Download Review Class Eight

Review Class Eight
Outlines
 The key sentence of Producer theory: A
representative , or say, typical firm will
maximize his profit under the restriction of
technology and market structure.
 Recall that how should we translate this
sentence?
Outlines
Deeper sight
 Profit maximization problem facing a typical firm
can be divided into two parts:
 Part 1: Given any production level of y ,how to
choose the optimal inputs bundle to minimize
cost? (Ch 20 and Ch 21)
 Part 2: How to choose the proper output level of
y, such that the profit can be maximized? (Ch 22
and Ch 23 are referred to perfect competition,
while Ch 24 and Ch 25 are referred to
Monopoly.)
Outlines
Deeper sight
 For part 1, you should remember that cost minimization
problem is not the objective or the end, the purpose for
us is to obtain the cost function, which measures the
minimum cost of producing y units of output when
factor prices are (w1,w2).
 For part 2, having got the cost function, we will return to
the profit maximization problem, and analyze the
behavior of firm supply. We divide our discussion into
two parts in accordance with market structures:
 Ch 22 and Ch 23 are referred to perfect
competition, while Ch 24 and Ch 25 are referred
to Monopoly. This is our topic of this class.
Ch 22 Pure competition


1.
2.
3.
4.
First we discuss the behavior of firm supply in the
perfectly competitive market.
Technical assumptions of Pure competition:
There are many small firms and millions of consumers
such that individuals in the market are price takers.
The goods produced by every firm are identical, so the
main segment of the demand curve facing each
typical firm is horizontal.
In which all firms and households have complete
information, say, concerning the goods that are
available in the market and the prices charged.
There is no externality.
Ch 22
Pure competition
 The market structure of perfect
competition can be expressed as the
demand curve facing to the typical firm.
 Warning:
 Distinguish the market demand and the
demand facing to the typical firm.
 Note that the type of demand curve facing
to a typical firm reflects the first two
assumptions for the pure competition.
The demand curve facing
a competitive firm. p380
Market demand
P
Market
price P*
Demand curve
facing firm
Q
Ch 22 Firm supply (short run)
 Arithmetically,


max p y  cs ( y )
y


 max p y  FC  VC ( y )
y
 F .O.C. : p  MC ( y * )
 S .O.C. : MC ' ( y )  0
*
 Are the conditions enough?
Ch 22
Firm supply (short run)
 In the short run, if the revenue can not cover the
fixed cost a bit, does the typical firm keep on
operating?
 So in the short-run, the rational firm must choose
the optimal output level which should also satisfy
p y  VC ( y )  0
*
*
 p  AVC( y )
*
Ch 22 Firm supply (short run)
 So I can summarize the conditions which the typical firm
must satisfy in the short-run given the market price in
the arithmetical form:
*
*
MC ( y )  p  AVC( y ),
*
MC ( y )  0
 If we relax the given price, we can obtain the vitally
important curve called supply curve, which is defined as
a graph of the relationship between the price of a good
and the optimal quantity supplied in the competitive
market.
Ch 22 Firm supply (short run)
Ch 22 Firm supply (short run)
 The supply curve is the upward-sloping
part of the marginal cost curve that lies
above the average variable cost curve.
 The shut-down point and break-even point.
Ch 22
Firm supply (long run)
 Arithmetically,


max p y  CL ( y )
y
 F .O.C. : p  LMC ( y )
*
 S .O.C. : LMC ' ( y )  0;
*
p y  CL ( y )  p  LAC ( y )
*
*
*
The firm’s long-run
supply curve
LMC(y)
LAC(y)
y
Ch 22
Firm supply (long run)
 As we did in the short-run case, if we relax
the given price, we can obtain the long run
supply curve, which is defined just now.
 Now we consider the limiting case of
“constant return to scale”.
 In the limiting case of constant return to
scale, how is the long-run supply curve for
the typical firm?
Ch 22
Firm supply (long run)
Ch 22 Why a firm will come into a
market?
 Because of trade benefits, which is measured by
producer’s surplus.
 Def. of producer’s surplus: The amount a seller is
actually paid for a good minus the seller’s
variable cost.
producer ' s surplus  py  cv ( y);
profits  py  cv ( y)  FC
Ch 22 Why a firm will come into a
market?
 We have two methods to describe the
variable cost in the figure.
 The area under the marginal cost gives
the variable cost.
 We can also use the point on the AVC to
exhibit the variable cost.
Ch 22
Why a firm will come into a market?
Ch 23 Industry supply in the
competitive market.
 Horizontal summation:
Ch 23 Industry equilibrium in the
short run
 For the industry: In order to find the
industry equilibrium we take this market
supply curve and find the intersection with
the market demand curve, and we can
find the equilibrium price every typical firm
must take as given.
Ch 23 Industry equilibrium in the
short run
 For every firm:
Ch 23 Industry equilibrium in the
long run
 Long-run supply curve of the industry

In the limit, as firms become infinitesimally
small, the industry’s long-run supply curve is
horizontal at min AC(y).
Ch 23 Industry equilibrium in the
long run
Ch 23 Industry equilibrium in the
long run
 For every typical firm: Free entry and exit.
 So The
long-run equilibrium will
involve the maximum number of
firms with 0 profit.
Economic Rent
 Payments to a factor of production that are
in excess of the minimum payment
necessary to have that factor supplied.
 (The above definition comes from the
viewpoint of the owner of the limited factor.)
 Two key features
 Fixed for the economy as a whole
 It is the price of products that determines the
value of fixed factor.
 Example: oil, farmland, licenses
Economic Rent
 Solve for the Economic rent, the convenient way
is to make the analysis from the viewpoint of the
user of the Economic Rent, which is the
producer.
 Suppose the land is the only fixed and limited
factor, and the cost of the landlord for seeking
rent is 0, how to solve for the Economic Rent in
the long run and in the competitive market?
 In this case, the fixed cost, the economic rent
and the producer’s surplus are equal.
Economic Rent
Ch 24 Monopoly
 Now we discuss the firm behavior in the
market structure of Monopoly.
 An industry structure when there is only
one firm in the industry is called Monopoly.
 How to reflect this assumption of market
structure?
 The demand curve facing to monopoly is
the market demand curve, which is
downward sloping.
Ch 24 Monopoly
 Arithmetically,
Max y r ( y )  c( y )
FOC : MR( y )  MC ( y )
SOC : MR '( y )  MC '( y )
Ch 24 Monopoly
Ch 24 Monopoly
 As we did just now, we seek for the optimal
quantity which yields to the maximum profit, and
let the demand determine the price.
 Can we do the opposite way?
 Markup pricing:
MR  MC
 p  MC (1  1
D
)
Ch 24 Monopoly
Ch 24 Welfare analysis of Monopoly
(Inefficiency of Monopoly)
Ch 24 (Quantity) Taxation (or
Subsidy) on Monopoly
Ch 24 Natural Monopoly
 Natural monopoly: A monopoly that arises
because a single firm can supply a good
or service to an entire market at a smaller
cost than could two or more firms.
 Usually, downward sloping LAC is the sign
for the natural monopoly, which reflects
the increasing return to scale.
Ch 24 Natural Monopoly
Ch 24 Whether to control by the
government?
Ch 24 Minimum efficient scale
 Def.: The level of output that minimizes
average cost, relative to the size of
demand.
P
P
D
D
AC
AC
O
Q*
D
Q
O
Q*
Q
D
Ch 25 Price discrimination
 Def. of Price discrimination: For a monopoly,
selling different units for different prices is called
Price discrimination. (Three types)
 First-degree price discrimination means that the
monopolist sells different units of output for
different price and these prices may differ from
person to person.
 ______Perfect price discrimination
Ch 25 Price discrimination
 Watch out:
 The monopoly can know every consumer who
want to consume very much. That is to say,
reservation prices of different units for every
consumer can be “observed” by the monopoly.
 The objective for the monopoly is to acquire all
of the consumer surplus which denoted in the
ordinary competitive market.
Ch 25 Price discrimination
 Third-degree price discrimination occurs when
monopolist sells different people for different
prices, but every unit of output sold to a given
person sells for the same price.
 Watch out:
 Market separation is the very important
condition: No arbitrage.
 The firm will maximize profit, but what level of
output to be sell in each market?
Ch 25 Price discrimination
 Arithmetically,
max p1 ( y1 ) y1  p( y1 ) y1  c y1  y2 
y1 , y 2
 
 
 
 MR1 y  MR2 y  MC Y ,
*
1
Y y y
*
*
1
*
2
*
2
*
Ch 25 Price discrimination


1
*
*

p1 ( y1 ) 1 

MC
(
Y
),
*

(
y

1
1) 



1
*

p2 ( y2* ) 1 

MC
(
Y
)
*
  2 ( y2 ) 
if p1  p2 ,  1 ( y )   2 ( y )
*
1
*
2
Ch 25 Price discrimination
市场 1
市场 2
P
总市场
P
P
D1
D2
E1
P1
P2
MC
E2
G
MR1
O
MR2
Q
Q1
MR
D1
O
Q2
D2
QO
Q
Ch 25 Monopolistic Competition
 Dissertation.