1 / 24

Microeconomics I

Microeconomics I. Undergraduate Programs Fernando Branco 2006-2007 Second Semester Sessions 5&6. Perfect competition. A perfectly competitive market is characterized by: Many sellers and buyers (“ small ”); Products are perfect substitutes (homogeneous);

lila-oconnor
Download Presentation

Microeconomics I

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Microeconomics I Undergraduate Programs Fernando Branco 2006-2007 Second Semester Sessions 5&6

  2. Perfect competition • A perfectly competitive market is characterized by: • Many sellers and buyers (“small”); • Products are perfect substitutes (homogeneous); • Agents have perfect information relative do products and prices; • There are no transaction costs; • There is free entry and exit.

  3. Market demand and firm demand • Clients will want to buy from the lowest cost seller.

  4. Firm’s supplyand marginal costs • How much does a firm want to supply in the market? • It depends on the market price. • The firm chooses the quantity to maximize its profits: • The second order condition requires that the marginal costs are increasing.

  5. Firm’s supply:short run and long run • In the short run: • There is supply only if the price exceeds the average variable cost. • In the long run: • There is supply only if the price exceeds the average (total) cost.

  6. Si S p* D qi* q* Market equilibrium: short run • The market equilibrium in the short run results from the intersection of supply and demand:

  7. C S (MC) p* AC qi* q Market equilibrium:long run • The market equilibrium in the long run depends on the productive structure only. • The demand determines the number of active suppliers only.

  8. Properties of the equilibrium • The equilibrium in a competitive market allows for efficient transactions: • P=MC; • Global surplus is maximized; • In the long-run, the average cost is minimized.

  9. Comparative staticsin the equilibrium • What is the impact on the equilibrium if the demand expands? • What is the impact on the equilibrium if the price of an input increases? • What is the impact on the equilibrium if there is a technological innovation that reduces costs?

  10. Monopoly market • A single firm serves the “relevant market”: • There are no close substitutes; • Monopolies are often “local” monopolies. • The demand of the market is the same as the demand of the firm. • The firm has control over the price: • But the price charged determines the quantity sold.

  11. Sources of monopoly • Entry barriers; • Economies of scale; • Economies of scope.

  12. The monopolist’s decision • How much should the firm sell? • The firm chooses a quantity to maximize its profit: • Graphical analysis. • The impact of fixed costs. • Why not a supply curve?

  13. P, C MC P* AC D MR Q* Q The monopolist’s decision: a graph

  14. MC MC MC AC AC AC P* P* P* D D D MR MR MR Q* Q* Q* The fixed costs

  15. P, C P1* D1 P2* D2 MC Q* Q Why not a supply curve?

  16. Topics in the monopoly • A monopolist with two-plants: • Price discrimination: • Perfect price dicrimination (first-degree); • Second-degree price discrimination; • Third-degree price discrimination: • The monopolist with two markets.

  17. Monopolist with two plants • How much to produce in each plant? • Equalize the marginal cost in each plant. • Graphic analysis.

  18. CMg2 P, C CMg1 CMg P* D RMg Q Q2* Q1* Q* Monopolist with two plants: graphic

  19. Perfect price discrimination • What if the monopolist could charge different prices for different transaction? • The monopolist could charge a price per transaction: • exactly the amount that the buyer would be willing to pay. • The volume of transactions would be maximzied; • The monopolist would get the full surplus.

  20. P P P1 P2 P1 P3 P4 P2 P5 P6 P3 P7 CMg Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q Q Q1 Q2 Q3 Increasing discrimination

  21. Second degree price discrimination • Discrimination for several types of buyers. • Examples: • Discounts, two-part tariffs, blocks. • The monopolist increases the profit and the quantity transacted.

  22. Third-degree price discrimination • Charge different prices in different markets. • Example of a monopolist with two-markets: • Marginal revenues are equalized.

  23. Monopolistic competition • Many buyers and sellers • Firms produce differentiated goods: • Each has close substitutes. • Free entry and exit. • Product demand and entry. • In the short-run, behave as a monopolist. • In the long-run, demand adjusts and monopolist has zero profit.

  24. Firms’ decisions • Each firm maximizes profits as monopolists do: • It is important to distinguish between the short-run (fixed n) and the long-run (n varies). • In the long-run demand adjusts so that:

More Related