Microeconomics Review PDF

REVIEW MICRO-ECONOMICS Prof. Wioletta Nawrot YOU WILL REVIEW THIS WEEK Supply, Demand and Market Elasticities Costs Consumer Theory Profit Maximisation Perfect Competition Monopoly Oligopoly and Game Theory (Competitive Strategy)...

REVIEW MICRO-ECONOMICS Prof. Wioletta Nawrot YOU WILL REVIEW THIS WEEK Supply, Demand and Market Elasticities Costs Consumer Theory Profit Maximisation Perfect Competition Monopoly Oligopoly and Game Theory (Competitive Strategy) 2 SUPPLY, DEMAND AND MARKET This is only a quick overview of the topic! For more details please watch the recordings of the full lectures and revise the weekly Practice Worksheets! As presented in : Krugman P., Wells R., Microeconomics, Worth Publishers. 3 Supply, Demand and Markets Review  Downward sloping Demand curve: Why?  Upward sloping Supply curve: Why?  Movement along and shift: Understand the difference and what causes each movement.  Changes in Supply and Demand and equilibrium P and Q.  Consumer and producer surpluses.  Price floors and ceilings, shortage and surplus, deadweight loss. Supply, Demand and Markets Changes to Market Equilibrium New Equilibrium Shift of Supply Curve Shift of Demand Curve Left Right Left Right Shortage / Surplus Shortage Surplus Surplus Shortage New E Price Higher Lower Lower Higher New E Quantity Lower Higher Lower Higher Simultaneous Shifts Supply Increases Supply Decreases Price: ambiguous Price: up Demand Increases Quantity: up Quantity: ambiguous Price: down Price: ambiguous Demand Decreases Quantity: ambiguous Quantity: down Supply, Demand and Markets Consumer and Producer Surplus Supply, Demand and Markets Inefficiencies of the Price Floor and Ceiling END SUPPLY, DEMAND AND MARKET DO YOU HAVE QUESTIONS? Please join your Q&A session! 8 ELASTICITIES This is only a quick overview of the topic! For more details please watch the recordings of the full lectures and revise the weekly Practice Worksheets! As presented in : Krugman P., Wells R., Microeconomics, Worth Publishers. 9 Elasticities Review  The Price Elastiticy od Demand - PED.  Elasticity and revenue: price effect and quantity effect.  The Price Elasticity of Supply – PES.  The Cross-Price Elasticity of Demand - XED (substitute/complement goods).  The Income Elasticity of Demand, YED, (inferior/normal goods)  Calculate and interpret elasticities and recognize elastic/inelastic and the factors determining the PED, PES! Elasticities PED PES Elasticities Applications of PED to business PED can be used as a tool in the pricing decision. Reminder: PED changes along the demand curve! PED < 1 – (Relatively) Inelastic Demand: INCREASE price of the good  The price effect is stronger than the quantity effect; POSITIVE effect on the Total Revenue  Attention: Increase the price ONLY to the level of price, at which PED = 1! PED = 1 - Do NOT change the price; Firm maximizes Total Revenue PED > 1 – (Relatively) Elastic Demand: DECREASE price of the good  The quantity effect is stronger than the price effect; POSITIVE effect on the Total Revenue  Attention: Decrease the price ONLY to the level of price, at which PED = 1! 12 Elasticities XED YED END ELASTICITIES DO YOU HAVE QUESTIONS? Please join your Q&A session! 14 COSTS This is only a quick overview of the topic! For more details please watch the recordings of the full lectures and revise the weekly Practice Worksheets! As presented in : Krugman P., Wells R., Microeconomics, Worth Publishers. 15 Costs Review  Opportunity cost – Include; Sunk Cost – Ignore.  Marginal cost (MC), Average cost (AC), Fixed cost (FC), Average variable cost (AVC).  Diminishing returns and increasing MC.  MC crosses AC at minimum of AC.  Increasing return to scale: definition and sources. Costs Review Short Run Long Run END COSTS DO YOU HAVE QUESTIONS? Please join your Q&A session! 18 CONSUMER THEORY This is only a quick overview of the topic! For more details please watch the recordings of the full lectures and revise the weekly Practice Worksheets! As presented in: Krugman P., Wells R., Microeconomics, Worth Publishers. 19 Consumer Theory Review  Total utility and marginal utility  The law of diminishing marginal utility  Indifference curves  Budget constraint  Optimal choice END CONSUMER THEORY DO YOU HAVE QUESTIONS? Please join your Q&A session! 21 PROFIT MAXIMISATION This is only a quick overview of the topic! For more details please watch the recordings of the full lectures and revise the weekly Practice Worksheets! As presented in: Krugman P., Wells R., Microeconomics, Worth Publishers. 22 Profit Maximisaton Review  Total Profit = Total Revenue – Total Cost  All questions about pricing have the same answer: MR = MC FC does not matter for pricing, it matters for profitability.  For a monopolist MR < P because of the trade off between high P and low Q (i.e., the monopolist faces a downward sloping demand curve)  For a perfect competitor MR = P because the firm is a price taker (i.e, the firm faces a perfectly elastic (horizontal) demand curve) END PROFIT MAXIMISATION DO YOU HAVE QUESTIONS? Please join your Q&A session! 24 PERFECT COMPETITION This is only a quick overview of the topic! For more details please watch the recordings of the full lectures and revise the weekly Practice Worksheets! As presented in: Krugman P., Wells R., Microeconomics, Worth Publishers. 25 Perfect Competition Review  In competitive markets firms are price takers; produce where: P = MC (as MR = P). Price is determined by aggregate demand and aggregate supply.  Firms in the industry in the Short Run shut down if P < min of AVC (AVC = MC); Firms in the industry in the Long Run shut down if P < min of AC (AC = MC) Firm $ Industry $ s (P) mc (q) ac (q) P = MR d (P) q* q Q Perfect Competition Review Firm $ Industry $ s (P) mc (q) ac (q) P = MR P’ = MR’ d (P) q’* q* q Q Whenever market price exceeds minimum average total cost, the producer is profitable. New firms enter. In the Long Run market equilibrium P = MC = ACMIN and profit is zero (break even) END PERFECT COMPETITION DO YOU HAVE QUESTIONS? Please join your weekly Q&A session! 28 MONOPOLY This is only a quick overview of the topic! For more details please watch the recordings of the full lectures and revise the weekly Practice Worksheets! As presented in: Krugman P., Wells R., Microeconomics, Worth Publishers. 29 Monopoly Review  Distinguish Firms with Market Power, Monopoly and Natural Monopoly.  Downward sloping Demand curve and MR. The Monopolist has to decrease the price in order to sell more. Profit Loss Monopoly Review  P = MC at the perfectly competitive firm’s profit- maximizing quantity of output.  P > MR = MC at the monopolist’s profit-maximizing quantity of output.  Compared with a competitive industry, a monopolist does the following: Produces a smaller quantity: QM < QC Charges a higher price: PM > PC Earns a profit.  A monopolist may price discriminate: For the same good, different prices for different sets of consumers. END MONOPOLY DO YOU HAVE QUESTIONS? Please join your Q&A session! 32 OLIGOPOLY AND GAME THEORY (COMPETITIVE STRATEGY) This is only a quick overview of the topic! For more details please watch the recordings of the full lectures and revise the weekly Practice Worksheets! As presented in: Krugman P., Wells R., Microeconomics, Worth Publishers. 33 Oligopoly Review  Imperfect competition and oligopolies: Definition and measurement (the HHI)  Non cooperative behavior  may lead to prisoner's dilemma, Nash equilibrium.  Cooperative behavior: Tacit collusion or cartels. Tacit collusion: the kinked demand curve, price leadership, frequent flyers programs. Cartels: forbidden but may be sustain in repeated games  How to escape the prisoner’s dilemma? Differentiate enough or start cooperative behaviors.  In oligopoly firms behave strategically: collude, deter entry, commit on entry… Game Theory Review  Useful tool to understand/represent oligopoly behaviors.  Make use of simultaneous games and sequential games.  Sequential games are solved by backward induction.  Simultaneous games are solved using the concept of dominant strategies (one strategy gives the best outcome regardless of what the other player is doing) or the Nash Equilibrium (none of the players have a incentive to deviate).  Simultaneous games can be repeated. END OLIGOPOLY AND GAMES THEORY (COMPETITIVE STRATEGY) DO YOU HAVE QUESTIONS? Please join your Q&A session! 36