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7/18/2019 Comprehensive Slide Micro 1
http://slidepdf.com/reader/full/comprehensive-slide-micro-1 1/185
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LECTURER
Dr Nguyễn Thị Tường Anh
Head of Microeconomics section
Teaching:+ Microeconomics for bachelor courses (FTU)
+ Internat ional Econom ics and Trade for master course inInternational Business (La Trobe University – Australia)
+ Econom ics for manager for VCCI
+ Microeconomics and Marketing for FPT University
Email: [email protected]
Cell phone: 0904 221816
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Textbook
1. Princ ip les o f econom ics, GregoryMankiw, Worth Publishers, 2007
2. Exercise books
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Lecture
3 credits
Twice per week, 7.5 weeks
Timetable: every Monday and Thursday
10 minutes break
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Assessment
Class participation: 10%
- by random check
2 midterm tests: 30% (15% each):
- 3 Short-answer questions and 1 exercise (30 min)
- to be announced in advance
Final test: 60%:
- multiple choice questions (50 min)
- covers ALL contents discussed in the class
- according to university’s schedule
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Assessment (cont.)
Presentation or essay is encouraged- Group or individual
- works on one Vietnamese current economics andtrade issue
- good quality will get bonus mark added to the finalresult
- Chosen topic must be announced to lecturers inadvance and be approved by lecturer
- Submit 1 week before the last lecture
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Regulation
No chatting
No sleeping
No ringing
No late coming
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CHAPTER 1
INTRODUCTION TO MICROECONOMICS
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Content
Microeconomics
Basic questions
Economic choice
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Chapter 1: Introduction
I. Microeconomics
1. The economy
Household
Government
Firm
Output marketInput market
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I. Microeconomics
1. The economy
- There are at least 3 members in any economy, which interactingwith each other in a certain economic mechanism.
Economic mechanism:- market economy (1)
- planning economy (2)
- mixed economy (3)
2 3 1
Cuba US, UK,Japan...
HongKong
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Map of Cuba
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Hong Kong notes
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Hong Kong notes
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Hong Kong notes
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I. Microeconomics
2. Some definitions
Scarcity: When the need is greater than the
supplying ability
Commodities: Tools to satisfy needs
Resources: Inputs used to produce commodities to
satisfy needs, including:
+ Labour (L)+ Materials (M)
+ Capital (K)
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I. Microeconomics3. Microeconomics and macroeconomics
Economics: study how society allocates scarce
resources for competitive goals
Microeconomics:study the behavior of each
member in an economy Macroeconomics: study the economy as a whole
Microeconomics Macroeconomics Econometric
ECONOMICS
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II. Basic questions
3 questions
WHAT?
HOW?
FOR WHOM?
TO PRODUCE
WHERE?
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III. Economic choice
1. Choice’s principles
- Need to choose because of scarce resources. If resource isalready spent on A it can not be spent on B
- Many ways to spend resources → easy to choose
2. Choice’s target- Household: Optimize benefit
- Firm: Optimize profit
- Government: Optimize social welfare
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III. Economic choice
3. Choosing tool- Opportunity cost (OC): The value of the best missed opportunity
when making a choice
- Marginal thinking
+ Marginal cost (MC): The change in total cost resultingfrom a change from quantity
+ Marginal benefit (MB): The change in total benefitresulting from a change from quantity
)(' QTC Q
TC MC
)(' QTBQ
TB MB
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Alfred Marshall
(1842 - 1924)
British economist
One of the greatestmicroeconomist
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Chapter 2
DEMAND AND SUPPLY
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Content
+ Demand
+ Supply
+ Market equilibrium
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I. Demand
1. Definitions
2. The law of demand
3. Demonstrating demand
4. Determinants in demand function
5. Movement and shift of demand curve
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I. Demand
1. Some definitions- Demand (D): The quantity of goods and services that consumer is
willing to buy and afford to buy at various price level in a certain time,ceteris paribus.
- Quantity demanded (QD): The quantity of goods and servicesthat consumer is willing to buy and afford to buy at a price level in acertain time, ceteris paribus.
- Individual demand
- Market demand
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I. Demand
2. The law of demand
P
QDP
QD
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I. Demand
3. Demonstrating demand
- Demand schedule
- Demand curve
- Demand function
P = - aQD + b
QD = - aP + b
QD = f (Px, Py, I, T, E, N)
P
Q
P1
P2
Q1 Q2
A
B
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I. Demand
4. Determinants in demand function4.1. Price of related goods (PY)
- Substitutes goods: A and B are substitutes if theusage of A can be replaced by the usage of B, provided that the initial consumption target is
unchanged
P S ↑ → QS ↓ → QR ↑
P S ↓ → QS ↑ → QR ↓
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I. Demand
4. Determinants in demand function
4.1. Price of related goods (PY)- Complementary goods: A and B are complementary if the usage
of A must go together with the usage of B to ensure the initialutility of both goods
P C QC QR
P C QC QR
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King Camp Gillett (1855 - 1932)
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I. Demand
4. Determinants in demand function
4.2. Income of consumer (I)
I QD
I QD
I QD
I QD
Normal goods
Inferior goods
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I. Demand
4. Determinants in demand function
4.2. Income of consumer (I)
- Engel curve: Attitude
toward any goodsdepends on buyer’s
income, not on goods’ quality
I
Q
I1
I2
I3
Q1 Q3 Q2
Inferior
Normal
I*
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I. Demand
4. Determinants in demand function
4.3. Taste of consumer (T)
4.4. Expectation of consumer (E)
4.5. Number of consumer (N)
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I. Demand
4. Determinants in demand function
4.3. Taste of consumer (T)
Gender
Age
Culture
Religion
….
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I. Demand
5. Movement and shift of the demand curve
- Movement: PX - endogenous variable
- Shift: The rest determinants – exogenousvariables
P P
P1
P2
Q1 Q
2
P
Q1 Q2
A
B
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Questions
1. Chicken and fish are substitutes goods.
a. The decrease in chicken’s price causes a
movement in fish’s demand curve
b. The increase in chicken’s price causes a left shift infish’s demand curve
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II. Supply
1. Some definitions
2. The law of supply
3. Tools to demonstrate supply
4. Determinants in supply function
5. Movement and shift of supply curve
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II. Supply
1. Some definitions
- Supply (S): The quantity of goods and services thatsupplier is willing to supply and able to supply at various pricelevel in a certain time, ceteris paribus.
- Quantity supplied (QS): The quantity of goods andservices that supplier is willing to supply and able to supply ata price level in a certain time, ceteris paribus.
- Individual’s supply (firm’s supply)
- Market supply
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II. Supply
2. The law of supply
P QS
P QS
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II. Supply
3. Tools to demonstrate supply
- Supply schedule
- Supply curve
- Supply functionP = aQS + b
QS=aP + b
QS = f (Px, Pi, G, Te, E, N)
P
Q
P1
P2
Q1 Q2
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II. Supply
4. Determinants in supply function
4.1. Price of inputs (Pi)
4.2. Government’s policies
4.3. Technology
4.4. Expectation4.5. Number of supplier
Pi C Profit QS
Pi C Profit QS
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II. Supply
5. Movement and shift of the supply curve- Movement: PX: endogenous variable- Shift: The rest factors – exogenous variables
-
P
P2
P1
Q1 Q2
P
P1
Q1 Q2 Q Q
SS1
S2
A
B
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III. Market equilibrium
1. Equilibrium status
2. Surplus and shortage
3. Price controlling
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III. Market equilibrium
1. Equilibrium status
- Status in which quantitydemanded equals to
quantity supplied- - Merger demand schedule
and supply scheduleP = -aQD + b
P = cQS + dE (PE, QE)
- Intersection of (S) and (D)
-
D
S
EPE
QE
P
Q
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III. Market equilibrium
2. Surplus and shortage
- Shortage
+ P 2 < P E
+ QS < QD => shortage
+ Appear market’s
pressure to make P 2
return to the equilibrium price
Shortage
Shortage
PE
P2
QS QD QE
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III. Market equilibrium
2. Surplus and shortage
- Surplus:
+ P 1 > P E
+ QS > QD => surplus
+ Appear market’s
pressure to make P 2return to the equilibrium
price
Surplus
Surplus
PE
P1
QD QS QE
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III. Market equilibrium
3. Price controlling
- Controlled by the Government
- Ceiling price (PC)
+ The highest price allowedin the market
+ For the sake of buyer
+ Appear shortage
+ Government’s responsibility
EPE
QE QS QD
(G)
PC
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III. Market equilibrium
3. Price controlling
- Floor price (PF)
+ The lowest price allowedin the market
+ For the sake of supplier
+ Appear surplus
+ Government’s responsibility
PE
QE
PF
QD QS
(G)
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Quantity
Price
10%
?%
A
B
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How to
calculate thechange?
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ELASTICITY
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Contents
Elasticity of demand
Elasticity of supply
El i i f d d
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Elasticity of demand
*Price elasticity of demand (EDP)
*Income elasticity of demand (EDI)
*Cross elasticity of demand (EDPy)
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Elasticity of demand
Price elasticity of demand (EPD)
- The percentage changed in quantitydemanded resulting from 1% change in price
-
P
Q E
D
P
%
%
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Elasticity of demand
Price elasticity of demand (EPD)
Point elasticity
E.g: Demand curve: P = 18 – 2Q and point A (P=6,Q=6)
What is price elasticity of demand at point A
P
P
Q
Q :
Q
P
P
P
Q
P .'. )(
P
Q E
D
P
%
%
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EDP= -1/2 . 6/6= -1/2
Conclusion:
-
-
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Elasticity of demand
Price elasticity of demand (EPD)
Arc elasticity
Eg: At price P=7.000VND, consumer buys 10kilos ofpork/ month. At price P= 6.000 VND, consumer buys
15kilos/ month. What is price elasticity of demand?
2
2
21
21
21
21
P P
P P
E
D
P AB
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Elasticity of demand
Conclusion: Price elasticity of demandalways:
- Unit – free and negative value
- Usually use absolute value
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Elasticity of demand
Price elasticity of demand(EP
D)
• /E/ < 1: Inelastic demand• - steep demand curve
- large change in price, smallchange in quantity demanded
- Consumers are not very sensitiveto the change in price
- the goods is hard to replaceor necessity
P
Q
P1
P2
Q2 Q1
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Elasticity of demand
Price elasticity of demand (EPD)
• /E/ > 1: Elastic demand,
• - flat demand curve
- small change in price, largechange in quantity demanded
- Consumers are very sensitiveto the change in price
- the goods is easy to replace
P
Q
P1
P2
Q2 Q1
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Elasticity of demand
Price elasticity of demand (EPD)
• /E/ = 1: Unitary-elastic demand
• - slope down demand curve- %change in price equal to %
change in quantity demanded
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Elasticity of demand
Price elasticity of demand (EPD)
• /E/ = 0: Perfectly Inelastic demand
• - Demand curve is parallel to the
vertical axis- Change in price doesn’t affect
quantity demanded
- Consumers are not sensitive
to the change in price- The good is irreplaceable
P
Q
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Elasticity of demand
Price elasticity of demand(EP
D)
• /E/ = ∞: Perfectly elastic
demand
• - Demand curve is parallel to
the horizontal axis- Change in price affects totallyon quantity demanded
- Consumers are perfectly
sensitive to the change in price
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Elasticity of demand
Price elasticity of demand (EPD)
• Factors ef fect ing on E P D
- The availability of substitutes goods
- More substitute: E>1, less substitute: E<1
- The characteristic of the goods
- Necessities: E<1, Innecessities: E>1- The time needed to find out the substitutes goods
- Long time: E>1, Short time: E<1
- The ratio of the spending in total income
- Big ratio: E>1, Small ratio: E<1
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Elasticity of demand
* The relationship
between EP
D
, P andTR
E<1 E=1 E>1
P
P
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Elasticity of demand
Price elasticity of demand (EPD)
• The relationship betweenEP
D, P and TR
/E/<1: P ↓ TR ↓
P1
P2
Q1 Q
2
Minus
Plus
A
B
O
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Elasticity of demand
* The relationship
between EP
D
, P andTR
E<1 E=1 E>1
P
P
TR
TR
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Elasticity of demand
Price elasticity of demand (EPD)
* The relationship between EPD, P and TR /E/>1: TR ↑ when P↓ Minus
Plus
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Elasticity of demand
• The relationshipbetween EP
D, P and
TR
E<1 E=1 E>1
P
P
TR
TR
TR =
const
TR =
const
TR
TR
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Elasticity of demand
Income elasticity of demand (EID)
- The percentage changed in quantitydemanded resulting from 1% change inincome
-
- EID <0: Inferior goods
- EID >0: Normal goods- EI
D >1: Luxury goods
Q
I Q
I
Q E I
D
I .'%
%)(
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Elasticity of demand
Cross-elasticity of demand (EPyD)
- The percentage changed in quantity demandedresulting from 1% change in price of related goods
EPyD
> 0 : Substitutes goods
EPyD
< 0 : Complements goods
EPyD
= 0 : Independent goods
-
Q P Q
P Q E Y
P
Y
D
P Y Y .'
%%
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Elasticity of supply
Price elasticity of supply (EPS)
- The percentage changed in quantity suppliedresulting from 1% change in price
-
P
Q E S S
P
%
%
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Elasticity of supply
E=0: Perfectly inelastic supply
E<1: Inelastic supply
E>1: Elastic supply
E=1: Unitary elastic supply
E=∞: Perfectly elastic supply
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Elasticity of supply Factors affecting on elasticity of supply:
- Time needed to find substitutes resources forinputs
- Availability of inputs
Questions:
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Questions: 1. If 10% increase in A’s price leads to 2% increase in total
revenue, A is elastic – demand
2. Decrease in gasoline’s price makes the demand curve ofmotorbikes ( D1) shift to the right to ( D2) and this ( D2) is moreelastic than ( D1) at any quantity level (in absolute value)
3. All points in a demand curve has the same value ofslope and price elasticity of demand ( point elasticity )
4. “Food” is less elastic demand than “Kinh Do soft cake”
5. Per-unit tax imposed on producer of good, whichdemand is more elastic than supply will makes thatproducer bear the smaller part in total tax amount incomparison with consumer’s part.
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CHAPTER 4THEORY ON CONSUMER’S BEHAVIOR
Content
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Content
Theory on consumer’s utility
The principle of diminishing marginal utility
Consumer’s surplus
Consumer’s preferences
Budget constraint
Maximizing utility (Optimal decision with budget
constraint )
I Theory on consumer’s utility
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I. Theory on consumer s utility
1. Some definitions1.1. Utility (U)- The benefit or satisfaction a person gets
from consuming goods or services- An abstract concept
- Unit – free
- Depends on consumer’s perception(subjectivity)
I Theory on consumer’s utility
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I. Theory on consumer s utility
1. Some definitions1.2. Total utility (TU)
- The total benefit or satisfaction a person gets from
the consumption of goods and services- Depends on the person’s level of consumption –
more consumption generally gives more total utility
I Theory on consumer’s utility
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I. Theory on consumer s utility
1. Some definitions
1.3. Marginal utility (MU)
- The change in total utility resulting from the change in thequantity of consumed goods and/ or services
)(' QTU Q
TU MU
I Theory on consumer’s utility
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I. Theory on consumer s utility
2. The principle of diminishing marginalutility
- In a certain time period, continuous consumption will
lead to the increase in total utility but a decrease inmarginal utility
* Application
I. Theory on consumer’s utility
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I. Theory on consumer s utility
3. Consumer’s surplus (CS) - The difference between
the market price and the price buyer willing to pay
- The area below demandcurve and above themarket price line
P
Q
P*
CS
II Theory on consumer’s choice
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II. Theory on consumer s choice
1. Consumer’s preferences
- Some assumpt ions :
+ Preferences do not depend on good’s price or income
+ People can sort all the possible combinations of goods that mightbe consumed into 3 groups: preferred, not preferred andindifferent
+ Consumers prefer more to less
+ Consumer’s preference is transitivity
II Theory on consumer’s choice
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II. Theory on consumer s choice
1. Consumer’s preferences
AB
C D
A (preferredarea)
C (lesspreferred
area)
II. Theory on consumer’s choice
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II. Theory on consumer s choice
1. Consumer’spreferences
Indifference curve:
shows the variouscombinations of consumption
quantities that lead to the
same level of well-being or
happiness I1
I2
Better
A
B
C
Movie
Food
II. Theory on consumer’s choice
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II. Theory on consumer s choice
1. Consumer’s preferences Indifference curve’s characteristics - Downward sloping, the closer to the right hand-
side, the higher utility consumer can gain- Never intersect
X.MUx + Y . MUy = 0
- → -MUx / MUy = Y / X
- → -MUx / MUy : the slope of Indifference curve =The marginal rate of substitution (MRS)
II. Theory on consumer’s choice
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II. Theory on consumer s choice
1. Consumer’s preferences MRS: reduce gradually as
the quantity consumedincreases
A
B
CD
Y
X
II. Theory on consumer’s choice
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II. Theory on consumer s choice
MRS reveals consumer’s preference towardgood and service
A
B
A
B
Y
X
Y
X
II. Theory on consumer’s choice
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II. Theory on consumer s choice
*Special indifference curvePerfect substitute goods
vs
Mc Donald’s vs Burger King
vs
MRS = const
II. Theory on consumer’s choice
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II. Theory on consumer s choice
*Special indifference curvePerfect Complement goods
II. Theory on consumer’s choice
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. T eo y o co su e s c o ce
2. Budget constraint
- Budget line (BL): shows the various
combinations of consumption that consumercan get from the available income
I=P X .Q X +P Y .QY
→ QY
= I/P Y
– (P X
/P Y
).Q X
→ - P X /P Y : the slope of budgetconstraint or price line
Area C: can not afford
A
B
Movie(Y)
Food
C
D
II. Theory on consumer’s choice
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y
2. Budget constraint- I, PX= const, P Y changes
P Y decreases: BL1 → BL2
P Y increases: BL1 → BL3
BL1
BL2
BL3
Y
X
II. Theory on consumer’s choice
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y
2. Budget constraint- I, P Y= const, PX changes
PX decreases: BL1 → BL2
PX increases: BL1 → BL3
BL1
BL2
BL3
Y
X
II. Theory on consumer’s choice
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y
2. Budget constraint- PX, P Y= const, I changes
I increases: BL1 → BL2
I decreases: BL1 → BL3
BL1 BL2
BL3
Y
X
II. Theory on consumer’s choice
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y
3. Optimal consumption combination
I1
I2
I3
A
B
C
D
Y
X
II. Theory on consumer’s choice
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y
3. Utility maximizing choice- At point C, the indifference curve’ slope is equal to the
budget line’s slope
- In case of many goods and services:Y
Y
X
X
Y
X
Y
X
P
MU
P
MU
P
P
MU
MU
Z
Z
Y
Y
X
X
P MU
P MU
P MU .....
Chapter 3: Review
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p
A consumer decides to spend his income of 200$on X and Y.
a. PX = 4$, PY = 2$. Draw this consumer’s budget line
b. Due to the decrease in quantity supplied, Y’s price goes up to 4$.Draw new budget line
c. There is a promotion from the seller. Buying 20 units of Y at priceof 2$, consumer will get 10 units more free of charge. This is
applied on the first 20 units of Y only. The following units arestill applied the price of 2$ (except the bonus). Draw newbudget line
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CHAPTER 5
THEORY ONFIRM’S BEHAVIOR
Content
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*Theory on production- Production and Production function
- Short run &Long run
*Theory on cost - Total, average and marginal cost
- Economic, Accounting and Sunk cost
*Theory on profit- Total and marginal revenue
- Profit maximization
I. Theory on production
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y p
1. Some definitions- Production
INPUTS OUTPUTSPRODUCTION
M(Material)
L(Labour)
K(Capital)
Goods
(Tangible)
Services
(Intangible)
I. Theory on production
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y p
1. Some definitions- Short run and long run
+ Short run: is a period of time in which the quantity of at least
one input is fixed (fixed input) and the quantities of the otherinputs can be varied (variable inputs)
+ Long run: is a period of time in which the quantity of all inputscan be varied
* No specific time that can be marked on the calendar
to separate the short run from the long run
I. Theory on production
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y p
Photocopy shop
I. Theory on production
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y p
2. Production function
- The maximum quantity of outputs gained from
certain quantity of inputs at current technologyconstraint in a certain time period
Q = f (Xi)
I. Theory on production
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y p
Charles W. Cobb Paul H. Douglas, 1892-1976.
I. Theory on production
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y p
2. Production function- Cobb-Douglas production function For production, the function is
Q = ALαK β,where:
Q = output
L = labour input
K = capital input
α and β = labour and capital's share of output.
I. Theory on production
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p
According to Cobb& Douglas:
US economy’s production functionfrom 1899 - 1912:
Q = L0.25K 0.75
→ conclusion:
I. Theory on production
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3. Production in short-run- Average Product of an input (AP) : is equal to total
product divided by the quantity of the inputemployed
- Average Product of labour (APL)
- Average Product of capital (APK)
i X
Q AP
L
Q AP L
K
Q AP K
I. Theory on production
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3. Production in short-run- Marginal Product of a input (MP ) is the increase in total
product divided by the increase in the quantity of the inputemployed, holding the quantity of all other inputs constant
- Marginal Product of labour (MP L)
- Marginal Product of capital (MP K )
)(' Xii
Q
X
Q MP
)(' L L Q L
Q MP
)(' K K Q K
Q MP
I. Theory on production
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What is the
relationshipbetween MP
and AP?
Capital(K)
Labour(L)
Output(Q)
APL MPL
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( ) ( ) ( )
4 0 0
4 1 70
4 2 150
4 3 75
4 4 288
4 5
4 6
4 7 52
}
}
52
10
Capital(K)
Labour(L)
Output(Q)
APL MPL
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( ) ( ) ( )
4 0 0 0 -
4 1 70 70
4 2 150 75
4 3 225 75
4 4 288 72
4 5 340 68
4 6 354 59
4 7 364 52
70}
}
}
}
}
}
}
80
75
63
52
14
10
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I. Theory on production
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3. Production in short-run- The law of diminishing marginal returns: occurs
when the marginal product of an additional input(e.g. worker) is less than the marginal product of
previous input (i.e. previous worker)
II. Theory on cost
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1. Cost in short-run
1.1. Fixed cos t, variable cost, total cost
- Fixed cos t (FC): the cost of a fixed input, independent withthe output level
- Examples:
C
Q
FCFC
II. Theory on cost
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1. Cost in short-run
1.1. Fixed cos t, variable cost, total cost
- Variable cost (VC): the cost of a variable input, varies withthe output level
- Examples:C
Q
VC
II. Theory on cost
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1. Cost in short-run1.1. Fixed co st, variable
cos t , total co st
- Total cost (TC): is the sum of
total fixed cost and totalvariable cost
TC = VC + FC
C
Q
FCFC VC
TC
II. Theory on cost
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1. Cost in short-run1.2. Average co st
- Average fixed cost (AFC): is total fixed cost per unit ofoutput
AFC
C
Q
Q
FC AFC
II. Theory on cost
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1. Cost in short-run1.2. Average co st
- Average variable cost (AVC): is total variable cost per unitof output
- Note: Average curves (except AFC) are U-shaped
AVC
Q
VC AVC
C
Q
II. Theory on cost
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1. Cost in short-run1.2. Average co st
- Average total cost (ATC): istotal cost per unit of output
C
Q
AFC
AVC AFC Q
TC ATC
AVC
ATC
II. Theory on cost
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1. Cost in short-run1.3. Marginal co st (MC): is
the change in total costresults from a unitincrease in output
MC intersects AVC and ATC attheir minimum points
C
Q
AVC
ATC
MC
AVCmin
ATCmin
)()( '' QQ VC TC Q
TC MC
Fill in the blank
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Q FC VC TC AVC ATC MC
1 15 -
2 36 15.5
3 5 52
4 83
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Q FC VC TC AVC ATC MC
1 5 15 20 15 20 -
2 5 31 36 15.5 18 16
3 5 52 57 17.3 19 21
4 5 83 88 20.75 22 31
II. Theory on cost
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2. Economic cost, Accounting cost and Sunk cost
- Economic cost: Total amount paid for inputs used inproduction, includes:
- Explicit cost: Amount paid for inputs that do not belong to the firm’sowner
- Implicit cost: Amount paid for inputs that belong to the firm’s owner
Economic Cost = Explicit Cost + Implicit cost
II. Theory on cost
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2. Economic cost, Accounting cost and Sunk cost
- Accounting cost: Amount paid for inputs used inproduction and reported in accounting notes
- Sunk cost: Amount paid for inputs used in
production which neither be refundable norchangeable by future decisions/ actions
Economic Cost = Accounting Cost + Opportunity cost
III. Theory on profit
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1. Definition- Profit ( ): is the difference between total revenue and
total cost
- Factors affect on profit:
- + P, Q, ATC
- +
TC TR
)(.. ATC P Q ATC Q P Q
II. Theory on profit
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II. Theory on profit
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1. Definition- Average revenue: is total revenue per unit of output
- Marginal revenue: is the change in total revenueresults from a unit increase in output
Q
TR AR
)(' QTR
Q
TR MR
II. Theory on profit
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2. Profit maximization
0)'( )( QTC TR
0 MC MR MAX
0' )( Q MAX
0'' )()( QQ TC TR
MC MR MAX
II. Theory on profit
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3. Revenue maximization0' )( Q MAX TRTR
0 MR
0 MRTR MAX
Review
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Answer true or false with short explanation anduse diagram if necessary
1. When quantity increases, average product neverincreases
2. When marginal cost increases, average costs alsoincrease
3. If marginal cost is decreasing, total cost will go downas well.
4. Maximizing total revenue happens only whendemand’s price elastic is unitary
Exercise
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Firm A’s demand curve are: P = 40 – Q
and average total cost is 10$ at any level of quantity
a. What is firm A’s fixed cost?
b. State out the optimal quantity and price for firm A
Exercise
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Firm A’s demand and total cost functions are as
follows:
a. State out optimal Q,P, and TR to prove that profit
maximization and revenue maximization are quitedifferent
b. Firm A’s strategy is to earn as much revenue aspossible provided that profit always equal to 10$.
State out optimal Q,P and TR
Q P 4.012
546.0 2 QQTC
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CHAPTER 6
MARKET STRUCTURE
Content
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Perfect competition
Monopoly
Monopolistic competition Oligopoly
MARKET STRUCTURE
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1. Market- Where suppliers and consumers meet
- Where demand and supply exist
??????
- Where all activities in economy are price-led
MARKET STRUCTURE
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MARKETSTRUCTURE
PERFECTCOMPETITION
IMPERFECTCOMPETITION
MONOPOLY
MONOPOLISTICCOMPETITION
OLIGPOLY
MARKET STRUCTURE
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Types of market
Perfectcompetition
Monopolisticcompetition Oligopoly Monopoly
Number of suppliers
Products
Entry barrier
Market power
Non-pricecompetition
Unlimited Several Few One
Identical Different Identical/Different Unique
Veryhigh
HighLowNone
Very
strong
StrongWeakNone
None Little NoneMuch
I. PERFECT COMPETITION
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1. Definition- A type of market where there are unlimited
suppliers and their products are identical
- Examples: Agricultural products ....
PERFECT COMPETITION
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2. Characteristics
- Suppliers are price-taker
- No entry barrier
- No market power
- Symmetric information
- No non-price competition (no advertisement)
- Not necessary to choose supplier
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OPEC: Organization of Petroleum Exportingcountries:
OPEC
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OPEC
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OPEC
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OPEC
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- 1950s: Petroleum was exploiting by some bigfirms, using dumping price to compete →very low price, just 1,5 – 2USD/ barrel
- OPEC found on 14 Sep 1960 with 11
members in order to keep petroleum’s pricenot very low
- Sep 1973: increase price by 70%,
- Dec 1973: increase price by 130%- Using price as a weapon to against Western
countries who supporting Israel
PERFECT COMPETITION
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3. Demand and marginalrevenue curves
- Demand curve: parallelwith horizontal axis
- Marginal curve: coincidingwith demand curve
- → MR = P
P =MR
P
Q
P*
PERFECT COMPETITION
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4. Maximizing profitMAX: MR=MC
In perfect competition: MR = P
MAX in perfect competition:
P=MC
MC
P=MRP*
Q* Q
P
PERFECT COMPETITION
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5. Break-even, shut down point
= TR – TC = Q (P - ATC)
P> ATCmin → > 0 → profit
P= ATCmin → = 0 → break-even point
P< ATCmin → < 0 → loss
AVCmin< P < ATCmin → continue producing P < AVCmin → shut down
PERFECT COMPETITION
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5. Break-even, shutdown point
P> ATCmin
TR = P*AQ*OTC = OCBQ*
→ = P*ABC
MC
P=MR
P*
Q* Q
P
A
O
ATC
BC
max
PERFECT COMPETITION
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5. Break-even, shutdown point
P= ATCmin
TR = P*AQ*O
TC = P*AQ*O
= 0
Q*: break-even point
MC
P=MRP*
Q* Q
P
A
O
ATC
PERFECT COMPETITION
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MC
P=MRP*
Q* Q
P
5. Break-even, shutdown point
P< ATCmin
TR = P*AQ*O
TC = OCBQ*
→ - = P*ABC
CB
O
A
-
ATC
PERFECT COMPETITION
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MC
P=MR
P*
Q* Q
P
5. Break-even, shutdown point
AVCmin < P < ATCmin
TR = P*AQ*O
TC = OCBQ*
* Continue: Lose - = P*ABC
* Stop: Lose FC = BCEF
FC > -
Continue producing
BC
A
E F
AVC
ATC
PERFECT COMPETITION
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5. Break-even, shut downpoint
P < AVCmin
TR = P*AQ*O
TC = OCBQ*
* Continue: Lose - = P*ABC
* Stop: Lose FC = BCEF
FC < -
→ Stop producing(shut down point)
MC
P=MRP*
Q* Q
P
AVC
ATC
F
A
O
E
CB
PERFECT COMPETITION
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6. Supply curve
- Coinciding with MC,but from AVCmin
MC
P=MRP*
Q* Q
P
AVC
PERFECT COMPETITION
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7. Producer’s surplus(PS)
- The area below priceline and above marginal
cost curve
PS = TR – VC
= + FC
PS
P
QQ*
P*P=MR
MC
EXERCISE
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Total cost function of a perfect competition firm is:
TC = Q 2 + Q + 100
a. At P = 27$, state out Q* and
MAX
b. State out the break-even point of this firm
c. At P = 9$, should this firm close its business?
d. Show this firm’s supply curve
MONOPOLY
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1. Definition- A type of market where there is only one supplier
and the product is unique
- Examples:
2. Reasons of monopoly- Economy of scales
- Stipulated by government
- Owning patterns, license….
- Monopoly in inputs
- Monopoly in location
MONOPOLY
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MONOPOLY
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CULLIAN
3.106 carat
Found in 1905
Largest in the world
MONOPOLY
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MONOPOLY
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3. Demand and marginalrevenue curves
- Demand curve: downwardsloping and relatively steep
- Marginal revenue curve:downward sloping, is twiceas steep as the slope of thedemand curve (and the
same intercept)P = -aQ + b
MR = -2aQ + b
P
Q
DMR
MONOPOLY
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4. Maximizingprofit
MAX: MR=MC
P
Q
DMR
MC
Q*m
P*m
max: MR=MC
ATC
MAX
MONOPOLY
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P
Q
DMR
MC
Q*m
P*m
P*c
Q*c
P*m>>P*c
Q*m<<Q*c
max: MR=MC
MONOPOLY
5. Supply curve of a monopolist
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P changes, Q is constant P is constant, Q changesP
Q
D1 MR1
MC
P
D1 MR1
MC
MR2
D2
Q*
P*1
P*2
P*
MR2
D2
Q*1 Q*2
MONOPOLY
5. Supply curve of a monopolist
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- No 1:1 relationship between price and
quantity
- → No functional relationship between priceand quantity
- → No supply curve in monopoly
pp y p
MONOPOLY
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6. Market power- Found in 1934 by Abba Lerner
(0 ≤ L ≤ 1)
- In perfect competition: P = MC → L = 0
- The higher value of L is, the stronger market power a firmcan gain
P
MC P L
EXERCISE
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A monopolist is facing with a demand curve:
P = 18 – 2Q
and total cost function: TC = Q2
a. State out P*, Q* and * MAX
b. Government imposes 3$/ unit tax on producer. What is
new P**, Q** and ** MAX
c. Government imposes a fixed tax amount of 10$ on producer. Compare P***, Q*** and *** MAX with P*, Q*
and * MAX in question a
Imperfect competition
Monopolistic competition
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Definition- A type of market where there are a lot of suppliers
but their products are relatively different-
Example:Demand and marginal revenue curves- Demand curve: Downward sloping (each firm is a
mini-monopolist) but more elastic thanmonopolist’s demand curve
- Marginal revenue curve: downward sloping, hastwice the slope of the demand curve
p p
Imperfect competition
Monopolistic competition
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p p
Maximizing profit
MAX: MR=MC
P
Q
DMR
MC
Q*
P*
max: MR=MC
ATC
MAX
Imperfect competition
Oligopoly
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g p y
Definition:- A type of market where there are some suppliersbut holding total or at least a very large part ofmarket share- Example:
Characteristics:- Firms depends closely on each other → join in a
game and competitors act as players- Firms are relatively powerful in market- Entry barrier is relatively high- Firm can either be cartelized or leading-price
Imperfect competition
Oligopoly
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g p y
Cartelized (public collusion):- Firms may merger and act as a monopolist → help
reduce competing cost
- Cartel will agree about price and quantity, then
allocate quota for each member
- Harmony among members is in top priority
- Transparency in information is importance to avoid
member’s fraudulent
OREC???
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Imperfect competition
Oligopoly
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g p y
Price leadership (Non-public collusion)
-
Occurs when cartelization is illegal- One firm will act as leader and sets up price, the
others are followers
- The leader must be strong enough to punish the
others, which do not follow his price, by pushing tothe lowest level so that that firm will go bankruptcy
Imperfect competition
Oligopoly
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g p y
A kinked demand curve
→ Oligopolies never compete
each other by price
Q
P
D1
D2
MR1
MR2
MC1
MC2
Q*
P*
Imperfect competition
Oligopoly – Game theory – Prisoners’ dilemma
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g p y y
A
Acknowledge
Does notacknowledge
B
Acknowledge A: -5, B: - 5 A: - 10, B: 0
Does not
k l d A 0 B 10 A 2 B 2