...write the expression for marginal revenue: Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 9 of 50 10.1 MONOPOLY A Rule of Thumb for Pricing Chapter 10: Market Power: Monopoly and Monopsony Note that the extra revenue from an incremental unit of quantity, ∆(PQ)/∆Q, has two components: 1. Producing one extra unit and selling it at price P brings in revenue (1)(P) = P. 2. But because the firm faces a downward-sloping demand curve, producing and selling this extra unit also results in a small drop in price ∆P/∆Q, which reduces the revenue from all units sold (i.e., a change in revenue Q[∆P/∆Q]). Thus, Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 10 of 50 10.1 MONOPOLY A Rule of Thumb for Pricing Chapter 10: Market Power: Monopoly and Monopsony (Q/P)(∆P/∆Q) is the reciprocal of the elasticity of demand, 1/Ed, measured at the profit-maximizing output, and Now, because the firm’s objective is to maximize profit, we can set marginal revenue equal to marginal cost: which can be rearranged to give us (10.1) Equivalently, we can rearrange this equation to express price directly as a markup over marginal cost: (10.2) 11 of 50 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. Applying MR-MC Output and Pricing Chapter 10: Market Power: Monopoly and Monopsony ...
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...The relationship between the quantity sold and the price charged is governed by the (aggregate) demand curve q (p). Note, in order to focus on the relationship between q and p, we suppress the wealth arguments in the aggregate demand function. We can thus state the monopolist’s problem as follows: max pq (p) − c (q (p)) . p Note, however, that there is a one-to-one correspondence between the price charged and the quantity the monopolist sells. Thus we can rewrite the problem in terms of quantity sold instead of the price charged. Let p (q) be the inverse demand function. That is, p (q (p)) = p. The firm’s profit maximization problem can then be written as max p (q) q − c (q) . q It turns out that it is usually easier to look at the problem in terms of setting quantity and letting price be determined by the market. For this reason, we will use the quantity-setting approach. 1 References: Tirole, Chapter 1; MWG, Chapter 12; Bulow, “Durable-Goods Monopolists,” JPE 90(2) 314-332. 233 Nolan Miller Notes on Microeconomic Theory: Chapter 9 P ver: Aug. 2006 P0 A B D Q0 Q Figure 9.1: The Monopolist’s Marginal Revenue In order for the solution to be unique, we need the objective function to be strictly concave (i.e. d2 π dq2 < 0). The second derivative of profit with respect to q is given by d2 (p (q) q − c (q)) = p00 (q) q + 2p0 (q) − c00 (q) . dq 2 If cost...
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...Microeconomics Chapter 1 –Introduction- Microeconomics: * The study of how individuals and firms make themselves as well of as possible in a world of scarcity(shortage) and the consequences of those individual decisions for markets and the entire economy. * Often called price theory: emphasize the important role of the price 1.1 Microeconomics: The Allocation of Scare Resources Trade-Offs: * Which goods and services to produce: limitation of production, resources ( worker, raw materials, capital and energy) * How to produce: to produce a given output a firm needs to use more of one resource and less of another * Who gets the goods and services: the more of society’s goods and services you get, the less someone else gets Who makes the Decisions: * The government * A company Price Determine Allocations: * Market: an exchange mechanism that allows buyers to trade with sellers 1.2 Models Model: * a description of the relationship between two or more economic variables * can be used to predict the effect of a change of one variable Simplifications by Assumptions: * Example: Income threshold model of China to explain car purchasing behavior in China * Only the income is important Testing Theories: * Testing theories by checking whether predictions are correct Positive vs. Normative: * Positive statement: a testable hypothesis about cause and effect * Test the truth of a statement * Normative statement:...
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...Econ 101: Intro to Microeconomics Spring 2012, Handout 8 Solutions More on Monopolies 1. A monopoly faces a market demand curve given by P = 42 − Q. Its marginal cost curve is given by M C = Q. (a) Find an equation for the marginal revenue curve. Graph market demand, marginal revenue, and marginal cost for this monopoly. Double the slope of the demand curve to get the MR: M R = 42 − 2Q. The graph should show a line twice as steep as the original demand curve, but with the same price intercept. Note: the “double the slope” rule only works when the equation is solved for P! (b) Find the profit-maximizing level of production for this monopolist. M R = M C to get 42 − 2Q = Q ⇒ Q = 14. (c) What price will the monopolist charge? Plug the Q from part (b) into the demand curve: P = 42 − 14 = $28. (d) Is marginal revenue equal to price? Why or why not? Marginal revenue is less than price because the price effect (an increase in price per unit tends to increase total revenue) and the quantity effect (an increase in the price per unit tends to decrease the quantity sold, which lowers total revenue) move in opposite directions. (e) What price would be socially optimal? 1 Econ 101: Intro to Microeconomics Spring 2012, Handout 8 Solutions Socially optimal price where M C = P ⇒ Q = 42 − Q ⇒ Q = 21 ⇒ P = 42 − 21 = $21. (f) What is the monopolist’s total revenue? T R = P ∗ Q = 28 ∗ 14 = 392 2. Suppose a local utility company has a demand curve given by P = 120 − 4Q. TC for...
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...PLAGIARISM POLICY”. Course: Introduction to Micro Economics (801) Semester: Autumn, 2010 Total Marks: 100 Level: M.Sc Economics Pass Marks: 40 ASSIGNMENT No. 1 (Units 1–5) Q.1 How is the Microeconomics different from macroeconomics? Discuss also the subject matter of microeconomics in detail. (20) Q.2 Compare the consumer behavior under Cardinalist and Ordinalist school of thought. (20) Q.3 What is meant by elastic demand and inelastic demand? Write the formulas for point elasticity and arc- elasticity. How can elasticity at a point along a linear demand curve can be determined by inspection? (20) Q.4 Explain long-run laws of return to scale in detail. (20) Q.5 Explain the statement “that the shape of cost curve plays an important role in decision making”. (20) ASSIGNMENT No. 2 (Units 6–9) Total Marks: 100 Pass Marks: 40 Q.1 Explain short run and long run equilibrium of a firm in a perfect competitive market? (20) Q.2 How price discrimination exists and which are the necessary conditions, must be fulfilled for its implementation? (20) Q.3 Determine the equilibrium price and output when a monopolist produces a homogenous product in different plants. (20) Q.4 Analyze the Sweezy and Chamberlin’s solution of stability in oligopoly market. (20) Q.5 Write notes on the followings. a) Collusive oligopoly b) Monopolistic Competition...
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...Q2:The XYZ Co. is hiring salespersons. Due to the existence of asymmetric information, the firm has decided to pay the salespersons a fixed hourly rate that is independent of how much they sell or their ability to sell. Explain what type(s) of asymmetric information problem(s) may take place and how can they be addressed. You are expected to illustrate your answer using relevant diagrams and/ or equations. ECN256 ASYMMETRIC INFORMATION ECN256 ASYMMETRIC INFORMATION Salespersons, being boundary spanners between the organization and customers, play a critical role in enhancing customer satisfaction in order to maintain the buyer–seller relationship in situations involving service failures (Naylor & Frank, 2000). Companies hire sales people as employee’s or on a commission basis. According to the question, the firm is hiring a salesperson that will be paid an hourly rate. Paying hourly rate at start is preferable compare to that of commission. Because if the firm and its product is popular and the sales person effort level is high; therefore, in order to motivate the salesperson fixed hourly rate is advisable because whether the salesperson sales or not they still have their fixed hourly rate and also is independent of how much the firm sell or their ability to sell. Unlike commission, the higher you sale the higher you are been compensated and the lower you sale the lower you are been commissioned. Salespersons that are been commissioned, tend to feel ownership of their...
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...a large percentage cut in the amount of the firm’s good demanded. In such a case, economists say that the demand for the good is highly elastic. On the other hand, when there are few good substitutes for a firm’s product, the firm might be able to raise its price substantially with only a small decrease in the quantity demanded resulting. In such a case, demand is said to be highly inelastic” (Henderson,. D 2008). Now let’s look at converting all price values into dollars. And then place the values of P, A, Px, I and M in the above equation: QD = -5200 – (42×5) + (20×6) + (5.2×5500) + (0.20×10000) + (0.25×5000) = 26560. * Price elasticity (ep) = ∂Q∂P×PQ ∂Q∂P = -42, P = 5, Q = 26560…… Own Price elasticity (ep) = - 42× 526560 = - 0.008 (approx.) * Cross price elasticity (exy) = ∂Q∂Px×PxQ ∂Q∂Px = 20, Px = 6, Q = 26560 Cross price elasticity (exy) =...
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...Chapter 2 The Basics of Supply and Demand Questions for Review 1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will the price of ice cream rise to a new market-clearing level? Suppose the supply of ice cream is completely inelastic in the short run, so the supply curve is vertical as shown below. The initial equilibrium is at price P1. The unusually hot weather causes the demand curve for ice cream to shift from D1 to D2, creating short-run excess demand (i.e., a temporary shortage) at the current price. Consumers will bid against each other for the ice cream, putting upward pressure on the price, and ice cream sellers will react by raising price. The price of ice cream will rise until the quantity demanded and the quantity supplied are equal, which occurs at price P2. Copyright © 2013 Pearson Education. Inc. Publishing as Prentice Hall. Chapter 2 The Basics of Supply and Demand 2. Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold: a. An increase in the price of margarine. Butter and margarine are substitute goods for most people. Therefore, an increase in the price of margarine will cause people to increase their consumption of butter, thereby shifting the demand curve for butter out from D1 to D2 in Figure 2.2.a. This shift in demand causes the equilibrium price of butter to rise from...
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...UB18416BBU26251 INTRODUCTION TO MICROECONOMICS A Final Thesis Presented to AIU The Academic Department Of the School of Business and Economics In Partial Fulfillment of the Requirements For the Bachelors Degree in Business Administration Atlantic International University (AIU) @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ @@ INTRODUCTION TO MICROECONOMICS @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ @ Emmanuel Kasozi Atlantic International University (AIU) – School of Business and Economics August 15, 2012 School work, Micro economics @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ Atlantic International University (AIU) CONTENTS 1 1.0. Microeconomics and Business Markets an overview 2.0. Economics is defined 3.0. Opportunity cost 4.0. 3 Production curve 2 5.0. Microeconomics is defined 6.0. Business Markets 7.0. Market 8.0. 8 Assumptions of markets 3 Demand, Supply and market Equilibrium 9.0. 10 Demand 10.0. Factors influencing Demand 11.0. Demand curve 12.0. Ceteris Paribus 4 13.0. Supply 14 14.0. The law of supply 15.0. Supply schedule 16.0. Supply curve 17.0. Factors influencing supply Atlantic International University (AIU) 18.0. Equilibrium 19.0. Reference 21 MICROECONOMICS AND BUSINESS MARKETS An...
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...Defining Economic Economic is the social science that examines how people, government, businesses, and nation make choice on dealing with limited resources to satisfy their wants and needs. Economic is broken down into many forms. First there is macroeconomic, which focus on the behaviors of the combined economy. Next there is microeconomics, which is the study on separate buyers. The central to solving economic divided into three parts. First, is what products need to be produce, and how much to produce. Second, is how the products will be produce. Last, who are the products produce for (Colander, D. C. 2008). Microeconomic is the study of the market performance of individual buyers and firms in an effort to understand the decision-making process of businesses and family. Microeconomic concentrate on the relationship between individual buyers and sellers. It also examined the influences that will affect the choice made by users and vendors. Microeconomic focus on the supply and demand and how each firms make the choice of how much of something they must produce, and how much the goods will be charge. The buyers’ demand of the goods help sellers determines the price of the goods. The term of supply refer to how much the market can offer to the buyers. The quantity supplied indicates to the volume of certain product creators agree to supply base on the certain price. With the law of supply, it proves the quantities that will be sold for a certain price. In the...
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...MIcroeconomics: Markets, Methods & Models Douglas Curtis and Ian Irvine | Version 2014/2015 $ ADAPTED OPEN TEXT FORMATIVE ONLINE ASSESSMENT COURSE SUPPLEMENTS COURSE LOGISTICS & SUPPORT a d v a n c i n g l e a r n i n g www.lyryx.com Copyright This work is licensed under a Creative Commons AttributionNonCommercial-NoDerivs 3.0 Unported License. http://creativecommons.org/licenses/by-nc-nd/3.0/deed.en_GB Douglas Curtis and Ian Irvine Edition 1.11 This edition is differentiated from the first edition solely by minor editorial adjustments. Content has not been altered. Microeconomics: Markets, Methods and Models About the Authors Doug Curtis is a specialist in macroeconomics. He is the author of twenty research papers on fiscal policy, monetary policy, and economic growth and structural change. He has also prepared research reports for Canadian industry and government agencies and authored numerous working papers. He completed his PhD at McGill University, and has held visiting appointments at the University of Cambridge and the University of York in the United Kingdom. His current research interests are monetary and fiscal policy rules, and the relationship between economic growth and structural change. He is Professor Emeritus of Economics at Trent University in Peterborough, Ontario, and Sessional Adjunct Professor at Queen’s University in Kingston, Ontario Ian Irvine is a specialist in microeconomics, public economics, economic inequality...
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...values into dollars and by putting the values of Price, competitions, income, Advertisement and number of oven, we shall have the following demand. So 500 cents= 5 Dollar 600 Cents= 6 Dollars QD=-5200-42(5)+20(6)+5.2(5500)+0.2(10,000)+0.25(5000) QD = -5200-210+120+28600+2000+1250 QD = 26,560 units Ep ( Price elasticity of demand) Own price elasticity of demand (ep) = ∂Q∂P×PQ ∂Q∂P = -42, P = 5, Q = 26,560 Own Price elasticity (ep) = - 42 × 526,560 x 100= - 0.79 (approx.) EX (Cross Price elasticity-in terms of competitors’ products) Cross price elasticity (exy) = ∂Q∂Px×PQ ∂Q∂Px = 20, Px = 6, Q = 26,560 Cross price elasticity (exy) = 6 × 2026,560 x 100= 0.45 (approx.) EI (Income elasticity) Income elasticity (eI) = ∂Q∂I×IQ ∂Q∂I = 5.2, I = 5500, Q = 26,560 Income elasticity (eI) = 5.2 × 550026,560 = 1.077 (approx.) EA ( Advertisement elasticity) Advertisement elasticity (eA) = ∂Q∂A×AQ ∂Q∂A = 0.2, A = 10,000, Q = 26,560 Advertisement elasticity (eA) = 0.2 × 10,00026,560 = 0.075 (approx.) EM Supply elasticity Supply elasticity (eM) = ∂Q∂A×MQ ∂Q∂A = 0.25, M = 5,000, Q = 26,560 Suppply elasticity (eA) = 0.25 × 5,00026,560 = 0.047 (approx.) Part 2: Price elasticity of demand Price elasticity is -0.79. There is negative relationship between price and demand. However, the ratio is less than 1, which means that an increase in the price of the food leads to the fall of the quantity demanded by less than proportionate amount. Therefore, an increase...
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...decisions that most efficiently satisfy their needs and achieve stated objectives. ♦ How do people make rational choice? This is the subject of Economics! Paul A. Samuelson’s definition of Economics “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources, which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in society.” Managerial Economics Economics ♦ Micro: individual decision maker ♦ Marco: aggregate level Managerial Economics ♦ The study of making decisions in allocating scarce resources to achieve a managerial objective ♦ The application of microeconomics on effective management ♦ Managerial Economics helps managers make rational choice. ♦ Manager in “narrow” sense and in “broad” sense After completing BSP1005, you will be able to: ♦ Thoroughly understand the function of market mechanisms and the interaction among economic agents ♦ Understand how the interplay between cost and demand fundamentals shape the prices that prevail in a market ♦ Identify the categories of costs that are relevant for critical business decisions, such as pricing and market entry and exit ♦ Use several important game-theory-based models of competition in oligopoly markets Course Road Map Demand and Supply Determination of Prices Consumer Theory Production and Cost Theory Competitive Markets Managerial Economics...
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...and optimal output that will be produced by a competitive firm. . In Unit 2, The Analysis of Competitive Markets, we will study the welfare effects of a government policy by using consumer and producer surplus. Unit 1 Introduction In this Unit, we will learn a new mathematical technique. By using this technique, we calculate marginal cost, marginal revenue, and the optimal output the competitive firm will produce. Learning objectives Upon completion of this unit you should be able to: • define the derivative of basic functions; • use derivatives to calculate marginal revenue and marginal cost; and • use derivatives to calculate a competitive firm's supply function. Assigned reading/viewing/listening Microeconomics, Eighth Edition textbook and study guide – Chapters 8. How to proceed 1. Read the PowerPoint slides of Chapter 8 to get a brief idea about the chapter. 2. Read chapter 8 carefully. 3. Solve the provided problems on the textbook's companion website. 4. Solve exercises at the end of chapter 8 in your textbook. Key words and examples Derivation technique A function shows a relation between two variables. For example, y=f(x)=2x is a function and it is describing the relation between variables x and y. As the variable x takes values, we can determine the value of y. In this case, when x=1, y = 2 x = 2. 1 = 2. Or when x=2, y=2x=2.2 = 4. In economics, we use functions to describe the relation between cost and quantity,...
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...In economics, demand is an economic principle that describes a consumer's desire, willingness and ability to pay a price for a specific good or service. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. The term demand signifies the ability or the willingness to buy a particular commodity at a given point of time. Economists record demand on a demand schedule and plot it on a graph as a demand curve that is usually downward sloping. The downward slope reflects the negative or inverse relationship between price and quantity demanded: as price decreases, quantity demanded increases. In principle, each consumer has a demand curve for any product that he or she is willing and able to buy, and the consumer's demand curve is equal to the marginal utility (benefit) curve. When the demand curves of all consumers are added up horizontally,the result is the market demand curve for that product which also indicates a negative or inverse relationship between the price and quantity demanded. If there are no externalities, the market demand curve is also equal to the social utility (benefit) curve. The demand equation is the mathematical expression of the relationship between the quantity of a good demanded and those factors that affect the willingness and ability of a consumer...
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