Unit 3 Notes PDF

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Economics Unit 3  Perfect Competition  Characteristics  Large # of buyers/sellers  Products are homogeneous  Buyers/sellers have perfect info  No barrier to entry/exit  Short run Profits as signals  P>ATC  Profit>0 (making profits)  Market entry  P=ATC  Profit=0 (breakeven)  Zero economic profit  PATC Elasticity and monopolists profits  Law of demand  Price and Quantity are inversely related  TR=P x Q  Elasticity= %ΔQ/ %ΔP How to boosts monopolists profit  Price discrimination  Age  Classes  Military  Students  Gender  Location  Timeframe  Matinée movie tickets Conditions necessary for price discrimination  Demand curve must be downward sloping  Identify and distinguish between people based on willingness to pay  Easily and cheaply  Prevent resale (arbitrage)  Ticket scalpers

Perfect Competition Many buyers/sellers Product homogeneity No barriers to entry

Monopoly No(single seller) N/A Maybe

Monopolistic competition Yes No Maybe

No barriers to exit No economic profit

No(significant to barriers to entry only) Possible economic profit

 Social costs of monopoly  Quantity goes down and price goes up  P>MC  Inefficient outcome  Guarantee of profit?  NO  Profit=TR-TC  Costs are too high  Demand too low(no demand)  Monopolistic competition (imperfect competition)  Number of firms  Large number  Small market share that each share makes up  Little to no collusion  Firms are independent to each other  Product differentiation  Many close substitutes  Monopoly over their own products  Some market power  Profit maximization  MR=MC  Tells you the Q*  At Q*, what are P* and ATC  Tendency towards zero economic profits  Starting to look more like perfect competition  Advertising  TC goes up and TR goes up  Hope to increase demand  Highlight differentness  Patent/trademark/copyright  Brand  Forms/methods of advertising  Who  Possibly everyone  Focused/more direct target audience  What  Informational(search)  Persuasive(experience)  Pros  Conveys info; signaling  Stimulate competition  Cons  Overstating the differentness  Manipulative  Create artificial demand

Yes No economic profit



Could be non-informative

 Oligopoly  When there is a small number of sellers in a particular market  Products are identical or similar  Relatively close substitutes  There are Barriers to entry  Firms are interdependent or strategically dependent  Firms are aware of other firms pricing, allocative and productive efficiency  Barriers to entry that give rise to oligopoly  Legal  Economies of scale  Mergers  Vertical merger-tied to the supply chain (1)  Horizontal merger- companies buying out other companies in the same market  Reducing the number of sellers  Measuring industry concentration  Four firm concentration ratio  What is the combined market share of the top 4 firms in the industry?(2)  Two questions  What combined concentration ratio of the top 4 firms constitutes an oligopoly?  How to account for the relative share sizes of the top four firms in the market?  Herfindahl – Hirschman index(HHI)  Sum of the squares of each firms market share  Upper and lower bounds  Monopoly: HHI=10,00  Duopoly  25/75 split: HHI=6250  50/50 split: HHI=5000  Oligopoly  10 firms @ 10%: HHI=1000  100 firms @ 1%: HHI=100  1000 firms @ .1%: HHI=10  The more firms that share a portion of the market share the lower the HHI will be and will resemble more and more of a monopoly  Larger number of firms with smaller the market share = lower HHI  Game theory  Prisoners dilemma  Outcome: both confess  “Nash Equilibrium”  Where each party has picked a choice given the choices of the other party  https://www.khanacademy.org/economics-finance-domain/microeconomics/nashequilibrium-tutorial/nash-eq-tutorial/v/prisoners-dilemma-and-nash-equilibrium  Better outcome: both lie  If the game is repeated then they would have learned their lesson and be able to get a better outcome

 Game Theory: How actors behave in strategic situations(games)  Types of games  Cooperative vs. Competitive  Payoff structures  Zero, positive, or negative sum  Single vs. repeated  Strategy- a decision making rule  Dominant strategy- no matter what the players do one person will always “win”  Mixed strategy- using the strategy that would be best against the other player’s strategy  Response/reaction function  (P,Q)=f(P,Q)  Ours^ theirs^  Cartels  A group of firms colludes and functions as a monopoly  Conditions necessary  Small number of firms  Similar products  Easily observable actions  Price, quantity, etc.  Stability in your market(demand, costs)  Major problems  Higher prices -> new entrants  Cheating  Incentive to increase price or quantity

- Productive efficiency occurs when a product is produced using the least-costly combination of resources. This can only be achieved if the producer is producing a level of output that corresponds to their minimum ATC. Under perfect competition, there is a tendency for P = ATC; under the other market structures, we may end up with an outcome where P > ATC, and that ATC is greater than the minimum ATC (the firms experience a mark-up). - Allocative efficiency occurs when a society is producing the 'right' mix of goods and services there is no good or service that is being over- or under-produced. If people desire more of a product, demand will increase, raising price, and attracting more suppliers into the market, which will require the use of more resources. Vice versa if people desire less of the product. As long as the conditions of perfect competition are met (or nearly met), any single market will respond to the changes in consumers' wants, and resources will be re/allocated into the production of the 'right' mix of goods/services....