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ECON 100 Tutorial 6

ECON 100 Tutorial 6. Rob Pryce r.pryce@lancaster.ac.uk www.robpryce.co.uk/teaching. Question 1. The Market for Petrol. Many buyers and sellers Very similar (identical) product Although in the UK the market is dominated by only a handful of firms ( eg . BP). MAYBE. Question 1.

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ECON 100 Tutorial 6

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  1. ECON 100Tutorial 6 Rob Pryce r.pryce@lancaster.ac.uk www.robpryce.co.uk/teaching

  2. Question 1 The Market for Petrol Many buyers and sellers Very similar (identical) product Although in the UK the market is dominated by only a handful of firms (eg. BP) MAYBE

  3. Question 1 The Market for Blue Jeans Many buyers and sellers Product is not identical Important aspect is branding so each seller is not a price taker PROBABLY NOT

  4. Question 1 The Market for Milk and Wheat Many buyers and sellers Product is identical YES

  5. Question 1 The Market for IBM Shares Many buyers and sellers Product is identical However, there may be some big players – institutional investors such as pension funds PROBABLY YES

  6. Question 1 The Market for Electricity Product is identical Many buyers, but few sellers Product may not be exactly identical either – firms are trying to differentiate over CO2 NO

  7. Question 1 The Market for Cable Television Many buyers, but few sellers Product is not identical Product is not exactly identical – you can buy different packages NO

  8. Question 2 Remember back to week 3’s questions “elasticity is dependent on the definition of the market” If demand curve is horizontal, PED is infinite. In a perfectly competitive market, there are perfect substitutes Consumer buys the cheapest product (since they’re identical) If firm raises prices, sales = 0 We’d only see a downward sloping aggregate demand curve

  9. Question 3 Google the question – you’ll get the answer! Main point is that if you don’t keep up, you quit If one firm can achieve lower costs, its rivals must catch up or leave So there is an incentive to be efficient – especially if others can’t

  10. Question 4 In the short run, firms will not produce if MR < AVC This is the because they are not getting rewarded for any extra effort So the supply curve is the marginal cost curve when MC > AVC There’s a really good youtube video explaining this: http://www.youtube.com/watch?v=_POik0fJpsY Firms set MR = MC Firms are price takers MR is therefore constant, and is equal to price So set Q* = MC = P Suppose P = €1.50 Q = 10 Suppose P = €2 Q = 12.5

  11. Question 5 0 -1 0 -1 2 3 1 3 2 1 0 2 3 2 6 4 2 0 2 3 3 6 9 2 -1 2 3 4 8 12 1 -3 2 3 5 15 10 -1 -6

  12. Question 6: Long-run cost curves

  13. Question 6: a decrease in demand Firm Market Price Price MC S1 ATC Long-run supply P1 Loss P1 P2 P2 D1 D2 Quantity(market) Quantity(firm) Short-run response

  14. Question 6: a decrease in demand Firm Market S2 Price Price MC S1 ATC Long-run supply P1 P1 P2 D1 D2 Quantity(market) Quantity(firm) Long-run response

  15. Question 7

  16. Question 7

  17. Question 7b - Diagrammatically

  18. Question 7b – Calculation Method Pk= £20, PL = £10

  19. Question 7c - Diagrammatically

  20. Question 7c – Calculation Method Pk= £20, PL = £20

  21. Class Test Bring: Pens Pencils Rubber Calculator Student Card (Library Card NOT PURPLE CARD) Brain

  22. Any Questions? Office hour: Wednesday 12:30 Or email me

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