is not incurred when the firm decides to produce no output Sunk- a fixed cost is sunk if it is incurred even when the firm decides not to operate Opportunity Cost- the cost associated with forgoing the opportunity to employ a resource in its best alternative use Isocost Line- contains all the input combinations with the same cost
Family of Isocost Lines- contains, for a given input prices, the isocost lines for all of the possible cost levels of the firm Interior Choice- an input combination is an interior choice if it uses at least a little bit of every input Interior Solution- when the least-cost input combination is an interior choice, we call it an interior solution Tangency Condition- an input combination satisfies the tangency condition if, at that input combination, the isocost line is tangent to the isoquant. Note it is when Boundary Solution- if the least-cost input combination excludes some inputs it is a boundary solution Output Expansion Path- shows the least-cost input combinations at all possible levels of output for fixed input prices Average Cost- a firms cost per unit of output produced
Marginal Units of Output- are the last units, where is the smallest amount of output the firm can add or suntract Marginal Cost- measures how much extra cost the firm incurs to produce the marginal units of output, per unit of output added
Efficient Scale of Production- the output level at which its average cost is lowest Economies of Scale- a firm experiences economies of scale when its average cost falls as it produces more Diseconomies of Scale- a firm experiences diseconomies of scale when its average cost rises as it produces more ECON2310 Page 13
it produces more
The No-Overlap Rule The Area below the isocost line that contains the firm's least-cost input combination for producing Q units does not overlap with the area above the Q-unit isoquant
The Relationship Between the Average and Marginal Cost Curves When output is finely divisible, the average cost curve is upward sloping at Q if marginal cost is above average cost. It is downward sloping if marginal cost is below average cost, and neither rising nor falling if marginal cost equals average cost. Moreover, the marginal cost curve always crosses the average cost curve from below at the efficient scale of production
Response to a Change in an Input Price When the price of an input decreases, a firm's least-cost production method never uses less of that input, and usually employs more. Likewise, when the price of an input increases, a firm's least-cost production method never uses more of that input, and usually employs less
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Chapter 9- Profit Maximization October 29, 2013
10:51 AM
Definitions Profit- is equal to a firm's revenue minus its costs
Inverse Demand Function- describes how much the firm must charge to sell any given quantity of its product. It takes the form Marginal Revenue- a firm's marginal revenue at units equals the extra revenue produced by the marginal units sold, measured on a per unit basis
Infrramarginal Units- the units the firm sells other than the marginal units Price Taker- a firm is a price taker when it can sell as much as it wants at some given price , but nothing at any higher price Supply Function- the supply function of a price taking firm tells us how much the firm wants to sell at each possible price . It is a function of the form Law of Supply- when the market price increases, the profit-maximizing sales quantity for a price-taking firm never decreases
Finding the Profit-Maximizing Sales Quantity Using marginal Revenue and Marginal Cost 1) Quantity Rule: Identify and positive sales quantity at which . If more than one positive sales quantity satisfies , determine which one is best (which produces the highest profit) 2) Shut-Down Rule: Check whether the most profitable positive sales quantity from step one results in greater profit than shutting down. If it does, that is the profit-maximizing choice. If not, then selling nothing is the best option. If they are the same, then either choice maximizes profit
The Shut-Down Rule Without Sunk Fixed Costs If exceeds the best positive sales quantity maximizes profit. If is less than , shutting down maximizes profit. If equals , then both the positive sales quantity and shutting down yield zero profit, which is the best the firm can do
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Chapter 14- Equilibrium and Efficiency November 4, 2013
11:03 AM
Definitions Product Homogeneous- when products are identical in the eye of the purchaser Differentiated- when some purchasers view the products as different Market Demand- the sum of the demands of all the individual consumers Market Demand Curve- the horizontal sum of individual demand curves Market Supply- the sum of the supply of all the individual sellers Market Supply Curve- the horizontal sum of the individual supply curves Free Entry- there is free entry in a market when technology is freely available to anyone who wishes to start a firm and entry is unrestricted. In that case, the number of potential firms is unlimited Aggregate Surplus- equals consumers total willingness to pay for a good less firms' total avoidable cost of production. It captures the net benefit created by the production and consumption of the good
Deadweight Loss- a reduction in aggregate surplus below its maximum possible value
Factors That Make a Market Perfectly Competitive 1) Buyers and sellers face no transaction costs 2) Products are homogeneous 3) There are many suppliers, each accounting for a small fraction of the overall supply of the good
Three Properties of Long-Run Competitive Equilibrium with Free Entry 1) The equilibrium price must equal 2) Firms must earn zero profit 3) Each active firm must produce at its efficient scale of production
Using Market Demand and Supply Curves to Measure Total Willingness to Pay and Total Avoidable Cost Whenever the units of a good are consumed by those individuals with the highest willingness to pay for them, we can measure consumers total willingness to pay for the units by the area under the market demand curve up to that quantity Whenever the units of a good are produced by the firms with the lowest avoidable cost of producing them, we can measure firms total avoidable cost for the units they produce by the area under the market supply curve up to that quantity
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Chapter 15- Market Interventions November 6, 2013
10:15 PM
Definitions Specific Tax- a fixed dollar amount that must be paid on each unit bought or sold Ad Valorem Tax- a tax that is stated as a percentage of the good's price Incidence- the incidence of a tax indicates how much of the tax burden is borne by various market participants
Deadweight Loss of Taxation- the lost aggregate surplus due to a tax Subsidy- a payment that reduces the amount that buyers pay for a good or increases the amount that the sellers receive Price Floors- the minimum price that sellers can charge Price Support- raises the market price by making purchases of the good, thereby increasing demand Production quota- imposes limits on the quantity that individual firms can produce Quota Rent- the difference between the marginal cost of production at the quota amount and the price that results from the imposition of the quota Voluntary Production Reduction- offers firms inducements to reduce their production voluntarily
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Chapter 17-Monopoly November 19, 2013
5:53 PM
Definitions Market Power- a firm has market power when it can profitably charge a price that is above marginal cost Monopoly Market- a market with a single seller, who is called a monopolist Oligopoly Market- a market with a few (but not many) sellers, who are called oligopolists Marginal Revenue- Equation below
Markup/Price-Cost Margin/Lerner Index- equals the amount by which its price exceeds its marginal cost, expressed as a percentage of its price
Deadweight Loss from Monopoly Pricing- the amount by which aggregate surplus falls short of its maximum possible level, which is attained in a perfectly competitive market Pass-Through Rate- the ratio the increase in price that occurs in response to a small increase in marginal cost, measured per dollar of increase in marginal cost Monopsony Market- a market with a single buyer, who is called a monopsonist Marginal Expenditure- the extra cost incurred to hire or purchase the marginal units of an input, per marginal unit
Natural Monopoly- a market where a good is produced most economically by a single firm
Finding the Profit-Maximizing Sales Quantity Using Marginal Revenue and Marginal Cost Step 1: Quantity Rule- Identify any positive sales quantities at which . If more than one positive sales quantity satisfies . Determine which one is best (which produces the highest profit). Step 2: Shut-Down Rule- Check whether the most profitable positive sales quantity from step one results in greater profit than shutting down.
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Chapter 18- Pricing Strategies November 20, 2013
10:24 PM
Definitions Price Discrimination- a firm engages in price discrimination when it charges different prices for different units of the same good Perfect Price Discrimination- a monopolist can perfectly price discriminate if it knows perfectly the customer's willingness to pay for each unit and can charge a different price for each unit Observable Customer Characteristics- price discrimination is based on observable customer characteristics when a firms can distinguish, even if imperfectly, consumers with a high willingness to pay versus a low willingness to pay Self-Selection- price discrimination is based on self-selection when the firms offers a menu of alternatives, designed so that different customers will make different choices based on their willingness to pay Quantity-Dependant Pricing- the price a consumer pays for an additional unit depends on how many units the consumer has bought Two-Part Tariff- consumers pay a fixed fee if they buy anything at all, plus a separate per-unit price for each unit they buy
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Chapter 19-Oligopoly November 23, 2013
1:15 PM
Definitions Nash Equilibrium- each firm is making a profit maximizing choice given the choices of its rivals Price Fixing- firms engage in price fixing when they agree on the prices they will charge or quantities they will produce Horizontal Merger- two or more competing firms combine their operations
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10:52 AM
Definitions Demand Curve- shows how much buyers if the product want to buy at each possible price, holding fixed all other factors the affect demand Substitutes- two products are substitutes, if all else equal, an increase in the price of one of the products causes buyers to demand more of the other product Compliments- two products are compliments, if all else equal, an increase in the price of one of the products causes consumers to demand less of the other product Demand Function- describes the amount of the product that is demanded for each possible combination of its price and other factors
Example Formula
Inverse Demand Function- the function for a firm's product describes how much the firm must change to sell any given quantity of its product
Example Formula
Supply Curve- shows how much sellers of a product want to sell at each possible price, holding fixed all other factors that affect supply Supply Function- describes the amount of the product that is supplied for each possible combination of its price and other factors
Example Formula
Inverse Supply Function- Example Formula
Equilibrium Price- the price at which the amounts supplied and demanded are equal Elasticity- the elasticity of Y with respect to X, denoted E equals the percentage change in Y divided by the percentage change in X, or equivalently, the percentage change in Y for each one percent increase in X
Price Elasticity of Demand- denoted Ed, equals the percentage change in the amount ECON2310 Page 1
Price Elasticity of Demand- denoted Ed, equals the percentage change in the amount demanded for each one percent increase in the price Linear Formula
Non-Linear Formula
Elastic- demand is elastic when the elasticity of demand is less than -1 Inelastic- demand is inelastic when the elasticity of demand is greater than -1 (that is between -1 and 0) Perfectly Elastic- demand is perfectly elastic when the demand curve is horizontal so that the elasticity od demand equal negative infinity Perfectly Inelastic- demand is perfectly inelastic when the demand curve is vertical so that the elasticity of demand is zero Constant Elasticity- (or isoelastic) demand curve has the same elasticity at every price Price Elasticity of Supply- denoted Es, equals the percentage change in the amount supplied for each one percent increase in the price Linear Formula
Non-Linear Formula
Perfectly Elastic- supply is perfectly elastic when the supply curve is horizontal so that the price elasticity of supply is infinite Perfectly Inelastic- supply is perfectly inelastic when the supply curve is vertical so the price elasticity of supply is zero Income Elasticity of Demand- equals the percentage change in the amount of demanded for each one percent increase in income
Normal Good- the demand for a product increases when income grows larger Inferior Good- if demand decreases when income grows larger Cross-Price Elasticity of Demand- equals the percentage change in the amount demanded of the product for each one percent increase in the price of the other product
Movements and Shifts in Demand Curve A change in the price of a product causes a movement along its demand curve, resulting in a ECON2310 Page 2
A change in the price of a product causes a movement along its demand curve, resulting in a change in the quantity (or amount) demanded. A change in some other factor (such as consumer tastes or income, or the price of other products) causes a shift of the entire demand curve, known as a change in demand
Movements and Shifts in Supply Curve A change in the price of a product causes a movement along its supply curve, resulting in a change in the quantity (or amount) supplied. A change in some other factor (such as technology or input prices) causes a shift of the entire supply curve, known as a change in supply
Effects on Changes in Demand or Supply Source of Change
Effect on Price Effect on Amount Bought/Sold
Increase in Demand Rises
Rises
Decrease in Demand Falls
Falls
Increase in Supply
Falls
Rises
Decrease in Supply
Rises
Falls
Price Responsiveness of Demand and Supply 1) The demand curve shifts: the steeper the supply curve, (the less responsive the amount supplied is to price), the larger the price change and the smaller the change in the amount bought and sold 2) The Supply curve shifts: the steeper the demand curve (the less responsive the amount demanded is to price), the larger the price change and the smaller the change in the amount bought and sold
Total Expenditure and the Elasticity of Demand A small increase in the price causes total expenditure to increase if demand is inelastic, and decrease if demand is elastic. Total expenditure is largest at a price for which elasticity equals -1
Changes in Market Equilibrium and the Elasticity of Demand and Supply 1) When the demand curve shifts: the less elastic the supply curve at the initial equilibrium price, the larger the price change and the smaller the change in the amount bought and sold 2) When supply curve shifts: the less elastic the demand curve at the initial equilibrium price, the larger the price change and the smaller the change in the amount bought and sold
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Chapter 3- Balancing Benefits and Costs September 11, 2013
12:18 PM
Definitions Opportunity Cost- the cost associated with forgoing the opportunity to employ a resource in its best alternative use Net Benefit- equals total benefit less total cost Marginal Units- the marginal units of an action choice X are the last units, where is the smallest amount you can add or subtract Marginal Cost of an Activity- at an activity level of X units is equal to the extra cost incurred due to the marginal units
Marginal Benefit of an Action- at an activity level of X is equal to the extra benefit produced by the marginal units
Sunk Cost- a cost that the decision maker has already incurred or is committed to pay. It is unavoidable
The Relationship Between Marginal Benefit and the Total Cost Curve When actions are finely divisible, the marginal benefit when choosing action X is equal to the slope of the total benefit curve at X
The Relationship Between Marginal Cost and the Total Cost Curve When actions are finely divisible, the marginal cost when choosing action X is equal to the slope of the total cost curve at X
The No Marginal Improvement Principle (for Finely Divisible Actions) If actions are finely divisible, then marginal benefit equals marginal cost (MB = MC) at any best choice at which it is possible to both increase and decrease the level of activity a little bit
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Chapter 4- Principles and Preferences September 15, 2013
5:08 PM
Definitions Preferences- tells us about a consumer's likes and dislikes Indifferent- a consumer is indifferent between two alternatives when liking (or disliking) them equally Consumption Bundle- the collection of goods that an individual consumes over a given period, such as an hour, a day, a month, a year or a lifetime Indifference Curve- starting with any alternative, an indifference curve shows all the other alternatives that a consumer likes equally well Family of Indifference Curves- a collection of indifference curves that represents the preferences of the same individual Bad- a bad is an object, condition or activity that makes a consumer worse off Marginal Rate of Substitution for X with Y- written is the rate at which a consumer must adjust Y to maintain the same level of well-being when X changes by a tiny amount, from a given starting point
Declining MRS- an indifference curve that has a declining MRS if it becomes flatter moving along the curve from the northwest to the southwest Perfect Substitutes- two products are perfect substitutes if their functions are identical, so that a consumer is willing to swap one for the other at a fixed rate Perfect Compliments- two products are perfect compliments if they are valuable only when used together in fixed proportions Utility- a numeric value indicating the consumer's relative well-bring. Higher utility indicates greater satisfaction than lower utility Utility Function- a mathematical formula that assigns a utility value to each consumption bundle Ordinal- allows to determine only whether one alternative is better or worse than another Cardinal- tells us something about the intensity of those preferences Marginal Utility- the change in the consumer's utility resulting from the addition of a very small amount of some good, divided by the amount added
General Principles of Consumer Decision Making The Ranking Principle A consumer ranks, in order of preference (though possibly with ties), all potentially available alternatives The Choice Principle Among the available alternatives, the consumer selects the one that he ranks the highest
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The More-Is-Better Principle When one consumption bundle contains more of every good than a second bundle, a consumer prefers the first bundle
Properties of Indifference Curves and Families of Indifference Curves 1) Indifference curves are thin 2) Indifference curves do not slope upward 3) The indifference curve that runs through any consumption bundle, call it A, separates all the better than A bundles from all the worse than A bundles 4) Indifference curves from the same family never cross 5) In comparing any two bundles, the consumer prefers the one located on the indifference curve that is furthest from the origin
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Chapter 5- Constraints, Choices, and Demand September 22, 2013
7:48 PM
Definitions Income- a consumers income consists of the money received during some fixed period of time Budget Constraint- identifies all of the consumption bundles a consumer can afford over some period of time Budget Line- shows all of the consumption bundles that just exhaust a consumers income
Rationed- when the government or a supplier limits the amount that each consumer can purchase, we say that the good is rationed Interior Choice- an affordable bundle is an interior choice if, for each good, there are affordable bundles containing a little bit more of that good and affordable bundles containing a little bit less of it. When the best affordable choice is an interior choice, we call it an interior choice Tangency Condition- a bundle on the budget line satisfies the tangency condition if, at that bundle, the budget line lies tangent to the consumer's indifference curve Boundary Choice- at a boundary choice there are no affordable bundles that contain either a little bit more or a little bit less of some good. When the consumer's best choice is a boundary choice, we call it a boundary solution Price-Consumption Curve- shows how the best affordable consumption bundle changes as the price of a good changes, holding everything else fixed (including the consumers income and preferences as well as all other prices) Individual Demand Curve- describes the relationship between the price of a good and the amount a particular consumer purchases, holding everything else fixed Income Effect- the change in the consumption of a good that results from a change in income Income Consumption Curve- shows how the best affordable consumption bundle changes as income changes, holding everything else fixed (including prices and the consumer's preferences) Engel Curve- describes the relationship between income and the amount consumed, holding everything else fixed (including prices and the consumers preferences)
The Properties of a Budget Line 1) The budget line is the boundary that separates the affordable consumption bundles from all other bundles. Choices that do not exhaust the consumer's income lie to the southwest of the budget line 2) The slope of the budget line equals the price time -1 =, with the price of the good measured on the horizontal axis appearing in the numerator, and the price of the good measured on the vertical axis appearing in the denominator 3) The budget line intersects the axis that measures the amount of any particular good, X, at the quantity M/Px, which is the amount of X the consumer can purchase by spending all income on X 4) A change in income shifts the budget line outward for an increase and inward for a decrease without changing its slope 5) A change in the price of a good rotates the budget line outward for a decrease and inward for an increase. The line pivots at the intercept for the good with the unchanged price and changes the slope of the budget line 6) Multiplying all prices by a single constant has the same effect on the budget line as dividing income by the same constant. Changing prices and income by the same ECON2310 Page 7
dividing income by the same constant. Changing prices and income by the same proportion has no effect on the budget line
The No-Overlap Rule The area above the indifference curve that runs through the consumer's best affordable bundle does not overlap with the area below the budget line. The area above the indifference curve that runs through any other affordable bundle does overlap with the area below the budget line
Properties of Best Choices 1) Assuming that more is better, the consumer's best choice lies on the budget line 2) We can recognize the best choices by applying the no-overlap rule 3) Interior solutions always satisfy the tangency condition. Consequently, if a bundle that includes two goods, X and Y, is an interior solution, then At that bundle 4) When indifference curves have declining MRSs, any interior choice that satisfies the tangency condition is a best affordable choice 5) Whenever the consumer purchases good X but not good Y, then
Properties of Normal and Inferior Goods 1) The income elasticity of demand is positive for normal goods and negative for inferior goods 2) We can tell whether goods are normal or inferior by examining the slope of the incomeconsumption curve 3) At least one good must be normal starting from any particular income level 4) No good can be inferior at all levels of income
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Substitution and Income Effect October 24, 2013
9:30 AM
Indifference curves for these preferences have a declining MRS. Therefore you can use the recipe from class to calculate income and substitution effects. Recall that the substitution effect bundle must satisfy 2 conditions: At this bundle, the MRS is equal to the new price ratio. And the utility of this bundle is the same as the utility of the original bundle purchased before the price change. Since numbers are drawn randomly, here is a particular example to show how to solve the question.
Suppose that px=2 and py=1. Income is M=24. Then the price of x increases to px=8. 1) What is the optimal bundle before the price change? a) MRSxy=px/py implies y/x = 2 and therefore y=2x. b) Plug this into the budget constraint: M=24=2x+y=2x+2x. This implies that x=6 and y=12. Btw, the utility at this bundle, which we will need later for the substitution effect bundle, is U=xy=6* 12=72. 2) What is the 'substitution effect bundle'? a) At this bundle, the MRS is equal to the new price ratio, so that MRSxy=y/x=8. Therefore, y=8x. b) This bundle lies on the same indifference curve as the initial bundle. Therefore, the utility of the substitution effect bundle needs to be the same as the utility of the initial bundle. Above, we calculated this utility to be 72. Therefore, for the utility of the substitution effect bundle needs to be 72=xy. Plug the condition from part a into this and you get 72=x*8x. Therefore, x=3 and y=24. This is the substitution effect bundle. 3) What is the optimal bundle after the budget constraint? a) The price ratio is now the new price ratio, so MRSxy=y/x=8. (This is the same as condition a for the substitution effect bundle.) Therefore, y=8x. b) Plug this condition into the budget constraint: M=24=8x+y=8x+8x. Therefore, x=1.5 and y=12. The substitution effect is change in demand from the initial to the substation effect bundle, so 3-6 =-3. The income effect is the change in demand from the substitution effect bundle to the final bundle, so 1.5=3=-1.5.
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Chapter 6- From Demand to Welfare September 29, 2013
12:41 PM
Definitions Uncompensated Price Change- consists of a price change with no change in income Compensated Price Change- consists of a price change and an income change which leave the consumer's wellbeing unaffected
Substitution Effect of a Price Change- the effect on consumption of a compensated price change Income Effect of a Price Change- the effect on consumption of removing compensation after creating a compensated price change Law of Demand- states that demand curves usually slope downward Giffen Good- a product is called a Giffen good if the amount purchased increases as the price rises Compensating Variation- the amount of money that exactly compensates the consumer for a change in circumstances Consumer Surplus- the net benefit a consumer receives from participating in the market for some good Cost of Living Index- measures the relative cost of achieving a fixed standard of living in different situations Nominal Income- the amount of money actually received in a particular period Real Income- the amount of money received in a particular period adjusted for changes in purchasing power that alter the cost of living over time
Fixed Weight Price Index- measures the percentage change in total cost of a fixed consumption bundle Laspeyres Price Index- a fixed weight index that is based on the consumption bundle actually purchased in the base period. It tells us whether the cost of the base-period consumption bundle has risen or fallen, and by how much Substitution Bias- the substitution bias of a Laspeyres price index involves a failure to capture the consumer's tendency to moderate the impact of a price increase by substituting away from goods that have become more expensive. As a result, the index overstates increases in the cost of living Labour Supply- refers to the sale of a consumer's time and effort to an employer
The Direction of Income and Substitution Effects 1) The substitution effect in negative for a price increase and positive for a price reduction 2) If a good is normal, the income effect reinforces the substitution effect. It is negative for a price increase and positive for a price reduction 3) If a good is inferior, the income effect opposes the substitution effect. It is positive for a price increase and negative for a price reduction
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Chapter 7- Technology and Production October 6, 2013
8:19 PM
Definitions Outputs- the physical products or services a firm produces Inputs- the materials, labour, land, or equipment that firms use to produce their outputs Production Technology- a firms production technology summarizes all of its possible methods for producing its output Efficient- a production method it efficient if there is no other way to produce a larger amount of output using the same amounts of inputs Production Possibilities Set- contains all the combinations of inputs and outputs that are possible given the firm's technology Efficient Production Frontier- contains the combinations of inputs and outputs that a firm can achieve using efficient production methods Production Function- a function of the form , giving the amount a firm can produce from given amounts of inputs using efficient production methods Variable Input- can be adjusted over time Fixed Input- cannot be adjusted over time Short Run- a period of time over which one or more inputs is fixed Long Run- a period of time over which all inputs are variable Average Product of Labour- the amount of output divided by the number of workers employed
Marginal Product of Labour- equals the extra output produced due to the of labour, per unit of labour added
marginal united
Marginal Units of Labour- the last units hired, where is the smallest amount of labour an employer can add or subtract Law of Diminishing Returns- states the general tendency for the marginal product of an input to eventual decline as its increased, holding all other inputs equal Isoquant- identifies all the input combinations that efficiently produce a given amount of output Family of Isoquants- consists of a firms isoquants corresponding to all of its possible output levels Marginal Rate of Substitution (MRTS) - the rate at which a firm must replace units of X with units of Y to keep output unchanged starting at a given input combination, when the changes involved are tiny. It equals the slopw of the firm's isoquant at this input combination, times -1
Declining Marginal Rate of Technical Substitution- an isoquant for a production process, using two inputs, X and Y, has a declining marginal rate of technical substitution if MRTS declines as we move along the isoquant, increasing input X and decreasing input Y ECON2310 Page 11
we move along the isoquant, increasing input X and decreasing input Y Perfect Substitutes- two products are perfect substitutes if their functions are identical, so that a consumer is willing to swap one for the other at a fixed rate Fixed Proportions- two inputs are used in fixed proportions when they must be combined in a fixed ration. They are then known as perfect compliments Perfect Compliments- two products are perfect compliments if they are valuable only when used together in fixed proportions Cobb-Douglas Production Function- formula below
Constant Returns to Scale- a firm has constant returns to scale if a proportional change in all inputs produces the same proportional change in outputs Increasing Returns to Scale- a proportional change in all inputs produces a more than proportional change in output Decreasing Returns to Scale- a proportional change in in all inputs produces a less than proportional change in output Technological Change- occurs when a firm's ability to turn inputs into output changes over time Factor-Neutral Technology Change- has no effect on the MRTS at any input combination. It simply changes the output level associated with each of a firm's iosquants
The Relationship Between a Firm's Average and Marginal Product Curves When the marginal product of an input is (larger than/smaller than/the same as) the average product, the marginal units of the input (raise/lower/do not effect) the average product
When labour inputs are finely divisible, the average product of labour curve is (rising/falling/neither rising nor falling) at L if the marginal product is (above/below/equal to) the average product
The Productive Inputs Principle Increasing the amounts of all inputs strictly increases the amount of output the firm can produce (using efficient production methods)
Five Properties of Isoquants and Families of Isoquants 1) Isoquants are thin 2) Isoquants do not slope upward 3) An isoquant is the boundary between input combinations that produce more and less than a given amount of output 4) Isoquants from the same technology do not cross 5) Higher-level isoquants lie farther from the origin
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Chapter 8- Cost October 15, 2013
8:35 PM
Definitions Total Cost- a firm's total cost of producing a given level of output is the expenditure required to produce that output in the most economical way possible Variable Costs- the costs of inputs that vary with the firm's output level Fixed Costs- the costs of inputs whose use does not vary as the firm's level of output changes, with the possible exception that the cost might not be incurred if the firm decides to produce nothing Avoidable- a fixed cost is avoidable if it is not incurred when the firm decides to produce no output Sunk- a fixed cost is sunk if it is incurred even when the firm decides not to operate Opportunity Cost- the cost associated with forgoing the opportunity to employ a resource in its best alternative use Isocost Line- contains all the input combinations with the same cost
Family of Isocost Lines- contains, for a given input prices, the isocost lines for all of the possible cost levels of the firm Interior Choice- an input combination is an interior choice if it uses at least a little bit of every input Interior Solution- when the least-cost input combination is an interior choice, we call it an interior solution Tangency Condition- an input combination satisfies the tangency condition if, at that input combination, the isocost line is tangent to the isoquant. Note it is when Boundary Solution- if the least-cost input combination excludes some inputs it is a boundary solution Output Expansion Path- shows the least-cost input combinations at all possible levels of output for fixed input prices Average Cost- a firms cost per unit of output produced
Marginal Units of Output- are the last units, where is the smallest amount of output the firm can add or suntract Marginal Cost- measures how much extra cost the firm incurs to produce the marginal units of output, per unit of output added
Efficient Scale of Production- the output level at which its average cost is lowest Economies of Scale- a firm experiences economies of scale when its average cost falls as it produces more Diseconomies of Scale- a firm experiences diseconomies of scale when its average cost rises as it produces more ECON2310 Page 13
it produces more
The No-Overlap Rule The Area below the isocost line that contains the firm's least-cost input combination for producing Q units does not overlap with the area above the Q-unit isoquant
The Relationship Between the Average and Marginal Cost Curves When output is finely divisible, the average cost curve is upward sloping at Q if marginal cost is above average cost. It is downward sloping if marginal cost is below average cost, and neither rising nor falling if marginal cost equals average cost. Moreover, the marginal cost curve always crosses the average cost curve from below at the efficient scale of production
Response to a Change in an Input Price When the price of an input decreases, a firm's least-cost production method never uses less of that input, and usually employs more. Likewise, when the price of an input increases, a firm's least-cost production method never uses more of that input, and usually employs less
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Chapter 9- Profit Maximization October 29, 2013
10:51 AM
Definitions Profit- is equal to a firm's revenue minus its costs
Inverse Demand Function- describes how much the firm must charge to sell any given quantity of its product. It takes the form Marginal Revenue- a firm's marginal revenue at units equals the extra revenue produced by the marginal units sold, measured on a per unit basis
Infrramarginal Units- the units the firm sells other than the marginal units Price Taker- a firm is a price taker when it can sell as much as it wants at some given price , but nothing at any higher price Supply Function- the supply function of a price taking firm tells us how much the firm wants to sell at each possible price . It is a function of the form Law of Supply- when the market price increases, the profit-maximizing sales quantity for a price-taking firm never decreases
Finding the Profit-Maximizing Sales Quantity Using marginal Revenue and Marginal Cost 1) Quantity Rule: Identify and positive sales quantity at which . If more than one positive sales quantity satisfies , determine which one is best (which produces the highest profit) 2) Shut-Down Rule: Check whether the most profitable positive sales quantity from step one results in greater profit than shutting down. If it does, that is the profit-maximizing choice. If not, then selling nothing is the best option. If they are the same, then either choice maximizes profit
The Shut-Down Rule Without Sunk Fixed Costs If exceeds the best positive sales quantity maximizes profit. If is less than , shutting down maximizes profit. If equals , then both the positive sales quantity and shutting down yield zero profit, which is the best the firm can do
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Chapter 14- Equilibrium and Efficiency November 4, 2013
11:03 AM
Definitions Product Homogeneous- when products are identical in the eye of the purchaser Differentiated- when some purchasers view the products as different Market Demand- the sum of the demands of all the individual consumers Market Demand Curve- the horizontal sum of individual demand curves Market Supply- the sum of the supply of all the individual sellers Market Supply Curve- the horizontal sum of the individual supply curves Free Entry- there is free entry in a market when technology is freely available to anyone who wishes to start a firm and entry is unrestricted. In that case, the number of potential firms is unlimited Aggregate Surplus- equals consumers total willingness to pay for a good less firms' total avoidable cost of production. It captures the net benefit created by the production and consumption of the good
Deadweight Loss- a reduction in aggregate surplus below its maximum possible value
Factors That Make a Market Perfectly Competitive 1) Buyers and sellers face no transaction costs 2) Products are homogeneous 3) There are many suppliers, each accounting for a small fraction of the overall supply of the good
Three Properties of Long-Run Competitive Equilibrium with Free Entry 1) The equilibrium price must equal 2) Firms must earn zero profit 3) Each active firm must produce at its efficient scale of production
Using Market Demand and Supply Curves to Measure Total Willingness to Pay and Total Avoidable Cost Whenever the units of a good are consumed by those individuals with the highest willingness to pay for them, we can measure consumers total willingness to pay for the units by the area under the market demand curve up to that quantity Whenever the units of a good are produced by the firms with the lowest avoidable cost of producing them, we can measure firms total avoidable cost for the units they produce by the area under the market supply curve up to that quantity
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Chapter 15- Market Interventions November 6, 2013
10:15 PM
Definitions Specific Tax- a fixed dollar amount that must be paid on each unit bought or sold Ad Valorem Tax- a tax that is stated as a percentage of the good's price Incidence- the incidence of a tax indicates how much of the tax burden is borne by various market participants
Deadweight Loss of Taxation- the lost aggregate surplus due to a tax Subsidy- a payment that reduces the amount that buyers pay for a good or increases the amount that the sellers receive Price Floors- the minimum price that sellers can charge Price Support- raises the market price by making purchases of the good, thereby increasing demand Production quota- imposes limits on the quantity that individual firms can produce Quota Rent- the difference between the marginal cost of production at the quota amount and the price that results from the imposition of the quota Voluntary Production Reduction- offers firms inducements to reduce their production voluntarily
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Chapter 17-Monopoly November 19, 2013
5:53 PM
Definitions Market Power- a firm has market power when it can profitably charge a price that is above marginal cost Monopoly Market- a market with a single seller, who is called a monopolist Oligopoly Market- a market with a few (but not many) sellers, who are called oligopolists Marginal Revenue- Equation below
Markup/Price-Cost Margin/Lerner Index- equals the amount by which its price exceeds its marginal cost, expressed as a percentage of its price
Deadweight Loss from Monopoly Pricing- the amount by which aggregate surplus falls short of its maximum possible level, which is attained in a perfectly competitive market Pass-Through Rate- the ratio the increase in price that occurs in response to a small increase in marginal cost, measured per dollar of increase in marginal cost Monopsony Market- a market with a single buyer, who is called a monopsonist Marginal Expenditure- the extra cost incurred to hire or purchase the marginal units of an input, per marginal unit
Natural Monopoly- a market where a good is produced most economically by a single firm
Finding the Profit-Maximizing Sales Quantity Using Marginal Revenue and Marginal Cost Step 1: Quantity Rule- Identify any positive sales quantities at which . If more than one positive sales quantity satisfies . Determine which one is best (which produces the highest profit). Step 2: Shut-Down Rule- Check whether the most profitable positive sales quantity from step one results in greater profit than shutting down.
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Chapter 18- Pricing Strategies November 20, 2013
10:24 PM
Definitions Price Discrimination- a firm engages in price discrimination when it charges different prices for different units of the same good Perfect Price Discrimination- a monopolist can perfectly price discriminate if it knows perfectly the customer's willingness to pay for each unit and can charge a different price for each unit Observable Customer Characteristics- price discrimination is based on observable customer characteristics when a firms can distinguish, even if imperfectly, consumers with a high willingness to pay versus a low willingness to pay Self-Selection- price discrimination is based on self-selection when the firms offers a menu of alternatives, designed so that different customers will make different choices based on their willingness to pay Quantity-Dependant Pricing- the price a consumer pays for an additional unit depends on how many units the consumer has bought Two-Part Tariff- consumers pay a fixed fee if they buy anything at all, plus a separate per-unit price for each unit they buy
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Chapter 19-Oligopoly November 23, 2013
1:15 PM
Definitions Nash Equilibrium- each firm is making a profit maximizing choice given the choices of its rivals Price Fixing- firms engage in price fixing when they agree on the prices they will charge or quantities they will produce Horizontal Merger- two or more competing firms combine their operations
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