Econ 204 Class Notes PDF

I Law of diminishing marginal returns 2-costs The law of diminishing marginal returns...

I Law of diminishing marginal returns 2-costs The law of diminishing marginal returns : if more than one in put is used , holding all other inputs constant , outputs will increase but eventually at rate. a diminishing Costs · costs actual expenditures depreciation accounting : plus expenses costs cost · economic : accounting cost plus opportunity. > - economic costs > accounting costs Costs in a short run short run : time period where at least one cost is fixed fixed costs : costs that do not change as quantity changes Variable costs costs that : change ↳ cost = fixed cost + variable cost (c = Fc + Vol FC VC Ac = E AFc = G Avc =G = Ac = AFc + Ava Q Fo Ac VC AFc O 10 O c AVc # when q= 0 10 vc = 0 - I 10 5 15 10 S 15 2 10 8 18 S 4 9 3 10 11 21 3 , 33 3 , 67 7 4 10 16 26 ZiS 4 6 5, S 10 25 35 2 S 7 6 10 4050 1 , 67 6 67. 8 33 , marginal cost : change in total cost resulting from an incremental change in output Mc = (Mc =) Q C Mc O 10 > - I IS S shapes of cost curve * 2 18 3 3 21 3 4 26 S S 35 9 15 " q"a 6 50  & i the marginal average rule : Law of 1. if Mc > Ac Ac I , diminishing marginal 2 if. Mc < Ac , Act returns 3 if Mc = Ac , to is at minimum. & marginal cost * ~ $ I-costs in T short run 2-costs in long run 3-perfect i # competition q'q E LRAC SRAD SRACe T Costs in the long run · all costs are variable. Short · SRAC = run average. cost LRAC long · = run average & cost Sa ta & > I : output - economies of scale , as doubles , costs less than double ↳ gains from specialization F > - I : as output doubles , cost double I > ' III diseconomies : outputs double costs - of scale , as more than double , ↳ management and coordination problems Economies of scope > if firm produces products them at - a several , should they produce one or several facilities ? ↳ if ((q ,, 92) < C(q , 01 + Clo , q2)= economies of scope. Market Structure · 4 different structures 1) perfect competition  2) monopoly 3) monopolistic competition 4) oligopoly Equilibrium of a profit maximizing firm ↳ noting that the decision of a firm to choose price and output is one decision. Once the firm has selected price , the that the a quantity they sell is up to customers. Conversely , if a firm chooses output they , must leave it to the market to determine the price of what they sell. I totalrevenue: RB as 131 marginal revenue : Mr = T = economic (4) profit : Pr = tot. revenue - tot cost.. I = R-c ,Tcq) = R(q) - C(q) profit ↳ ITI accounting profits opportunity cost Objective for the firm profits Tq profit = maximize To maximize profits in the short run the firm must follow two rules : of producing , - It A firm should produce only if total revenue is greater than equal to q0. or variable cost In = profit ↳ TG)n -Rq-Vog) o - firms produce when Rq Voq MC Er all of producing 2 A firm maximizes MR. profits when it chooses quantity where = q = 0 ↳ - 0 = S = - E X 1- > equilibrium at q'MR > MC Tr - , as q4 of profit > at MRCMC q" it gt - as , * 2- perfect > profit maximizing - = g. R competition * 3-profit 1) Perfect competition. q'q gl q maximization I. all firms in the market sell a homogeneous product. 2 nature of. consumers and producers know the product and price charged 3. many buyers , many sellers 4 market freedom of. is characterized by entry and exit P.. individual firms 5 are price takers ↳ perfectly clastic demand D 2 * * = p g + 1 + Mr = P + p # - p q* * = p ind. Firms E  · For for a perfectly competitive firm P = MR all q P = Mc · As an individual firm maximizes its profit at the quantity where · > - Profit rule maximizing un ↳ PLAVc P produce MC = ↳ oprofit PLAVo produce q mm g · P T = R - c - π = (P - Acq short III suppose PSP' , P = Mc & q run P,> Ava r > - produce q, units (2) Suppose P = P ', P = Mc & q i &"99 Q , P'cAvc(@q') , T = O pl = break even price 1- PCSR (3)p" P(P , < = Mc & q 2 - LR ↑ C Aver produce Co 3- competition (4)LP" , P = McC , PLAVc , q = 0 , i = - Fo analysis 1 quantity * Find where P = Mc. call it 4-monopoly 2 check. shutdown rule , if PLAva - produce O and TT = - Fc, if PC Ava - produce S q*. if the firm 3 IP Cp-adq * producingq* · is calculate = output Q* = nq*, · market = n = # of firms > - In the firms enter exit the market long run , can or long run ↳ Sfirm supply curve · do Mc ac 90 #0 no entry of new firms , demand curve goes down. Entry continues mar individua till n = 0 (d ) * #, p*, q * D s , Mc , ac , d *, q * =0  whenFirmsroses · Me Do , So 00 po Initially · , , do , Mc , q , acπ · In the exit long run,To induces * individual go gt ↳ St , exit continues till It = 0 firm p *, Q * # D. s *, ac d , Mc , q*, T =0 > Long - at the run equilibrium occurs quantity where T = 0 or at Mc = ac accept Competitive analysis · > Producers surplus - : amount producer paid-what produce is willing to * P* Q > * claim of - maximize - maximizes the som CS and Ps welfare * * > Consider price P ceiling Pc - < p #* - Cs = 1 + 2 Ps = 3 + 4 + s , Pc4Pc Q - cs , = 1 + 3 , Ps = 5 + 2, 4 deadweigth loss Si S Qe P i The market for human kidneys. ↳ Should be allowed ? people to sell their organs Q Kidney if o Q10 p= , p*, * · if p = a = Q = cs = 1+ 2 + PS = 3+4 if Kidneys cannot be sold + p = 0 , Q = Q. = cs = 1 + 3 , PS = o Dead 4 · weight loss = 2 + 2) Monopoly 1. One seller in a market for a commodity with no close substitutes 2. the monopoly has considerable control over price I price searcher 3. barriers to entry which protect monopolist from competitors ↳ entry barriers include : i economies. of scale ~ natural monopoly lasts 20 - ii. Patents - developers of a product have complete control over the product years (cannot renew) iii. Copyrights - intellectual rights ~ex DeBeers-diamonds - CSO iv. Control over a necessary input. v Public franchises government grants exclusive rights to firm (ex hudson's single -. a. bay company) ↳ done to ensureService  vi. Strategic barriers - firms construct barriers , blocking out competition PN > faces monopolist the market demand - curve. > - for a monopolist MRLP R(Q) = P(Q) Q D aRQ + PQM market Q MR P Profit maximination for the monopolist where MR = MC. 1. find MR = MC , Qm 2 at Qm , to demand curve to find Pm go up. 3 check shut down rule PmL AVC , produce O , IT = Fo , Qm Q. MR 4. calculatem = (Pm-Ac). Qu P "annon Om - 0 > - PcPm = A > - O profit > long - run equilibrium is equal D D to short run equilibrium MR MR Q Joseph Schumpeter : entry barriers are not a serious problem they , can be circumvented by technological change Monopoly profits. induce innovation. " "Monopoly is the most powerful engine of progress Economic wastes of monopoly deadweight ↑ I. loss ' with perfect competition , Cs +34+s , PS =+ 8 , Benefit-all ↳ with PS 8 monopoly , cs =2 , + +7 = , deadweight loss = 5 +. 2 X-inefficiency urQ ↳ monopolists get wasteful since they have no competition to keep them cost efficient => Ac shifts up 3 rent. seeking ↳ other firms who monopolist profit box will draw try to enter market, monopolist will spend resources protecting their monopoly. ↳ from profit box may be a lower bound on the wastes rent seeking  Policy I prevent abuse of monopoly power - competition Act ↳ prohibit : resale price maintenance, tied sales , exclusive dealing 2. price regulation a) First best X solution ! Fore the monopolist to Ba and charge producea ↳ measurement problem firms : know Mc but agency does not 4 Possible that PcLac at QT Lo b) second best solution - fair rate of return pricing 4 Force monopolist Ac intersects to operate where demand , Tm = , dul o 0 Price discrimination - occurs when differences in prices cannot be explained by difference in Mc I. first degree price discrimination - firm charges different price for each consumer 2 second block different price per different degree charge quantity (bulkl - pricing. -. third 3 degree = charge different price for different groups of consumers ↳ use price discrimination to increase profit -necessary conditions for price discrimination 1. must have over price power 2. identify different groups of consumers 3. must able to be prevent arbitrage 3) Monopolistic competition 1 firms. many 2 exit. easy entry and 3. compete by selling similar but differentiated products (Restrants Q Q > - demand for individual firm elastic than is more the market demand (flatter ( D D Mr Mc firm P marketP Equilibrium in the short run -individual fire maximines profits where  Equilibrium in the long run - T , CO induces new firms when new firms enter the demand of existing , firms decreases (MR shifts in1 /demand curve shifts inl (shift under ac) Stangant point) > when MR , Mc Pi acii - Occurs = , and = = 0 > dwl - > 0 Mc = > Puc) Ppc monopolistic - competition > prefer monopolistic competition it produces - since more variety PC = perfect Hotelling's Boardwalk competition : consider a beach with two ice cream sellers , each seller gets the consumers who find the seller closer to them , consumers are evenly distributed along the beach psellert 2 seller - each seller gets t of the market. average walk = ( Seller 1 moves towards center , so seller 2 moves towards middle both sellers have I of the market , average well , consumer suffer 4) Oligopoly I dominated. by a small number of firms 2. entry barriers exist. firms 3 are. mutually interdependent each must consider the possible reactions of its rivals to its prices , advertising and product development decisions. Game theory > Prisoners - dilemma ↳ two The evidence consider individuals x and g who have been caught in a crime. of crime , is conclusive , however there is circumstantial evidence that they committed crimez. How do the authorities convict them of crimes Ans 4 authorities interview "We have you to send you to jail for year If you. enough on a. confess to crime z and implicate your partner well give you 3 months and the other 20 both years , if you confess you'll each get 15 years. Can Y * X : if y confess I confess denys If I confess ,. y , : if confess I confess if cona I , days , # both always confesses Nash equilibrium  > Battle of the - sexes ↳ Jim and Jane like to spend Saturday night together , Jim likes to watch opera and Jane likes to watch wwe Jim whe opera * Jim : if Jane watches opera , I watch opera , # Jane : if Jane watches if Jim watches whe whe , , I I watch watch whe wwe % if Jim watches opera , I watch opera ↳ I Nash : whe wwe and , opera , opera => Gear and trick Gear companies ↳ Nash will cheat equilibrium (complying is Gear is will not stable and Trick / et ↳ repeating the game Period I Payoff 1a Payof i Periods I trigger 22 retaliation 2 - 2 I 4, 5 I 4,S 2200 - 2 2 - O C 4 ,S 1 2 200 - 3 3 4 O O O O 2 20 O 4 Nash - I S. S a O I 05 SiS ↳ backwards induction to prove firms will cheat. used always ↳ don't know uncertainty in values and number of games so we still Cooperation ? or competition I. te tendency to cooperate is greater for smaller numbers of sellers than for cooperaetel I few firms coordinate larger numbers of sellers. are easier to Z. tendency to cooperate is greater for producers of similar products than for - producers of differentiated products brand loyalty sharply consumer 3 use. tendency to cooperate is greater in a growing than in a contracting market · car % cooperate dominant firm ackwardswith. tendency to is greater when the market contains a , eduction Sequential game monopolist inncertainty / not ↳ first fight fight one player chooses ↳ entrant entrant ex. i X NASH outcome of = game  Firm ↳ ex. 2 i credible threat Race car motors small If > - RCM chooses first , Nash small , smal car big car is 6 3 o o Far small engine not what wants out engines I I 3 G engines big engines small car big car small 6 000 Dominant strategy for engines is big engines engine > Nash - I I 3 G now is big engines so must be big cars , big engines Macroeconomics Microeconomic concepts study of the aggregate - economy Objectives of macro economics policy ↳ ↳ low economic growth unemployment - ↳ lower low inflation (stable deficit prices government ↳ ↳ Wage growth environmental enhancement ↳ diversify Policy tools Fiscal policyE governments attempt to influence economy by setting and charging taxes Monetary policy -> change economy by changing interest rates and money in economy Unemployment ↳a do not have made effort to work person is unemployed if they a job , get has. employment - labour force measured by statistics canada. canada and survey ↳ LFS , surveys households across canada for information on job status. ↳ derives residents those age Working age population , Canadian over IS , excluding living working = Wap of armed forces and those institutions population on indigenous reservers, full time members in. the labor force people not force Working population labour = age people in I in ↓ retirees full time students , and those not activley seeking employment labourForceemployedunemploy WAP employed a ↳. 100 unemployment rate = labour force males = 84 % Canada Alberta Canada PR. 19sI Females = 24 % ,. males = 70 % WAP 33892 , 3 3975 7 , PR Females = 62 % 2023.. labour force 22010 , S 2736 4 , 20582 , 4 2529 , 8 lowest employment unemployment rate , 1, 2 %