513
WORKSHOP PLAN
SUMMER 2005
DR.
SHINGLETON
DESIGNED
IN NEW TIMES ROMAN, 16 FONT, PORTRAIT
ONLINE
SAVED IN HTML
WORKSHOP
4. AUG17
FINISH
NOTES FROM PREVIOUS WEEK
REVIEW OPERATING RULES/CASES 1, 2, 3,
4
INDUSTRY SUPPLY
COMPETITIVE MARKETS
ü
START AT LONG-RUN EQUILIBRIUM (CASE 3)
ü
TELL SHORT-RUN STORY FIRST (CASES 1, 2, OR 4)
ü
FINISH WITH LONG-RUN ADJUSTMENTS (TO CASE 3)
ü
EXAMPLES
QUIZ 3
ON COMPETITIVE MARKETS MODEL
USE 2-PANEL DIAGRAM
WRITE COMPLETE EXPLANATION
START AT LONG-RUN EQUILIBRIUM
(CASE 3)
TELL SHORT-RUN STORY FIRST
(CASES 1, 2, OR 4)
FINISH WITH LONG-RUN
ADJUSTMENTS (TO CASE 3)
THIS
WEEK IN 513 (NEW MATERIAL)
PRICE SETTING FIRM DEFINITION
NO PRICE DISCRIMINATION
MARGINAL REVENUE
USE
STRAIGHT LINE DEMAND CURVES
CONSTRUCTION
OF MR CURVE
WHAT
DOES NEGATIVE MR MEAN?
MR
= PNEW MINUS ( QOLD * PRICE REDUCTION)
ELASTICITY
REVIEW
DEMAND
IS ALWAYS ELASTIC WHEN THE FIRM MAKES THE RIGHT CHOICE
PRICE AND MARGINAL REVENUE
NOTE: dMR = 2*dP
QUANT PRICE SALES MARGINAL REVENUE
0 80 0 0
1 76 76 76
2 72 144 68
3 68 204 60
4 64 256 52
5 60 300 44
6 56 336 36
7 52 364 28
8 48 384 20
9 44 396 12
10 40 400 4
11 36 396 (4)
12 32 384 (12)
13 28 364 (20)
14 24 336 (28)
15 20 300 (36)
16 16 256 (55)
17 12 204 (52)
18
8 144 (60)
19
4 76 (68)
20
0 0 (76)
CH12 PR# 1 PG 281
NOTE:
SPREADSHEET QUESTION PROBABLY ON FINAL EXAM
OPERATING RULES FOR PRICE SETTING FIRMS
CASE 1... P
< AVC FOR EACH QUANTITY
SHORT
RUN
BEST
Q = 0
NO
SHUT DOWN PRICE
LOSS
= FIXED COST
LONG
RUN
LIQUIDATION
CASE 2... P > AVC FOR SOME QUANTITY
BUT P < ATC FOR EACH QUANTITY
SHORT
RUN
CHOOSE
Q SUCH THAT MR = MC
LOSS
< FIXED COST
SHOW
LOSS AREA
LONG
RUN
LIQUIDATION
CASE 3... P = ATC FOR ONE Q, P < ATC FOR
ALL OTHERS
SHORT
RUN AND LONG RUN
CHOOSE
Q SUCH THAT MR = MC
PROFIT
MARGIN = P - ATC
NO
PROFIT AREA/NORMAL PROFIT
OPERATING RULES FOR PRICE SETTING FIRMS
CASE 4... P
> ATC FOR SOME QUANTITY
SHORT
RUN AND LONG RUN
CHOOSE
Q SUCH THAT MR = MC
PROFIT
MARGIN = P - ATC
MAXIMUM
PROFIT MARGIN
IS
NOT MAXIMUM PROFIT
SHOW
PROFIT AREA
PROFIT
= P*Q - ATC*Q
THERE IS NO SUPPLY CURVE FOR FIRM OR FOR
INDUSTRY
CH12
PR #3 PG 281
NOTE:
SPREADSHEET QUESTION PROBABLY ON FINAL EXAM
INDUSTRIAL STRUCTURE...MONOPOLY
DEFINITION/
WHAT IS A MONOPOLY?
NO
ENTRY, NO EXIT
ENTRY BARRIERS
EXAMPLES...
CABLE
TELEVISION
LOCAL
TELEPHONE
SHOW HOW
REGULATION
NORMAL
PROFIT
INEFFICIENCY AND MONOPOLY
PRICE
OUTPUT
RESOURCES
MU
> MC
NON-PARETO
OUTCOME
MARKET
FAILURE
LDC
PERCEPTION OF CAPITALISM
WRITE OUT AN EXPLANATION TO ONE OF THE CASES
ON THE EFFECTS
CHANGED
DEMAND
CHANGED
COST
QUESTION
PROBABLY ON FINAL EXAM
NATURAL MONOPOLY... A SPECIAL CASE?
RELATED
TO HIGH FIXED COST
MARGINAL
COST PRICING/PG 329
AVERAGE
COST PRICING/PG 329
MONOPOLY
YIELDS LOWER PRICES TO CONSUMERS
AVERICH-JOHNSON
PRICE REGULATION
PRICE DISCRIMINATION
MARKET
DIVISION
BARRIERS
TO RESALE
PRICE
REGULATION
PARTIAL PRICE DISCRIMINATION
MR
= MC, AGAIN
MR
ON PRICE DISCRIMINATION
EXAMPLE...
AIR
FARES (SEE FIGURE, NEXT PAGE
EXAMPLE:
INTERNATIONAL MARKETS/MULTIPLE MARKETS
DUMPING:
SELLING
AT A LOWER PRICE IN FOREIGN MARKETS
W.T.O.
WORLD
TRADE ORGANIZATION
ENFORCES
TRADE RULES
PRICE
DISCRIMINATION/AIRLINE PRICING
THE BOTTOM LINE: PROFIT MAXIMIZATION
REQUIRES
ü ALL MARGINAL
COSTS TO BE EQUAL ACROSS ALL MARKETS
ü ALL
MARGINAL REVENUES (NOT PRICES) TO BE EQUAL OVER ALL MARKETS
ü ALL MC =
ALL MR
GRAPH MAY GET LOST
ON EMAIL
|
|
MONOPOLISTIC
COMPETITION 13
RELATIVELY
FREE ENTRY AND EXIT
LARGE
NUMBERS OF POTENTIAL SUPPLIERS
SOME
PRODUCT DIFFERENTIATION
BRAND
IDENTIFICATION
CONTINUOUS
PRODUCT DEVELOPMENT
ADVERTISING
AS A FIXED COST
=>
HIGHER VOLUME MEANS
LONG
RUN EQUILIBRIUM
EXAMPLE:
EFFECT OF DEMAND CHANGE
SHORT
RUN EQUILIBRIUM
SHOW
PROFIT/LOSS AREA
LONG
RUN EQUILIBRIUM
COMPARE
PRICE TO COMPETITIVE MARKET
ADVERTISING AND PRODUCT
DIFFERENTIATION
PURPOSE:
TO INCREASE DEMAND
PURPOSE:
TO REDUCE THE ELASTICITY OF DEMAND.
SIMULTANEOUS ENTRY/EXIT EXPLANATIONS
INFORMATION
PROBLEM
NEW
FIRMS COME IN BECAUSE THEY EXPECT PROFIT
OLD
FIRMS LEAVE BECAUSE THEY CAN'T DELIVER PROFIT
INDIVISIBILITY
PROBLEM
INEFFICIENCY AND MONOPOLISTIC COMPETITION
PRICE
NEVER = MIN ATC
OUTPUT
RESOURCES
MU
> MC
NON-PARETO
OUTCOME
MARKET
FAILURE
WRITE OUT AN EXPLANATION TO ONE OF THE CASES
ON THE EFFECTS
CHANGED DEMAND
CHANGED COST
QUESTION PROBABLY ON FINAL EXAM
OLIGOPOLY 13
OLIGOPOLY
SMALL
NUMBERS OF SUPPLIERS...HOW TO MEASURE SMALL?
INTERDEPENDENCE
OF DECISIONS
MAY OR
MAY NOT HAVE SOME PRODUCT DIFFERENTIATION
BARRIERS
TO ENTRY
OFTEN
LARGE CAPITAL INVESTMENT REQUIRED
OPERATING RULES
KINKED DEMAND CURVE
RIVALS
MAY NOT MATCH PRICE INCREASES
JOINT
PROFIT MAXIMIZATION
DIVIDING
THE SPOILS
CHEATING
RETALIATION
VS PRICE CUTS
GREAT
ELECTRICAL CONSPIRACY
THEORY
MC
= MR
SHOW
PROFIT/LOSS AREA
COMPARE
PRICE TO COMPETITIVE MARKET
INEFFICIENCY AND OLIGOPOLY
PRICE
NEVER = MIN ATC
OUTPUT
RESOURCES
MU
> MC
NON-PARETO
OUTCOME
MARKET
FAILURE
WRITE OUT AN EXPLANATION TO ONE OF THE CASES
ON THE EFFECTS
CHANGED DEMAND
CHANGED COST
QUESTION PROBABLY ON FINAL EXAM
DOMINANT
FIRM MODEL
LEFT-OVER DEMAND
SMALL FIRMS ARE PRICE TAKERS
CH13
PR #2 PG 313
REGULATION 14
ROLES 14
TOOLS 14
COMPARE TO EUROPEAN
VALUE OF
COMPETITIVE MARKETS
OVERSTATING THE CASE
NECESSARY
CONDITIONS FOR A POSITIVE ROLE FOR GOVERNMENT
ü
THERE
MUST BE A PROBLEM
ü
GOVERNMENT
MUST HAVE THE ABILITY TO ALLEVIATE THE PROBLEM
DEFINE PUBLIC
GOODS
MARGINAL COST
NO EXCLUSION
UNDERPRODUCED IN PRIVATE SECTOR
EXAMPLE: ADAM SMITH’S
LIGHTHOUSE
EXTERNALITIES
COASE THEOREM
LEAF BURNING VS BBQ
WHO OWNS THE ELEPHANTS?
MARGINAL COST/MARGINAL BENEFIT
HOW DIRTY IS THE IDEAL CLEAN
AIR?
ASSESSING THE COST
USING TAXES
MARGINAL COST OF
HEALTH
REGULATION AS AN
ALTERNATIVE
MERGERS AND
ACQUISITIONS
AMERICAN RULE: HOW DOES IT AFFECT
CONSUMERS?
NO HARM/ NO FOUL
EU RULE: BIGGER IS BADDER
UNLESS IT’S FRENCH OR GERMAN
MULTINATIONAL FIRMS HAVE TO DEAL WITH BOTH
SETS OF RULES