Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Recitation 5 Notes 1. Exam a. Explain exam sheet b. Answer questions about exam c. Invite anyone who is looking to improve to come to office hours PA 202 2pm – 4pm 2. Market Power a. Optimal supply rule: Keep expanding production as long as MR>MC and stop where MR=MC. Special case is for perfectly comp. firms: MR=P and so rule becomes MR=P=MC. b. Perfect competition: large number of firms producing homogenous products. They have no market power (i.e. no influence on market price) and as a result the firm is a price taker. An individual firm’s demand curve is horizontal. It can sell as much as it wants at the prevailing market price. It can increase the quantity without reducing the price of its product. Under perfect competition the firms demand curve, average revenue curve and marginal revenue curve are all the same. c. Monopolist: It is the only supplier of a unique product with no close substitutes. It has market power (i.e. influence on market price) and as a result the firm is a price setter. Ability to raise its price without losing all its sales. Downward sloping demand curve. More market power the steeper demand curve. In order to increase output produced, it has to lower the price, which is then applied to all units, not just the additional unit. Thus the marginal revenue is the price minus the revenue loss on all previous units that could have been sold at a higher price had the extra unit not added. MR from expansion is less than the price at which the output is sold while in Perfect compt. MR equals to price. Example 1: Monopoly Quantity Price Total Total Revenue cost 0 0 0 50 1 50 50 55 55 -5 50 5 2 45 90 65 32.50 25 40 10 3 40 120 80 26.67 40 30 15 4 35 140 100 25 40 20 20 5 30 150 125 25 25 10 25 6 26 156 156 26 0 6 31 ATC Marginal Marginal revenue cost Profit -50 - 1 - Monopoly 60 50 40 30 20 10 0 0 1 2 Demand 3 4 ATC 5 MR 6 7 MC Profit maximization: MR=MC at output=4 units and price=35 (look at Demand curve). Thus, Monopoly reduces output and charges higher price. d. Define market efficiency as the summation of consumer surplus and producer surplus. An efficient market maximizes that combined surplus From the example above, monopoly produces 4 units w/ price $35 while perfectly competitive firm produces more than 4 units (around 5.5) w/ less than $35 (show intersection of Demand curve and MC curve). OR from last week recitations notes as shown below: We need to draw AC curve to the figure below, which lies below orange line, and intersection of AC and Demand curve gives LR equilibrium for the perfectly competitive firm. It produces more than a monopoly (i.e. more than 4.5) but with a lower price than monopoly price. 1. Is the perfect competition efficient in this sense? why? A market is efficient when the marginal cost to the consumer is just equal to the marginal cost of the producer. This is a characteristic of perfect competition. From the figure below if we assume that monopoly market are divided into large number of perf. Compt. Markets. Then in the SR perf. Comp. firm produces more than 4.5 units with a lower price i.e. less than 6 (intersection of MC and Demand). In the long run, LR competitive output where AC intersects Demand curve (P=AR=AC), output is larger than monopoly and price is lower. 2 2. Why is the monopoly market outcome less efficient? Since it produces deadweight loss as you can show from the figure below. 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10 Redmarginal cost (imagine that it is the sum of MC curves of all perf. Comp. firms) Green demand (AR) Orangemarginal revenue 3. profits in SR and LR Example 2: Perfect Competition 1) (DVD movie seller or Greek yogurt shop etc) + no economic rent When a factor of production has qualities that make it uniquely well suited to production, then it earns rent. Economic rent: the portion of the earnings of a factor of production that exceeds the minimum necessary to induce that factor to be supplied. Market price=$16 (P=MR=AR=$16). Then profit=$16*7000-99000=13000 in the SR. This positive profit creates tendency for others to enter into the industry and so in the LR (no economic rent in this case) economic profit is zero i.e. produce at the min. of ATC=$13.83=P and so economic profit=0. Quantity 0 1000 2000 3000 4000 5000 6000 7000 8000 Total cost 50000 55000 58000 59000 64000 70000 83000 99000 122000 ATC 55 29 19.67 16 14 13.83 14.14 15.25 Marginal cost 5 3 1 5 6 13 16 23 you can draw MC, ATC and show equilibrium in SR and in LR. 2) Economic rent: SR profits followed by reduced but still positive economic profit in the LR 3 No need to give a numerical example; we can assume that the above cost structure is true for a case where there is economic profit such as Randy Smith or Starbucks. 3) Other examples: basketball players, football players etc Any other examples that you can think of… 4