EFB228 Micro

Difference between Economic cost and economic profit

Cost is the monetary value of all inputs used. Icludeds accounting and implicit costs

Profit is the difference between total revenue and all economic costs

Short run by definition

A timeframe in which some of the inputs cannot be varied

Long run by definition

A timeframe in which all of the firm’s inputs can be varied

What is an isoquant

shows the different combinations of two inputs that can produce a certain amount of output

they are convex in origin

Isocost lines

shows the different combinations of two inputs that incur the same cost

they are straight lines ususally defined as Price of L / Price of K

What are the 2 different types of games

Sequential and Simultaneous

What is the Nash Equilibrium

when each player chooses a strategy that gives themselves the highest payoff, given the strategy chosen by the other player

What characteristics of a game is to be considered the prisoner’s dilemma

Both players must have a dominant strategy

The Nash equilibrium does not maximise the collective interest of the players “Pareto Dominated”

what Sub-game Perfect Nash Equilibrium (SPNE)

used in sequential games and chooses the best outcome

in Perfect Comp when is profit maximisation occur

MR = MC

What are the key features of perfect competition

Many sellers and buyers

Similar products being sold

full information available to buyers

equal access to resources

free entry and exit from the market

They are also price takers

why competitive firms price takers

firms face a perfectly elastic demand curve

competitive markets in the short run

Profit is maximised when P = MC = MR

Competitive markets in the long run

If price falls below minimum average cost , producing at P = MC

How low can prices be in the short run of perfectly competitive markets

P > AVC

P = AVC

where price falls below minimum AVC they will shut down

Consumer Surplus in perfect competition

the difference between willingness to pay and actual price paid for each unit

Producer Surplus Competitive markets

the area above supply curve and below price

Features of monopolistic competition

Many sellers

differential products

no barriers to entry

What is a pure monopoly

A singe seller of a product that has no close substitutes

barriers to entry require patents, special ability

Demand for a Monopolist firm

Monopolistic demand is the market demand

to sell more the firm must lower the price

not a price taker but is a PRICE MAKER

Monopoly and marginal revenue

MR is always lower than demand as they must lower the price to sell more

Profit maximisation for monopoly

Where Marginal cost = MR < P

Losses under Monopoly

AC < P

Social Cost of a Monopoly

MC = AC

Imperfect Competition

when there is more than one seller but each seller has some control over the price

monopolistic and oligopoly are e.g.

Market Concentration Measures

use the 4 firm concentration ratio

use Herfindahl-Hirschman Index

Oligopoly characteristics

A few sellers dominate the sales of a product

entry is difficult or impossible

some firms have a large enough share to influence the price

firms consider’s rivals reactions when setting prices

Oligopolistic Price Rigidity

when firms fear their rivals won’t match price increases

results in a kinked demand curve

Collusion

fear of price war incentive to collude

keep price high

prevent entry of new firms

A cartel

firms acting together to coordinate decisions. to be successful

prevent new entry

establish target output level for all producers in the cartel that max. group profit

set quotas

ensure no firms exceeds its quotas

Grim Trigger

where a firm will be punished for cheating in oligopoly

Conditions to sustain collusion

Players be patient

interactions between players are frequent

one time gain from cheating is small compared the loss due to punishment

firms expected to stay in business long enough so that the future losses from punishment bear heavilty

Marginal Social Cost and Marginal Private Cost

MSC Higher when negative externality

MSC lower than MPC when positive externality

Inefficient externality

when MSC > MB

when is externality efficient

MSC = MB

The Coase Theorom

When transaction costs are low the same decision occurs regardless of property right

Social Cost

Private Cost + External Cost

Policy Solutions to Negative Externalities

Pigouvian Tax

Comman and Control Approach

Market - based approaches

Characteristics of a public good

Excludability: anyone can use it without paying

Rivalry : everyone can use it at the same time

Free Ride

choosing not to contribute to a public good while still receiving its benefits