Intermediate Microeconomics Notes

EC202 Intermediate Microeconomics - Lecture Notes

Course Information

  • Instructor: George Symeonidis
  • Office: 5B.215
  • Academic Support Hours: Thursdays 11-12 or by appointment
  • Email: symeonid@essex.ac.uk

Course Structure

  • Lectures: 10 two-hour sessions
  • Classes: Weekly one-hour sessions
  • Textbooks:
    1. Perloff
    2. Varian
    3. Morgan, Katz and Rosen
  • Materials: Lecture notes, Module Outline, Problem sets on Moodle
  • Prerequisites: Introductory economics; basic algebra; calculus is useful but not mandatory.
  • Assessment: Coursework and examination (May/June). Both are to be computed for the aggregate module mark.
    • Coursework: Test details to be announced.

Lecture Schedule Overview

  • Weeks 16-17: Monopoly I and II
  • Week 18: Introduction to Game Theory
  • Weeks 19-20: Oligopoly I and II
  • Weeks 21-22: Intertemporal Decisions: Consumption and Investment
  • Weeks 22-23: Behavior under Uncertainty I and II
  • Weeks 24-25: Asymmetric Information I and II

Concepts in Monopoly

Understanding Monopoly
  • Unlike firms in perfect competition, monopolistic firms set prices rather than taking them as given.
  • Examples of monopolistic organizations include major tech companies like Amazon and Google.
Monopoly vs Perfect Competition

  • Monopoly Characteristics:

    • One seller who can influence market prices.
    • No close substitutes for the product offered.
    • Entry barriers that prevent new competitors from entering the market.

  • Perfect Competition Characteristics:

    • Many sellers with no single entity able to influence market prices (price-taking behavior).
    • Homogeneous products and free market entry.

Sources of Monopoly

  • Types of monopolies include:
    • Indefinite Legal Monopoly: Example includes public utilities like electricity.
    • Temporary Legal Monopoly: Examples are patents or trade secrets.
    • De Facto Monopoly: Examples include unique access to specific inputs.
    • Natural Monopoly: Discussion of this will occur later in the course.

Market Power

  • Significant market power can arise from:
    • Large economies of scale.
    • High switching costs for customers.
    • Cost advantages through innovation.
  • Actors like Facebook leverage these factors to maintain market dominance.

Profit Maximization for Monopolists

Key Formulas

  • Profit ($$) is calculated as:
    = R(Q) - C(Q) = P(Q)Q - C(Q)
    Where $C(Q)$ is the firm's cost function.

  • Monopolists set MR = MC for maximizing profit:

    • Marginal Revenue ( ext{MR}) is always less than price ( ext{P}) due to downward-sloping demand.
    • This leads to the necessity of adjusting the price for every additional unit sold:
      rac{{ ext{d}Q}}{{ ext{d}P}} < 0
Deriving Marginal Revenue Curve
  • For demand given by
    Q = 12 - rac{1}{2}P
  • The inverse demand function is:
    P=24−2QP = 24 - 2Q
  • Therefore, MR can be derived as:
    MR=24−4QMR = 24 - 4Q
Demand Elasticity and Market Power
  • The relationship between MR and price elasticity of demand is essential:
    MR = Pigg(1 - rac{1}{ ext{|E|}}igg)
    Where:
  • $ ext{E}$ is the price elasticity of demand.

Welfare Implications of Monopoly

  • Price above marginal cost (MC) causes a misallocation of resources and a deadweight loss to society.
    • Shows the importance of understanding monopoly power for economic efficiency.

Regulation of Monopolies

Natural Monopoly
  • Naturally arises when single-firm production is more cost-effective than multiple firms.
  • Regulation seeks to ensure pricing at socially optimal levels, typically setting prices equal to MC to maximize welfare.
    • Yet challenges arise in policy design, especially regarding the regulation of firms with declining average costs.
Antitrust Policy
  • Designed to limit the adverse effects of monopolistic behavior and maintain competition in the market.
    • Enforcing rules against anti-competitive practices, mergers, and abuse of market power promotes fair market conditions.
Quiz and Assessment Questions
  • Questions are given in the lecture as practice to reinforce understanding of monopoly dynamics and regulatory economics.

Conclusion

  • Understanding monopoly power is crucial not only for theoretical evaluation but for crafting effective economic policies and regulations.