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University of Hawai‘i at Mānoa Department of Economics

University of Hawai‘i at Mānoa Department of Economics. ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #26 Thursday, April 15, 2004. ANNOUNCEMENTS. LAST LECTURE Tuesday, May 4, 2004, 12:00-1:15 PM, BIL 152 Review Session

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University of Hawai‘i at Mānoa Department of Economics

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  1. University of Hawai‘i at MānoaDepartment of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #26 Thursday, April 15, 2004

  2. ANNOUNCEMENTS • LAST LECTURE • Tuesday, May 4, 2004, 12:00-1:15 PM, BIL 152 • Review Session • Thursday, May 6, 4:30-5:30 PM, BIL 152 • FINAL EXAMINATION • Thursday, May 13, 2004, 12:00-2:00 PM, BIL 152

  3. Lecture 26 • Oligopoly • Dominant Firm Model • Introduction to Factor (Input) Markets

  4. Oligopoly • Few Firms • Price Makers (fringe takers) • Barriers to Entry • Homogeneous or Differentiated Product

  5. Dominant Firm/Price Leader Model of Oligopoly • One dominant firm acts as price leader. • Competitive fringe acts like price taking competitive firms. • Dominant firm takes the competitive fringe supply into consideration when maximizing profits by setting price.

  6. Residual Demand Curve $/Q Scf = ΣMCi Residual Demand Fringe Supply P0 Fringe Supply P1 Fringe Residual Demand P2 D Residual Demand 0 Q

  7. Residual Demand Curve $/Q Scf = ΣMCi P0 Residual Residual Demand D Residual Demand 0 Q

  8. Residual Demand Curve $/Q Scf = ΣMCi P0 Residual Residual Demand D Residual Demand 0 Q

  9. Residual Demand Curve $/Q Scf = ΣMCi DIndustry Ddominant firm 0 MRdominant firm Q

  10. Dominant Firm/Price Leader Model of Oligopoly $/Q Scf = ΣMCi MCdominant firm P* ATCdominant frim Ddominant firm DIndustry 0 Qcf Qdf QIndustry Q MRdominant firm

  11. Dominant Firm Model $/Q Scf = ΣMCi MCdominat firm P* ATCdominat frim 0 Qcf Qdf QIndustry Q

  12. Labor Markets • Production Theory • Total Product • Average Product • Marginal Product • Labor Demand • Marginal Revenue Product (MRP) • Value of the Marginal Product (VMP)

  13. THREE STAGES OF SHORT-RUN PRODUCTION Q STAGE II • • STAGE I TP STAGE III • L Q/L APL L L1 L0 L2 MPL

  14. Marginal Revenue Product (MRP) • Marginal Revenue Product of Labor equals the Marginal Revenue times the Marginal Product of Labor • MRPL= MR*MPL • Units of Measure: $/L = ($/Q)*(Q/L)

  15. Value of the Marginal Product (VMP) • The Value of the Marginal Product of Labor equals the output Price times the Marginal Product of Labor • VMPL= P*MPL • Units of Measure: $/L = ($/Q)*(Q/L) • For a competitive firm P=MR, therefore MR*MP=MRP=VMP=P*MP • For a monopolistic firm P>MR, therefore P*MP=VMP>MRP=MR*MP

  16. FACTOR COST • Marginal Factor Cost (MFC) • Average Factor Cost (AFC) • Under a rule of one price (wage), the wage rate, W, equals the average factor cost, AFC • W=AFC

  17. Competitive Input Market/Competitive Output Market Competitive Firm Labor Market $/L $/L SL W=AFC=MFC=MRP=VMP W MRP=VMP DL 0 0 L L* L

  18. Competitive Input Market/Monopolistic Output Market Monopolistic Firm Labor Market $/L $/L SL W=AFC=MFC=MRP<VMP VMPL W DL MRPL 0 0 L L* L

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