Transcript Market Structure Wrap-Up

Micro-Economics Review
Course Summary
Tax Summary
• Tax on buyers shifts D-curve, Tax on sellers shifts S-Curve
• Taxes always produce deadweight loss!
– You produce less at a higher cost
• Tax Incidence does not depend on who pays the tax!
– Buyers & Sellers share the burden
– Elasticity determines who bears the most!
• The majority of the tax burden falls on more inelastic curve
– Steeper curve pays more of tax
Tax on Sellers
Price of
Ice-Cream
Price
Cone
buyers
pay
$3.30
3.00
Price
2.80
without
tax
S2
Equilibrium
with tax
S1
Tax ($0.50)
A tax on sellers
shifts the supply
curve upward
by the amount of
the tax ($0.50).
Equilibrium without tax
Price
sellers
receive
Deadweight loss!
Demand, D1
0
90
100
Quantity of
Ice-Cream Cones
EXTERNALITIES
• An externality is the uncompensated impact of one person’s
actions on another person
– Both positive & negative externalities exist
• Externalities cause markets to be inefficient
– That is, markets do not maximize total surplus (welfare)
Negative Externality:
Pollution
MSC = (MCP + MCS)
Price of
Aluminum
External
social Cost
Supply = MCP
(private cost)
Correct a Negative
Externality with a
Tax
Spillover
Cost
Optimum
Equilibrium MC = MB
Demand = MBP
(private value)
0
QOPTIMUM QMARKET
Quantity of
Aluminum
Cost Curves
Marginal Cost declines at first and then
increases due to diminishing marginal product.
Costs
AFC, a short-run concept, declines throughout.
$3.00
Note how MC hits both ATC and AVC at their
minimum points.
MC
2.50
2.00
1.50
ATC
AVC
1.00
0.50
AFC
0
2
4
6
8
10
12
14
Quantity of Output
4 Market Structures
Maximize Profit
When:
MR = MC
Equilibrium
Price vs. MC
P = MC
Perfect
Competition
Long Run
Economic
Profit
MR = MC
MR = MC
MR = MC
P > MC
P > MC
P > MC
Monopolistic
Competition
No
No
Price
Price
Demand
& Marginal
Revenue
Curve
MC
MC
Oligopoly
Monopoly
Yes
Yes
Price
MC
MC
Price
Demand
MR
0
Quantity of Output
0
D
Quantity of Output
MR
0
D
Quantity of Output
MR
0
D
Quantity of Output
Perfect Competition
An increase in market demand…
…raises price and output.
(b) Short-Run Response
Price
Price
B
P2
P1
profit
Firm
Market
MC
S1
ATC
P2
A
Long-run
supply
P1
Quantity (market)
0
D2
D1
0
Q1
Q2
This can not be a long term equilibrium!
P > ATC encourages entry into the market
Will return to zero econ profit in long run
Quantity (firm)
Example: Monopoly Equilibrium
profit
Costs and
Revenue
To Find Equilibrium:
• Set MC = MR
• Line up to Demand Curve
MC
---------------------------
-----------------------------
Opportunity Costs:
Lower QTY
Higher Price
Deadweight Loss
0
ATC
Demand
Marginal revenue
Quantity
SHORT RUN: Monopolistic Competition
Price
Profit Exists!
LONG RUN: Monopolistic Competition
Price
Zero Profit, but not at
Efficient scale
MC
MC
ATC
ATC
P
Demand
MR
Demand
MR
0
Quantity
0
Quantity
produced
Efficient
scale
Quantity
Oligopoly: Game Theory
Every Dominant Strategy is a Nash Equilibrium
BUT: Every Nash Equilibrium is not a dominant strategy
Liz
HIGH
HIGH
Bob
LOW
400, 300
LOW
-800, 500
600, -800 -500, -500
Easy way to find dominant strategy:
First, Circle each players preferred boxes
Second, if 2 circles in same row you have a Dominant Strategy
Both Liz and Bob would choose Low!
It is an enforceable equilibrium because there is no incentive to cheat
Product & Factor Markets
Wage
Rate
Price
MC
ATC
P
Market
wage
MR
0
Quantity
produced
Efficient
scale
Demand
Quantity
MR = MC
Marginal Revenue Product
(demand curve for labor)
0
Profit-maximizing quantity
MRP = MFC
Quantity of
Workers
Competitive Input Markets
LABOR MARKET
Entire Factory Industry
Individual Firm
Low Skilled Workers
Price
Low Skilled Workers
SL
Q1
E1
$10
DL= MRPL
Qty
Small firms can hire all their
workers at Market wage
-------------------
-------------
$10 --------------
Price
Q1
SL = MFC
DL= MRPL
Qty
Competitive vs Market Power
MR = P for a competitive firm
MR < P for a firm with market power
MRP = [MPL * Price] only for
competitive firms in output market!
Therefore: MRPC > MRPM
MRPC = MPL * MR
MRPM = MPL * MR
P
Wage Rate
QM
---------------
---------------
P1
MRPM
QC
Qty
MRPC
Firms with market power
will hire less workers!
(Monopoly, Oligopoly, Monopolistic Competition