disccusion 8,9,10 Flashcards
Five assumptions of a (perfectly) competitive market:
- There are lots of buyers and sellers in the market.
- Each seller faces a perfectly elastic (individual) demand curve. Firms can change their level of output without affecting the price. Firms are price takers.
- There are no barriers to entry (not necessarily free).
- Sellers and buyers are fully informed (perfect information).
- Products are homogeneous, or identical.
where does the agency problem exsist
The agency problem exists in corporations, universities, government bureaus, and families.
Shirking:
If your boss cannot observe how hard you work and pays you a fixed salary, you might not want to exert effort because effort is costly to you. But this is not what your boss wants because the harder you work the more likely you produce quality outputs.
difference between short run and long run
The SR is when the firm faces fixed costs, and the LR is when it doesn’t.
We have economies of scale when LRAC
is falling
diseconomies of scale when LRAC
is rising
MC is the
economic cost incurred in producing the next unit
(Socially) optimal production is where (long question)
P = MC (marginal cost pricing).
- Producing at this point is Pareto Optimal, you can’t make anyone better off without making someone else worse off.
Pricing below or above MC brings
Pricing below or above MC brings about a misallocation of resources
- Produce if
p>AVC
Shut down if
p<AVC
We don’t look at AC because
e don’t look at AC because in the short-run fixed costs are sunk (cannot be
recouped).
Marginal Revenue (MR):
revenue the firm gets from selling an additional unit
If MR>MC,
selling one more unit you get more additional revenue than additional cost
If MR<MC,
what you get from selling the last unit is less than the cost of producing it.
Short-Run versus Long-Run Profit
Short-run profit is positive. But this is not stable. In the long-run, perfectly competitive firms can enter and they will enter until each is making zero economic profit. (Note that accounting profits are still positive even if economic profits are zero. This just means that entrepreneurs are indifferent between operating their own firm and earning their opportunity cost elsewhere.)
Two conditions for monopoly
- No close substitutes
- Barriers to entry exist (ability to keep out new competitors).
A Pareto-optimal policy…
A Pareto-optimal policy will make some economic agents better off and no economic agent worse off.
A cartel (if constitutes of all firms in the industry) would set
MC = MR for the entire market.
By joining the cartel and restricting output, the individual firm receives
positive economic profits. This is because the individual firm is not competing as harshly as it was against other firms.
Many cartels are not stable due to free-riding problems.
Firms have incentive to cheat and over produce, which is good for their profits, but bad for the
overall cartel.
It is hard for antitrust authority to distinguish
between cartel/price fixing and
oligopolies
Firm degree price discrimination (perfect discrimination):
- sellers know exactly everyone’s willingness to pay and extract all consumer surplus
- Second degree price discrimination (menu pricing):
sellers give consumers a menu of choices and let consumers select (ex: you can by a combo meal
or items separately, quantity discount)
- Third degree price discrimination (group pricing):
- set different prices for different groups of people (ex: student discount)
Perfect price discrimination
(socially efficient)
Group pricing
(more efficient than monopoly single pricing)
When marginal revenue is positive
demand is price elastic
When marginal revenue is negative
demand is price inelastic.
