- 1.EconomicsChapter 1Lecture 1
2. Economy. . . . . . The word economy comes from a Greek word
for one who manages a household. 3. Founder of economics Adam smith
is the founder economics (From 16 June 1723 died 17 July 1790 ). He
wrote a very first book of economics named Wealth of Nations Wealth
of Nations: the first modern work of economics. It earned him an
enormous reputation and would become one of the most influential
works on economics ever published. Smith is widely cited as the
father of modern economics and capitalism. 4. Economics Economics
is the study of scarcity and efficiency. Economics is the study of
how society manages its scarce resources. Economics is the study of
how societies use scarce resources to produce commodities and
distribute them among different people. 5. Economics Definition of
economics "the science which studies human behavior as a
relationship between ends and scarce means which have alternative
uses." by Lionel Robbins 6. Microeconomics and Macroeconomics
Microeconomicsfocuses on the individual parts of the economy. How
households and firms make decisions and how they interact in
specific markets Macroeconomicslooks at the economy as a whole. How
the markets, as a whole, interact at the national level. 7.
Microeconomics and Macroeconomics Microeconomics focuses on how
decisions are made by individuals and firms and the consequences of
those decisions. Ex.:How much it would cost for a university or
college to offer a new course the cost of the instructors salary,
the classroom facilities, the class materials, and so on.Having
determined the cost, the school can then decide whether or not to
offer the course by weighing the costs and benefits. 8.
Microeconomics and Macroeconomics Macroeconomics examines the
aggregate behavior of the economy (i.e. how the actions of all the
individuals and firms in the economy interact to produce a
particular level of economic performance as a whole). Ex.:Overall
level of prices in the economy (how high or how low they are
relative to prices last year) rather than the price of a particular
good or service. 9. Scarcity . . . . . . means that society has
limited resources and therefore cannot produce all the goods and
services people wish to have. Scarcity is the situation in which
there is not enough of something to satisfy all the desires for
that thing. 10. Efficiency Economic efficiency describes how well a
system generates desired output with a given set of inputs and
available technology.Efficiency is improved if more output is
generated without changing inputs, or in other words, the amount of
"waste" is reduced. Absence of waste. 11. Needs and Wants A need is
something that is necessary for organisms to live a healthy
life.The idea of want can be examined from many perspectives. In
secular societies want might be considered similar to the emotion
desire, which can be studied scientifically through the disciplines
of psychology or sociology. 12. Resources The basic resources that
are available to a society are factors of production: Natural
resources Human resources Capital resources Time resources 13.
Natural resources It includes good fertile land , rivers ,
mountains, water fall, sunshine and things that are inside the
curst of the earth. 14. Human resourcesAll those able bodies,
people who are able to work and contribute to production. it is
most important factor to contributes to production and in the
growth of economy. Worker must acquire education, skill and
knowledge. 15. Capital resources It includes machine, plants,
tools, roads, bridges and highways. it is also important factor to
contributes to production and in the growth of economy. 16. Time
resources It is also very important resource, because utilization
of limited time to produce goods and services to fulfill the needs
and wants of economic requirements. 17. Economic Problems Human
wants are unlimited, but resources are not.Three basic questions
must be answered in order to understand an economic system: What to
produced? How to produced? For whom to produced? 18. Economic
Problems What to produced? What goods and services should be
produce. those goods and services are needed by the economy. How to
produced? Which resources are utilize (Land, labour, capital &
organization) to produced goods and services these are required for
economy 19. Economic Problems For Whom to Produce? Is production
done for army or for producers or for households. Goods( Guns and
butter) and services education) are required for military or
society. 20. EconomicsChapter 1Lecture 2 21. Inputs and Outputs
Resources or factors of production are the inputs into the process
of production; goods and services of value to households are the
outputs of the process of production or the result of any process
which you working for. Inputs: it can primary such as land and
labour and it can be secondary such as capital and managerial skill
(entrepreneurial skills). 22. Capital formation and creation
process Capital formation means creation of new capital assets.
Process Saving: that part of an individual income which is not
spent on consumption. Banks: are financial institutes which accept
deposit and lend it out to entrepreneurs for production purpose as
a loan. They work for profit it is deference b/w interest paid to
depositor and receive form debtor 23. Capital formation and
creation process Money: is liquid assets. Money is lubricant it
helps in production. it is medium of exchange.Investment is the
process of using resources to produce new capital. Capital is the
accumulation of previous investment. 24. Opportunity cost &
Trade off Opportunity cost is that which we give up or forgo, when
we make a decision or a choice. Opportunity cost means the next
best alternative sacrifice. Resources are scarce so we give up or
forgo one and take other goods or services. Trade off means
choosing more of one thing and given up other thing. 25. Capital
Goods and Consumer Goods Capital goods are goods used to produce
other goods and services.Consumer goods are goods produced for
present consumption. 26. Market and its Kinds A market in economics
means settlement of transaction b/w buyers and sellers. Market is
the institution/place through which buyers and sellers interact and
engage in exchange. Market target allocation of scarce resources in
an appropriate and economical manner.Kinds Market for goods Market
for services 27. Economic Systems Economic systems are the basic
arrangements made by societies to solve the economic problem. They
include: Command economies Laissez-faire economies Mixed systems
Islamic system 28. Command economy In a command economy or
Socialism, a central government either directly or indirectly sets
output targets, incomes, and prices. All decisions of what, how and
for whom to produce are taken by state. 29. Laissez-faire economy
or Capitalism In a laissez-faire economy or capitalism individuals
and firms pursue their own self-interests without any central
direction or regulation. All decisions of what, how and for whom to
produce are taken by them self. 30. Mixed Systems, Markets, and
Governments Where both government and private sector are contribute
in market. Since markets are not perfect, governments intervene and
often play a major role in the economy. Some of the goals of
government are to: Minimize market inefficiencies Provide public
goods Redistribute income 31. The Production Possibility Frontier
With the given resources (land, labour, capital and organization)
& technology of a country the maximum amount of output it can
produce is known as production possibility frontier (ppf) The
production possibility frontier (ppf) is a graph that shows all of
the combinations of goods and services that can be produced if all
of societys resources are used efficiently. 32. Production
Possibility FrontierPossibilitiesButter (Million)Guns (In
thousand)A0150B10140C20120D3090E4050F500 33. Production Possibility
Frontier At point H, resources are either unemployed, or are used
inefficiently.The production possibility frontier curve has a
negative slope, which indicates a trade-off between producing one
good or another. Points inside of the curve are inefficient 34.
Production Possibility Frontier A move along the curve illustrates
the concept of opportunity cost and trade off. From point D, an
increase the production of capital goods requires a decrease in the
amount of consumer goods 35. Production Possibility Frontier
Outward shifts of the curve represent economic growth. An outward
shift means that it is possible to increase the production of one
good without decreasing the production of the other 36. Division of
labour Division of labour: means the splitting up of the process of
production into sub processes. The complete task of product making
is not perform by an individual but by the group of workers taken
up a certain parts of production. it is also known as
specialization. Concept of division of labour is given by Adam
Smith, he explain with the example of pin making factory 37. Demand
& SupplyChapter 3Lecture 3 38. Consumer Demand Demand in
economics means that desire which is backed by ability to buy and
willingness to buy. Ability + willingness = demand 39. Law of
Demand Other things remains the same a fall in price is accompanied
by an increase in quantity demanded and conversely a rise in price
is followed by fall in quantity demanded. 40. Schedule of Demand
Schedule of demand shows a series of price of goods and services
and quantity demanded at those price. PossibilitiesPriceQuantity
demandedA59B410C312D215E120 41. Demand Curve DD is demand curve and
it is downwards sloping showing inverse relationship between price
and quantity demanded. 42. Determinants of Demand Consumer income
Size of population Prices of related goods Tastes Expectations 43.
Determinants of Demand Consumer income Consumer income is major
factor that influence demand, if increase in income that will
increase the demand and vise versa. Increase in income better off
Decrease in income worse off 44. Determinants of Demand Size of
population The size of market is affect demand. the demand of goods
& services in big market( china) is very large and the demand
of goods & services in small market (Pakistan) is low. 45.
Determinants of Demand Substitutes & Complements When a fall in
the price of one good (Coffee) reduces the demand for another good
(tea), the two goods are called substitutes. When a fall in the
price of one good (milk) increases the demand for another good
(tea), the two goods are called complements. 46. Determinants of
Demand Taste Taste is also important factor that influence demand
reflection of many factor both physical and psychological that
increase/decrease demand. 47. Determinants of Demand Special
influences Climatically change Religious occasion Cultural occasion
Other events 48. Change in Quantity Demanded Change in Quantity
Demanded Movementalong the demand curve. Caused by a change in the
price of the product. 49. Shift in Demand Change in Demand A shift
in the demand curve, either to the left or right. Caused by a
change in a determinant other than the price. 50. Simple Linear
Regression Simple linear regression analysis analyzes the linear
relationship that exists between two variables.ya bxwhere: y =
Value of the dependent variable x = Value of the independent
variable a = Populations y-intercept b = Slope of the population
regression line 51. Simple Linear Regression The coefficients of
the line arenbornxy x2x (y banay bxy x)2x 52. CorrelationThe
correlation coefficient is a quantitative measure of the strength
of the linear relationship between two variables. The correlation
ranges from + 1.0 to - 1.0. A correlation of 1.0 indicates a
perfect linear relationship, whereas a correlation of 0 indicates
no linear relationship. 53. An algebraic formula for correlation
coefficientnr [ n(2x ) (xyx 2x) ][ n(y 2y ) (2y) ] 54. Demand
forecasting Y = a + bX or Qdx = F(Px,Y, Pc,Ps,T,N,..)a = - bX or
(a) = (Y - b(X)) / N b = nYX (Y) ( X)/ nX2- (X)2 Where b = The
slope of the regression line a = The intercept point of the
regression line and the y axis. n = Number of values or elements X
= Price Y = Quantity Demanded 55. Demand forecasting
Y(Q)X(P)YXX212.2(X)(Y)9908540253nYX855943616Y66nX2275113339X15(X)2225152304YX225181181X255611515755b-2.70a21.3
56. Forecasted Demand 6B1 218.6 15.9C313.2D410.55 4 PriceA3 2 1
0E57.80510 QDx1520 57. Problem Obtain the regression line and
interpret its Forecasted demand. Determine the correlation
coefficient and interpret itSold (y)Price
(x)2006.001906.501886.751807.001707.251627.50160The manager of a
seafood restaurant was asked to establish a pricing policy on
lobster dinners. Experimenting with prices produced the following
data:8.001558.251568.501488.751409.001339.25 58. Demand &
SupplyChapter 3Lecture 4 59. Supply and Stock Supply in economics
means the amount of commodity offered for sale in the market at
certain period of time and at certain price. Stock means the amount
of commodity which is ready for sale but not offered for sale in
the market and kept back in warehouse. Durable good have
distinction b/w supply and stock. Non Durable good (perishable)have
no distinction b/w supply and stock. 60. Law of Supply Other things
remains the same a fall in price is accompanied by an decrease in
quantity Supplied and conversely a rise in price is fallowed by
increase in quantity Supplied. 61. Schedule of Supply Schedule of
supply shows a series of price of goods and services and quantity
supplied at those price. PossibilitiesPriceQuantity
SupplyA518B416C312D27E10 62. Supply Curve SS is Supply curve and it
is upwards sloping showing same/positive relationship between price
and quantity supplied. 63. Determinants of Supply Priceof Inputs
Availability of Inputs Technology Government policies Expectations
64. Determinants of Supply Price and Availability of Inputs Price
of Inputs if the price are lowered then supply will increase and
vise versa (e.g. oil)Availability of Inputs if inputs are easily
available in market subsequently supply will increase and vise
versa. 65. Determinants of Supply Technology Technology is very
essential factor for influencing supply if latest technology is use
for production supply will increase and vise versa 66. Determinants
of Supply Government policies If government imposes the taxes on
inputs that will lead to decline in supply and if government
reduces the taxes on inputs afterward supply will increase. 67.
Determinants of Supply Special influences Climatically change
Religious occasion Cultural occasion Other events 68. Change in
Quantity Supplied Change in Quantity Supplied Movementalong the
supply curve. Caused by a change in the price of the product 69.
Shift in Supply Change in Supply A shiftin the Supply curve, either
to the left or right. Caused by a change in a determinant other
than the price. 70. Equilibrium Equilibrium in economics we
understand a state of balance or on interaction between two
opposite forces working in the opposite direction settle at one
point that is equilibrium price. The term price equilibrium is
market price. 71. Schedule of Equilibrium
PossibilitiesPriceQuantity demandedQuantity suppliedState of the
marketA5918Surplus 9mnB41016Surplus
6mnC31212EquilibriumD2157Scarcity 8mnE1200Scarcity 20mn 72.
Equilibrium The equilibrium price come at the intersection of
demand and supply curve at point C. The equilibrium price and
quantity comes where the units supply equal to amount demand 73.
Shift in Equilibrium due to shift in demand and supply 74.
Elasticity and Its ApplicationChapter 4Lecture 5 75. Elasticity . .
. is a measure of how much buyers and sellers respond to changes in
market conditions allows us to analyze supply and demand with
greater accuracy. 76. Price Elasticity of Demand Priceelasticity of
demand is the percentage change in quantity demanded given a
percent change in the price.Itis a measure of how much the quantity
demanded of a good responds to a change in the price of that
good.Responsivenessof quantity demand due to change in price is
known as elasticity of demand. 77. Computing the Price Elasticity
of Demand The price elasticity of demand is computed as the
percentage change in the quantity demanded divided by the
percentage change in price. Price Elasticity = Of
DemandEPPercentage Change in Qd Percentage Change in Price(% Q)/(%
P) 78. Elasticity, Percentage Change and Slope Because the price
elasticity of demand measures how much quantity demanded responds
to the price, it is closely related to the slope of the demand
curve. But instead of looking at unit change, elasticity looks at
percentage change. What do we mean by percentage change? 79. Brief
Assessment on Percentages If there are 50 tomatoes in a store and
you picked 16 of them, what percentage of the total did you pick?
Paul used to weigh 200 lbs last year, but now he only weighs 175
lbs. How many lbs did he lose? What is the percent change of the
loss? What is the average of 300 and 330? What is the midpoint? 80.
Computing the Price Elasticity of Demand Price elasticity of
demandEPPercentage change in quatity demanded Percentage change in
priceQ/Q P/PP QQ PExample: If the price of an ice cream cone
increases from $2.00 to $2.20 and the amount you buy falls from 10
to 8 cones then your elasticity of demand would be calculated as:
81. Types of Elasticity Price elasticityIncome elasticityCross
elasticity 82. Types of Elasticity Price elasticityPrice Elasticity
= Of DemandPercentage Change in QD Percentage Change in Price 83.
Income Elasticity of Demand Incomeelasticity of demand measures how
much the quantity demanded of a good responds to a change in
consumers income. It is computed as the percentage change in the
quantity demanded divided by the percentage change in income. 84.
Types of Elasticity Income elasticityIncome Elasticity = Of
DemandEIQ/Q I/IPercentage Change in QD Percentage Change in IncomeI
QQ I 85. Cross Price Elasticity of Demand Elasticity measure that
looks at the impact a change in the price of one good has on the
demand of another good. % change in demand Q1/% change in price of
Q2. Positive-Substitutes Negative-Complements. 86. Types of
Elasticity Cross elasticityPrice Elasticity = Of DemandPercentage
Change in QD (Tea) Percentage Change in PriceCoffee)EQbPmQb/Qb
Pm/PmP m Qb Qb P m 87. Ranges of Elasticity Inelastic Demand
Percentagechange in price is greater than percentage change in
quantity demand. Price elasticity of demand is less than
one.Elastic Demand Percentagechange in quantity demand is greater
than percentage change in price. Price elasticity of demand is
greater than one. 88. Perfectly Inelastic Demand - Elasticity
equals 0 PriceDemand$5 1. An increase in price... 4Quantity 100 2.
...leaves the quantity demanded unchanged. 89. Perfectly Elastic
Demand - Elasticity equals infinity Price 1. At any price above $4,
quantity demanded is zero.Demand$4 2. At exactly $4, consumers will
buy any quantity. 3. At a price below $4, quantity demanded is
infinite.Quantity 90. Inelastic Demand - Elasticity is less than 1
Price1. A 25% $5 increase in price... 4 DemandQuantity 90 100 2.
...leads to a 10% decrease in quantity. 91. Unit Elastic Demand -
Elasticity equals 1 Price1. A 25% $5 increase in price... 4
DemandQuantity 75 100 2. ...leads to a 25% decrease in quantity.
92. Elastic Demand - Elasticity is greater than 1 Price1. A 25% $5
increase in price... 4 DemandQuantity 50 100 2. ...leads to a 50%
decrease in quantity. 93. Determinants of Price Elasticity of
Demand Necessities versus LuxuriesAvailability of Close
SubstitutesDefinition of the MarketTime Horizon 94. Determinants of
Price Elasticity of Demand Demand tends to be more inelastic If the
good is a necessity. If the time period is shorter. The smaller the
number of close substitutes. The more broadly defined the market.
95. Determinants of Price Elasticity of Demand Demand tends to be
more elastic : ifthe good is a luxury. the longer the time period.
the larger the number of close substitutes. the more narrowly
defined the market. 96. Method Measuring Elasticity Total Revenue
Totalrevenue is the amount paid by buyers and received by sellers
of a good. Computed as the price of the good times the quantity
sold.TR = P x Q 97. Elasticity and Total Revenue Price$4P x Q =
$400 (total revenue)P0QDemand100Quantity 98. The Total Revenue Test
for Elasticity Increase in Decrease in Total Revenue Total Revenue
Increase in PriceINELASTIC DEMANDELASTIC DEMANDDecrease in
PriceELASTIC DEMANDINELASTIC DEMAND 99. Method Measuring Elasticity
the Average Formula The Average (midpoint formula) is preferable
when calculating the price elasticity of demand because it gives
the same answer regardless of the direction of the change.(Q2 Q1
)/[(Q2 Q1 )/2] Price Elasticity of Demand = (P2 P1 )/[(P2 P1 )/2]
100. Method Measuring Elasticity the Average Formula (Q 2 Q1 )/[(Q
2 Q1 )/2] Price Elasticity of Demand = (P2 P1 )/[(P2 P1 )/2]
Example: If the price of an ice cream cone increases from $2.00 to
$2.20 and the amount you buy falls from 10 to 8 cones the your
elasticity of demand, using the midpoint formula, would be
calculated as: 101. Method Measuring Elasticity of Straight line
The lower portion of a downward sloping demand curve is less
elastic than the upper portion. 102. Importance of Price Elasticity
of Demand Profit maximization requires that business set a price
that will maximize the firms profit Elasticity tells the firm how
much control it has over using price to raise profit If e > 1,
then the % Change in QD > % Change is Price and demand is said
to be elastic An increase in price will reduce total revenue A
decrease in price will increase total revenue 103. Importance of
Price Elasticity of Demand If e < 1, then the % change in QD
< % change in price, and demand is said to be inelastic An
increase in price will increase total revenue A decrease in price
will decrease total revenue If e = 1, then the % change in QD = %
change in Price, and demand is said to be unit elastic An increase
in price will have no impact on total revenue A decrease in price
will have no impact on total revenue 104. Computing the Price
Elasticity of Supply The price elasticity of supply is computed as
the percentage change in the quantity Supplied divided by the
percentage change in price. Price Elasticity = Of SupplyPercentage
Change in QS Percentage Change in Price 105. Supply Elasticity 106.
UtilityChapter 5Lecture 6 107. Utility The value a consumer places
on a unit of a good or service depends on the pleasure or
satisfaction he or she expects to derive form having or consuming
it at the point of making a consumption (consumer) choice. In
economics the satisfaction or pleasure consumers derive from the
consumption of consumer goods is called utility. Consumers,
however, cannot have every thing they wish to have. Consumers
choices are constrained by their incomes. [ Within the limits of
their incomes, consumers make their consumption choices by
evaluating and comparing consumer goods with regard to their
utilities. 108. Total Utility versus Marginal Utility Marginal
utility is the utility a consumer derives from the last unit of a
consumer good she or he consumes (during a given consumption
period), ceteris paribus. Total utility is the total utility a
consumer derives from the consumption of all of the units of a good
or a combination of goods over a given consumption period, ceteris
paribus. Total utility = Sum of marginal utilities 109. The Law of
Diminishing Marginal Utility The law of diminishing marginal
utility state that: as the amount of a good consumed increase, the
marginal utility of that good tends to diminish. We can illustrate
this law numerically. We can take an example of cup of ice cream
give to our consumer without any interval or break then we will see
that marginal utility will be diminish. If he consume more and more
of a good its marginal utility tends to decline. While its total
utility keeps an increasing but at slower and slower rate. 110. The
Law of Diminishing Marginal Utility Over a given consumption
period, the more of a good a consumer has, or has consumed, the
less marginal utility an additional unit contributes to his or her
overall satisfaction (total utility).Alternatively, we could say:
over a given consumption period, as more and more of a good is
consumed by a consumer, beyond a certain point, the marginal
utility of additional units begins to fall. 111. The Law of
Diminishing Marginal Utility Schedule Cup of Ice creamTotal
utilityMarginal utility0001st442nd733rd924th1015th1006th8-2 112.
The Law of Diminishing Marginal Utility Graph of Total &
Marginal utility 113. Law of Equi-Marginal Utility Assumptions Our
consumer is rational person. His aim is to maximize his
satisfaction. Money is limited & price are given and he has to
accept the prices. Marginal utility of money is constant. Our
consumer is facing the law of diminishing marginal utility in each
direction of purchase. He will arrange his purchases in order of
its importance 114. Law of Equi-Marginal Utility The fundamental
condition of maximum satisfaction or utility is the equi-marginal
principles, it state that a consumer having a fixed income and
facing given market prices of goods will achieve maximum
satisfaction or utility when the marginal utility of the last
dollar spend on each good is exactly the same as the marginal
utility of the last dollar spent on the any other good. 115. LAW OF
EQUIMARGINAL UTILITY Marginal utility of moneyIncome= 10 Prices of
both good A & B = 1units Marginal utility of money is =14
utilsUnit of consumptio nGood AGood B1st =14124 units202nd
=14222183rd =14320164th=14418145th=145166th =14614 116. Law of
Equi-Marginal Utility marginal utility of the last dollar spend MUa
MUb =--------- = ---------$Pa $Pb 117. Indifference Analysis 118.
Cardinal vs. Ordinal Utility Cardinal utility : Satisfaction
provided by any good or bundle of goods can be assigned a numerical
value by a utility function. Ordinal utility : People are able to
rank each possible bundle in order of preference. People are not
required to make quantitative statements about how much they like
various bundles. 119. indifference curve properties An indifference
curve should not slope up. Better bundles are to the northeast.
Indifference curves are downward sloping and bowed inward.
Indifference curves become less vertical as we move down them and
to the right. Indifference curves cannot cross/intersect. If
indifference curves crossed, it would violate the
prefermore-to-less principle. 120. Assumptions Our consumer is
rational person. His aim is to maximize his satisfaction. Money is
limited & price are given. He makes purchase in combination of
2 basket of good A & B simultaneously. He is indifferent to
select a combination of the 2 goods he makes different combination
& all the goods giving him equal level of satisfaction. 121.
Indifference Curve Indifference curve that is a tool of which shows
different combinations of two goods given to consumer same level of
satisfaction or a curve that shows combinations of two goods among
which an individual is indifferent.The slope of the indifference
curve is the ratio of marginal utilities of the two goods. 122.
Indifference Curve The absolute value of the slope of an
indifference curve is called the marginal rate of substitution.
123. Schedule of IC or Indifferent plans Schedule of IC shows a
series of combinations of 2 goods.
CombinationFoodClothingA16B23C32D41. E51 124. Graphing the
Indifference Curve Clothing (units per week)A6Indifference curves
slope downward to the right. If it sloped upward it would violate
the assumption that more of any commodity is preferred to less.5
4BPoint A,B,C,D are given our consumer same level of satisfaction
and hence he is indifferent & all combinations are equally
preferred.3C2D 1IC 12345Food (units per week) 125. Diminishing
Marginal Rate of Substitution Law of diminishing marginal rate of
substitution the scarcer a good, the greater its relative
substitution value; its marginal utility rises relative to marginal
utility of the good that has become plentiful.The rate at which one
good must be added when the other is taken away in order to keep
the individual indifferent between the two combinations. 126.
Schedule of IC and Marginal rate of substitutions Schedule of IC
shows a series of combinations of 2 goods and marginal rate
substitutions. CombinationFoodClothingM.R.SA16B2
+1331:3C3+1211:1D4+11.1/2 - 0.1/21:1/2E51 127. Diminishing Marginal
Rate of Substitution Clothing (units per week)Indifference curves
are convex because as more of one good is consumed, a consumer
would prefer to give up fewer units of a second good to get
additional units of the first one.A 6 5-3MRS = 341MRS is measured
by the slope of the indifference curve:B3MRS = 1-112C MRS =
1/2D-1/211 12345MRSCFood (units per week)F 128. A Group of
Indifference Curves Consumers will have a whole group of
indifference curves, each representing a different level of
satisfaction.If he/she prefers more to less, Consumer is better off
with the indifference curve that is extreme to the right. 129.
Indifference Map Clothing (units per week)An indifference map is a
set of indifference curves that describes a persons preferences for
all combinations of two commodities. IC3 show higher level of
satisfaction to her then IC1 and IC2.IC3 IC2 IC1Food (units per
week) 130. Consumers Choice Consumer buy clothing and foods. She/he
wants to maximize her/his utility given a budget constraint. 131.
What is a Budget Constraint? A budget constraint shows the
consumers purchase opportunities as every combination of two goods
that can be bought at given prices using a given amount of income.
132. Budget Constraint Clothing cost $1 and Food cost $1.5
each.Sophie has $6 income to spend.She can buy 6 cloth units or 4
food units or some combination of each. 133. Graphing the Budget
Constraint 134. Budget Constraint The slope of the budget
constraint is the ratio of the prices of the two goods.The slope
changes when the prices or income change. 135. Budget Constraint
with Income effect Clothing (units per week)Pc = $1 80APf = $2I =
$80Budget Line 2F + C = $80B60Pc = $1Pf = $2I = $40C 40D 20E
010203040Food (units per week) 136. Budget Constraint with Price
effect Clothing (units per week)Pc = $1 80APf = $2I = $80Budget
Line 2F + C = $80B60Pc = $1Pf = $4I = $80C 40D 20E 010203040Food
(units per week) 137. Indifference Curves Equilibrium Sophie will
maximize her satisfaction by consuming on the highest indifference
curve as possible, given her budget constraint.The best combination
is the point where the indifference curve and the budget line are
tangent and that point shows equilibrium of consumer. 138.
Indifference Curves Equilibrium The best combination is the point
where the slope of the budget line/price ratio equals the slope of
the indifference curve/MRS of two goods. 139. Indifference Curves
EquilibriumEAt point B U3 the budget line and the indifference
curve are tangent and no higher level of satisfaction can be
attained. 140. Indifference Curves EquilibriumEQUILIBRIUMPf PcMUf
MUc 141. Changes in Income An increase in income will cause the
budget constraint out in a parallel fashion Since px/py does not
change, the MRS will stay constant as the worker moves to higher
levels of satisfaction 142. Indifference Curves Equilibrium with
income effect 143. Increase in Income If x decreases as income
rises, x is an inferior good As income rises, the individual
chooses to consume less x and more yQuantity of yNote that the
indifference curves do not have to be oddly shaped. The assumption
of a diminishing MRS is obeyed.C BU3 U2A U1Quantity of x 144.
Changes in a Goods Price A change in the price of a good alters the
slope of the budget constraint it also changes the MRS at the
consumers utility-maximizing choices When the price changes, two
effects come into play substitution effect income effect 145.
Changes in a Goods Price Even if the individual remained on the
same indifference curve when the price changes, his optimal choice
will change because the MRS must equal the new price ratio the
substitution effect The price change alters the individuals real
income and therefore he must move to a new indifference curve the
income effect 146. Indifference Curves Equilibrium with Price
effect 147. Changes in a Goods Price Quantity of yTo isolate the
substitution effect, we hold real income constant but allow the
relative price of good x to change The substitution effect is the
movement from point A to point CACU1The individual substitutes good
x for good y because it is now relatively cheaper Quantity of
xSubstitution effect 148. ProductionChapter 6Lecture 10 149.
Production Function 1. Production - short run Productive efficiency
The Law of diminishing marginal returns 2. Production - long run
isoquants & isocosts least cost method of production 150.
Production By production in economics we understands the creations
of utility. Utility can be created in three ways. Form utility: can
be created by changing the shape of the matter & performing an
act of production (e.g. log of wood). 2. Place utility: the worker
creates utility by changing the place of that matter (e.g. Coal
miner). 1. 151. Production 3. Time utility: can be created by
taking the product over long period of time (e.g. crops is
harvested, preservation of grains). 152. Productivity Productivity
is a measure of the efficiency of production. Productivity is a
ratio of what is produced to what is required to produce it.
Usually this ratio is in the form of an average, expressing the
total output divided by the total input. Productivity is a measure
of output from a production process, per unit of input. 153.
Productive capacity Productive capacity: in economy is determent by
the size & quality of labor force.By Quality & quantity
capital stock(FOPs) By nation technical knowledge The ability to
use the knowledge The nature of public & private institutions
154. Production Function Production Function: means the
relationship b/w amount of input required to the amount of output
that can be obtained is called Production Function. To explain it
further we can say that for given state of engineers &
scientific/ technological knowledge of production function
significance the maximum amount of that can be produce with quality
of inputs. 155. Production Function e.g. the task of ditch digging
is perform in USA where large & expensive tractor is driven by
person along with supervisor the ditch which is 50ft length &
5ft in depth can be dough in 2 hours. Where as the same task is
performed in China where 50 worker with one hand pickle complete
the task in one whole day. In USA the task is capital intensive
& where as in China the task is labour intensive. 156. Total,
Average and Marginal Product Total product means the total amount
of output produce in physical term like bushel of wheat/ dozens of
boat. Average product means total product divided by number of
product. Marginal Product means input is the extra output produce
by one addition units of input while other input are constant. 157.
Total, Average and Marginal Product Units of Input (labour)Total
productMarginal productAverage
product120002300010001500335005001166.6743800300950539001007802000
158. Total & Marginal Product 159. Law of Diminishing Marginal
Returns This is basic law of production according this law we get
less & less of extra output. When we will add additional dozen
of input while other inputs held/remain constant. In other word the
marginal product of each units of input will declines as the amount
of that input increase, holding other all inputs remain constant.
160. Law of Diminishing Marginal Returns The L of D.M.R express a
very basic relationship as more & more labour is add to fixed
area of land, machine & other input the labour has less &
less of other factor to work with. Marginal product falls because
the land get crowded, the machine is over work so the marginal
product of labour declines 161. Law of Increasing Marginal Returns
Law of Increasing Marginal Returns operate in case of manufacturing
industry because machine are control by man, he may use better
technology to over come the problem. The entrepreneur is rational
person & he voids all of the law of diminishing Marginal
returns. 162. Law of Marginal Returns Units of Input (labour)Total
productMarginal
productReturns11002200100I.M.R3400200I.M.R4700300C.M.R51000300C.M.R61200200D.M.R71350150D.M.R81450100
163. Law of Marginal Returns C.M.RMarginal Returns300250 D.M.R
I.M.R200 150 100 0123456No. of input labour78 164. Return To Scale
The laws of Returns to Scale study the behavior of production when
all the productive factors or inputs are increased or decreased
simultaneously in the same ratio.We analyze here the effect of
doubling, trebling and so on of all the inputs of productive
resources on the output of the product. 165. Return To Scale It has
also three distinct stages Increasing Returns to Scale (10%
increase in input leads to 20% increase in output) Constant Returns
to Scale (10% increase in input leads to 10% increase in output)
Diminishing Returns to Scale (10% increase in input leads to 9%
increase in output) 166. Fixed and Variable Costs Fixedcosts are
those costs that do not vary with the quantity of output produced.
Variable costs are those costs that do change as the firm alters
the quantity of output produced. ShortRun vs. Long Run Costs 167.
Family of Total Costs TotalFixed Costs (TFC) Total Variable Costs
(TVC) Total Costs (TC)TC = TFC + TVC 168. Family of Total Costs
Quantity0 1 2 3 4 5 6 7 8 9 10Total CostFixed Cost Variable Cost$
3.00 3.30 3.80 4.50 5.40 6.50 7.80 9.30 11.00 12.90 15.00$3.00 3.00
3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00$ 0.00 0.30 0.80 1.50
2.40 3.50 4.80 6.30 8.00 9.90 12.00 169. Total-Cost Curve...
$16.00Total-cost curve$14.00Total Cost$12.00 $10.00 $8.00 $6.00
$4.00$2.00 $0.00 02468Quantity of Output (glasses of lemonade per
hour)1012 170. Relation Between Production Function and Total Cost.
Dimininishi ng Returns 171. Average Costs Averagecosts can be
determined by dividing the firms costs by the quantity of output
produced. The average cost is the cost of each typical unit of
product. 172. Family of Average Costs AverageFixed Costs (AFC)
Average Variable Costs (AVC) Average Total Costs (ATC)ATC = AFC +
AVC 173. Family of Average Costs Quantity0 1 2 3 4 5 6 7 8 9
10AFCAVC $3.00 1.50 1.00 0.75 0.60 0.50 0.43 0.38 0.33 0.30 $0.30
0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20AC $3.30 1.90 1.50 1.35
1.30 1.30 1.33 1.38 1.43 1.50 174. Marginal Cost Marginalcost (MC)
measures the amount total cost rises when the firm increases
production by one unit. Marginal cost helps answer the following
question: Howmuch does it cost to produce an additional unit of
output? 175. Marginal Cost (Change in total cost) MC = (Change in
quantity) = TCQ 176. Average-Cost and Marginal-Cost Curves... $3.50
$3.00 $2.50CostsMC $2.00AC$1.50AVC $1.00 $0.50AFC$0.0002468Quantity
of Output (glasses of lemonade per hour)1012 177. Three Important
Properties of Cost Curves Marginalcost eventually rises with the
quantity of output. Law of Diminishing Marginal
ReturnsTheaverage-total-cost curve is U-shaped. The marginal-cost
curve crosses the average cost curve at the minimum of average
cost. 178. Costs in the Long Run For many firms, the division of
totalcosts between fixed and variable costs depends on the time
horizon being considered. Inthe short run some costs are fixed. In
the long run fixed costs become variable costs. 179. Average Total
Cost in the Short and Long Runs... Average Total CostATC in short
run with small factoryATC in short run with medium factoryATC in
short run with large factoryATC in long run 0Quantity of Cars per
Day 180. Economies and Diseconomies of Scale Average Total CostATC
in long runEconomies of scale 0Constant Returns to
scaleDiseconomies of scale Quantity of Cars per Day 181. Isoquants
An isoquant is a contour line which joins together the different
combinations of two factors of production that are just physically
able to produce a given quantity of a good.Construction, slope and
maps 182. An isoquant 45 40Units Units of K of L 40 5 20 12 10 20 6
30 4 50Units of capital (K)35 30 25 20 15 10 5 0 051015202530Units
of labour (L)3540 fig4550 183. Diminishing marginal rate of factor
substitution 14gUnits of capital (K)12 K=210MRS = 2MRS = K / LhL=18
6 4 2isoquant0 024681012Units of labour (L)14 fig16182022 184. An
isoquant mapUnits of capital (K)302010I5 I4I10 010 Units of labour
(L)I2 20figI3 185. Isocosts Actual output also depends on costs
isocosts join combinations of K & L - same cost assuming
constant factor pricesConstruction, slope & map 186. An isocost
30AssumptionsUnits of capital (K)25PK = 20 000 W = 10 000 TC = 300
0002015105TC = 300 000 0 0510152025Units of labour (L)30 fig3540
187. Finding the least-cost method of production 35Assumptions 30PK
= 20 000 W = 10 000Units of capital (K)25TC = 200 00020TC = 300 000
15TC = 400 000 10TC = 500 0005 0 0102030Units of labour (L)40 fig50
188. Finding the least-cost method of production 35Units of capital
(K)30 25 20 15 10TPP15 0 0102030Units of labour (L)40 fig50 189.
Least cost method of production Tangency between iso-quant and
isocostWhere: Slope of iso-quant = slope of iso-costSuccessive
points of tangency - scale expansion path 190. Firms in Competitive
MarketsChapter 14 191. The Meaning of Competition A perfectly
competitive markethas the following characteristics: Thereare many
buyers and sellers in the market. The goods offered by the various
sellers are largely the same. Firms can freely enter or exit the
market. 192. The Meaning of Competition As a result of its
characteristics, theperfectly competitive market has the following
outcomes: Theactions of any single buyer or seller in the market
have a negligible impact on the market price. Each buyer and seller
takes the market price as given. Thus,each buyer and seller is a
price taker. 193. Example of Competitive Markets Eggs vs. Nike
Sneakers. Pay attention to the difference between the two market
structures. Which brand names do you recognize? QuickTime and a
Video decompressor are needed to see this picture. 194. Revenue of
a Competitive Firm Total revenue for a firm is the selling price
times the quantity sold.TR = (P X Q) 195. Revenue of a Competitive
Firm Marginal revenue is the change in total revenue from an
additional unit sold.MR = TR/ Q 196. Revenue of a Competitive
FirmFor competitive firms, marginal revenue equals the price of the
good. 197. Total, Average, and Marginal Revenue for a Competitive
Firm Quantity (Q) 1 2 3 4 5 6 7 8Price (P) $6.00 $6.00 $6.00 $6.00
$6.00 $6.00 $6.00 $6.00Total Revenue Average Revenue Marginal
Revenue (TR=PxQ) (AR=TR/Q) (MR= T R / Q ) $6.00 $6.00 $12.00 $6.00
$6.00 $18.00 $6.00 $6.00 $24.00 $6.00 $6.00 $30.00 $6.00 $6.00
$36.00 $6.00 $6.00 $42.00 $6.00 $6.00 $48.00 $6.00 $6.00 198.
Profit Maximization for the Competitive Firm Thegoal of a
competitive firm is to maximize profit. This means that the firm
will want to produce the quantity that maximizes the difference
between total revenue and total cost. 199. Profit Maximization: A
Numerical Example Price (P) $6.00 $6.00 $6.00 $6.00 $6.00 $6.00
$6.00 $6.00Quantity (Q) 0 1 2 3 4 5 6 7 8Total Revenue (TR=PxQ)
$0.00 $6.00 $12.00 $18.00 $24.00 $30.00 $36.00 $42.00 $48.00Total
Cost (TC) $3.00 $5.00 $8.00 $12.00 $17.00 $23.00 $30.00 $38.00
$47.00Profit (TR-TC) -$3.00 $1.00 $4.00 $6.00 $7.00 $7.00 $6.00
$4.00 $1.00Marginal Revenue Marginal Cost (MR= T R / Q ) MC= T C /
Q $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 $6.00$2.00 $3.00 $4.00
$5.00 $6.00 $7.00 $8.00 $9.00 200. Harcourt, Inc. items and derived
items copyright 2001 by Harcourt, Inc.Profit Maximization for the
Competitive Firm... Costs and RevenueThe firm maximizes profit by
producing the quantity at which marginal cost equals marginal
revenue.MCMC2 ATC P=MR1P = AR = MR AVCMC10Q1QMAXQ2Quantity 201.
Profit Maximization for the Competitive Firm Profit maximization
occurs at the quantity where marginal revenue equals marginal cost.
202. Profit Maximization for the Competitive FirmWhen MR > MC
increase Q When MR < MC decrease Q When MR = MC Profit is
maximized. The firm produces up to the point where MR=MC 203. The
Interaction of Firms and Markets in Competition Price And
CostsMarketFirmPriceS1MC AaS2$10P=MR0ATC =$7BATCbc AVCP=MR1dD0
q4q3q2q1 10 unitsqFQ1Q2QM 204. Copyright 2001 by Harcourt, Inc. All
rights reservedThe Marginal-Cost Curve and the Firms Supply
Decision... Costs and RevenueThis section of the firms MC curve is
also the firms supply curve (long-run).MCP2 ATCP1AVC0Q1Q2Quantity
205. The Firms Short-Run Decision to Shut Down A shutdownrefers to
a short-run decision not to produce anything during a specific
period of time because of current market conditions. Exit refers to
a long-run decision to leave the market. 206. The Firms Short-Run
Decision to Shut Down The firm considers its sunk costs when
deciding to exit, but ignores them when deciding whether to shut
down. Sunkcosts are costs that have already been committed and
cannot be recovered. 207. The Firms Short-Run Decision to Shut Down
Thefirm shuts down if the revenue it gets from producing is less
than the variable cost of production.Shut down if TR < VC Shut
down if TR/Q < VC/Q Shut down if P < AVC 208. The Firms
Short-Run Decision to Shut Down... CostsFirms short-run supply
curve. MCIf P > ATC, keep producing at a profit. ATCIf P >
AVC, keep producing in the short run.AVCIf P < AVC, shut down.
0Quantity 209. The Firms Short-Run Decision to Shut Down The
portion of the marginal-cost curve that lies above average variable
cost is the competitive firms short-run supply curve. 210. The
Firms Long-Run Decision to Exit or Enter a Market Inthe long-run,
the firm exits if the revenue it would get from producing is less
than its total cost.Exit if TR < TC Exit if TR/Q < TC/Q Exit
if P < ATC 211. The Firms Long-Run Decision to Exit or Enter a
Market A firmwill enter the industry if such an action would be
profitable.Enter if TR > TCEnter if TR/Q > TC/Q Enter if P
> ATC 212. The Competitive Firms LongRun Supply Curve... Costs
MC = Long-run S Firm enters if P > ATC ATC AVC Firm exits if P
< ATC0Quantity 213. Monopoly Chapter 15Copyright 2001 by
Harcourt, Inc. All rights reserved. Requests for permission to make
copies of any part of the work should be mailed to: Permissions
Department, Harcourt College Publishers, 6277 Sea Harbor Drive,
Orlando, Florida 32887-6777. 214. Monopoly While a competitive firm
is a price taker, a monopoly firm is a price maker. 215. Monopoly A
firmis considered a monopoly if . . . it is the sole seller of its
product. its product does not have close substitutes. 216. Why
Monopolies Arise The fundamental cause of monopoly is barriers to
entry. 217. Why Monopolies Arise Barriers to entry have three
sources: Ownership of a key resource. This tends to be rare. De
Beers is an exampleThe government gives a single firm the exclusive
right to produce some good. Patents, Copyrights and Government
Licensing.Costs of production make a single producer more efficient
than a large number of producers. Natural Monopolies 218. Economies
of Scale as a Cause of Monopoly... CostAverage total cost0Quantity
of Output 219. Monopoly versus Competition Monopoly Is the sole
producer Has a downwardsloping demand curve Is a price maker
Reduces price to increase salesCompetitive Firm Is one of many
producers Has a horizontal demand curve Is a price taker Sells as
much or as little at same price 220. Demand Curves for Competitive
and Monopoly Firms... (a) A Competitive Firms Demand Curve Price(b)
A Monopolists Demand Curve PriceDemandDemand 0Quantity of
Output0Quantity of Output 221. A Monopolys Revenue Total RevenueP x
Q = TR Average RevenueTR/Q = AR = P Marginal RevenueTR/ Q = MR 222.
A Monopolys Marginal Revenue A monopolists marginal revenue is
always less than the price of its good. Thedemand curve is downward
sloping. When a monopoly drops the price to sell one more unit, the
revenue received from previously sold units also decreases. 223. A
Monopolys Total, Average, and Marginal Revenue Quantity (Q) 0 1 2 3
4 5 6 7 8Price (P) $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 $5.00
$4.00 $3.00Total Revenue (TR=PxQ) $0.00 $10.00 $18.00 $24.00 $28.00
$30.00 $30.00 $28.00 $24.00Average Revenue (AR=TR/Q) $10.00 $9.00
$8.00 $7.00 $6.00 $5.00 $4.00 $3.00Marginal Revenue (MR= TR / Q )
$10.00 $8.00 $6.00 $4.00 $2.00 $0.00 -$2.00 -$4.00 224. A Monopolys
Marginal Revenue When a monopoly increases the amount it sells, it
has two effects on total revenue (P x Q). Theoutput effectmore
output is sold, so Q is higher. The price effectprice falls, so P
is lower. 225. Harcourt, Inc. items and derived items copyright
2001 by Harcourt, Inc.Demand and Marginal Revenue Curves for a
Monopoly... Price $11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4Demand
(average revenue)Marginal revenue 12345678Quantity of Water 226.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt,
Inc.Profit-Maximization for a Monopoly... 2. ...and then the demand
curve shows the price consistent with this quantity.Costs and
RevenueBMonopoly price1. The intersection of the marginal-revenue
curve and the marginalcost curve determines the profit-maximizing
quantity... Average total costA Demand Marginal costMarginal
revenue 0QMAXQuantity 227. Comparing Monopoly and Competition For a
competitive firm, price equals marginal cost.P = MR = MC For a
monopoly firm, price exceeds marginal cost.P > MR = MC 228. A
Monopolys ProfitProfit equals total revenue minus total
costs.Profit = TR - TC Profit = (TR/Q - TC/Q) x Q Profit = (P -
ATC) x Q 229. Harcourt, Inc. items and derived items copyright 2001
by Harcourt, Inc.The Monopolists Profit... Costs and Revenue
Marginal cost Monopoly E priceB Average total costAverage total
cost DC DemandMarginal revenue 0QMAXQuantity 230. The Monopolists
Profit The monopolist will receive economic profits as long as
price is greater than average total cost. 231. Public Policy Toward
Monopolies Government responds to the problem of monopoly in one of
four ways. Making monopolized industries more competitive.
Regulating the behavior of monopolies. Turning some private
monopolies into public enterprises. Doing nothing at all. 232. Two
Important Antitrust Laws Sherman Antitrust Act (1890) Reducedthe
market power of the large and powerful trusts of that time
period.Clayton Act (1914) Strengthenedthe governments powers and
authorized private lawsuits. 233. Marginal-Cost Pricing for a
Natural Monopoly... PriceAverage total cost Regulated priceAverage
total cost LossMarginal costDemand 0Quantity 234. Price
Discrimination Price discrimination is the practice of selling the
same good at different prices to different customers, even though
the costs for producing for the two customers are the same. In
order to do this, the firm must have market power. 235. Price
DiscriminationTwo important effects of price discrimination: Itcan
increase the monopolists profits. It can reduce deadweight loss.
But in order to price discriminate, the firm must Be able to
separate the customers on the basis of willingness to pay. Prevent
the customers from reselling the product. 236. Oligopoly Chapter
16Copyright 2001 by Harcourt, Inc. All rights reserved. Requests
for permission to make copies of any part of the work should be
mailed to: Permissions Department, Harcourt College Publishers,
6277 Sea Harbor Drive, Orlando, Florida 32887-6777. 237. Imperfect
Competition Imperfect competition includes industries in which
firms have competitors but do not face so much competition that
they are price takers. 238. Types of Imperfectly Competitive
Markets Oligopoly Only a few sellers, each offering a similar or
identical product to the others. Monopolistic Competition Many
firms selling products that are similar but not identical. 239. The
Four Types of Market Structure Number of Firms?Many firms One
firmMonopolyFew firmsOligopolyType of Products? Differentiated
productsIdentical productsMonopolistic CompetitionPerfect
Competition Tap water Tennis balls Novels Wheat Cable TV Crude oil
Movies Milk 240. Characteristics of an Oligopoly Market Fewsellers
offering similar or identical products Interdependent firms Best
off cooperating and acting like a monopolist by producing a small
quantity of output and charging a price above marginal cost There
is a tension between cooperation and self-interest. 241. A Duopoly
Example A duopoly is an oligopoly with only two members. It is the
simplest type of oligopoly. 242. A Duopoly Example: Demand Schedule
for Water Quantity 0 10 20 30 40 50 60 70 80 90 100 110 120Price
$120 110 100 90 80 70 60 50 40 30 20 10 0Total Revenue $ 0 1,100
2,000 2,700 3,200 3,500 3,600 3,500 3,200 2,700 2,000 1,100 0 243.
A Duopoly Example: Price and Quantity Supplied The price of water
in a perfectly competitivemarket would be driven to where the
marginal cost is zero: P = MC = $0 Q = 120 gallons The price and
quantity in a monopoly market would be where total profit is
maximized: P = $60 Q = 60 gallons 244. A Duopoly Example: Price and
Quantity Supplied The socially efficient quantity of water is120
gallons, but a monopolist would produce only 60 gallons of water.
So what outcome then could be expected from duopolists? 245.
Competition, Monopolies, and Cartels The duopolists may agree on
amonopoly outcome. Collusion Thetwo firms may agree on the quantity
to produce and the price to charge.Cartel Thetwo firms may join
together and act in unison.However, both outcomes are illegal in
the United States due to Antitrust laws. 246. Summary of
Equilibrium for an Oligopoly Possibleoutcome if oligopoly firms
pursue their own self-interests: Jointoutput is greater than the
monopoly quantity but less than the competitive industry quantity.
Market prices are lower than monopoly price but greater than
competitive price. Total profits are less than the monopoly profit.
247. How the Size of an Oligopoly Affects the Market Outcome
Howincreasing the number of sellers affects the price and quantity:
Theoutput effect: Because price is above marginal cost, selling
more at the going price raises profits. The price effect: Raising
production lowers the price and the profit per unit on all units
sold. 248. How the Size of an Oligopoly Affects the Market Outcome
Asthe number of sellers in an oligopoly grows larger, an
oligopolistic market looks more and more like a competitive market.
The price approaches marginal cost, and the quantity produced
approaches the socially efficient level. 249. Game Theory and the
Economics of Cooperation Gametheory is the study of how people
behave in strategic situations. Strategic decisions are those in
which each person, in deciding what actions to take, must consider
how others might respond to that action. Show its a Beautiful Mind
at this point!-The bar scene 250. Game Theory and the Economics of
Cooperation Becausethe number of firms in an oligopolistic market
is small, each firm must act strategically. Each firm knows that
its profit depends not only on how much it produced but also on how
much the other firms produce. 251. The Prisoners Dilemma The
prisoners dilemma provides insight into the difficulty in
maintaining cooperation. Often people (firms) fail to cooperate
with one another even when cooperation would make them better off.
252. The Equilibrium for an Oligopoly A Nash equilibrium is a
situation in which economic actors interacting with one another
each choose their best strategy given the strategies that all the
others have chosen (I.e. Dominant Strategy)
