Week 3 Flashcards
What is the supply curve good for?
IT is useful for 1) Companies use it to determine how much to produce
2) Government use it to determine taxes ( same as demand as both determine equilibrium in market)
3) has both normative and positive aspects to it.
Which supply curve is the one for Mineral water and ventalitor beds for covid 19 patients
1) Supply of mineral water ( as it is easier to produce bottles of water)
2) Supply of ventilator beds for covid 19 patients ( short run, in the long run supply is more elastic.
What are some important supply concepts?
What is a firm
Technology ! the production function
The firms decision ( how to produce, how much to produce)
What is a firm?
A social organisation that buys or hires productive inputs, coordinates them into production to produce goods and services and then sells the output.
In EC102 what will we assume about firms?
1) We assume that decision making in the firm is carried out by one agent
2) We will also assume that the firms ( one agent) objective is to maxmise profits ( we are not going to look at the idea that managers have different objectives etc. )
What does the supply curve give us an answer to for the market of microbrewery beer?
‘In a competitive market, if the price of a pint of beer in the UK is P, how many pints of beer will be produced in the UK’
What are profits?
The difference between revenue and costs.
What are costs here?
They are opportunity costs not accounting costs.
Give examples of opportunity costs ?
Opportunity costs of a productive factor ( unskilled labour ) is the highest return in alternative use of the factor.
With returns of opportunity costs, are they always monetary value?
No they can be pecuniary e.g. the wage at another job or non-pecuniary e.g. subjective enjoyment of lesuire.
What is the profit function and revenue function?
Profit (q) = Revenue (q) - Cost(q)
Revenue(q) = p x q
C(q) : cost of producing quanitiy q
In the short run lets say you have a microbrewery and prices have changed, what do you have to think about?
You have to think about how to respond to price change, you already have paid for the equipment and garage for this year and you cannot buy more, in the next few months
You can only fire or hire more brewers, you are constrained with the tech you have.
So in the short run, everything is fixed expect workers, you only think about how much to produce as this implies how many workers you need
In the long run lets say you are opening a microbrewery and you have to think whether it is worth it or not, what else do you think about?
Well you know all the factors of production are no longer fixed, so you need to decide how many workers you need, how much equipment you need and space, you are constrained by the technology?
In the LR opening a microbrewer, how do i determine the costs?
How: do i produce in the most efficient way, ( the best combination with avaliable tech and workers)
How much: At expected prices, would i be able to sell.
In this week what will we learn about Monopoly?
Why is it bad, how do monopolies choose how to sell and at what price.
What is a monopoly?
Monopolies represent an extreme market structure with a single seller ( we assume they are pure monopolies)
They can arise both naturally and through government protection
How do Monopolists maxmise profits?
They produce a lower quantiity and charging higher prices thana a perfectly competitibe seller, resulting in deadweight loss.
Why are there high barriers to entry in a monopoly?
As firms grow larger there average cost of production falls because of EOS. This means exisiting large firms have a cost advantage over new entrants, which maintains their monopoly power. It deters new firmsm from entering the market, because they are not able to compete with exisiitng firms.
What do monopolists choose to maximise profits?
Quanitites
For a fully competitive firm the price is what and can they sell at a higher price?
The price is given by the market
If you sell for more, no one will buy from you
At market price, you can sell any amount you produce
The firm always chooses Quanitity here
Why is Proift(q) = revenue (q) - C(q)
C(q) as the more you produce, the more costly it is and revenue is a function of the quanitity, ( how much you produce will tell you the price)
What is the difference in calculating revenue in a competitive firm and Monopoly?
Compeititve firm : Revenue(q) = P X q
Monopoly : Revenue (q) = P(q) x q
The price of the competitive firm is not a function of what you sell, it is given by the market, whereas for Monopoly p(q) is the demand curve, for any amount of q you produce ,what is the price which is determined by demand curve.
In a perfect competitive firm you are so small you don’t affect price but monopoly you do
Lets say the market for taedongang beer how does the demand curve look like.
The demand curve is a decreasing function
Why is a perfectly competitive firm the demand curve flat horzontially (extreme) ?
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So what is the same about Comeptitive firm and Monopoly?
There cost function is the same
Profit (q) = revenue(q) - cost (q)
They use the same technology
To summarise what is the difference between long run and short run?
Short run : can only make decisions on some inputs in the production function (labour) . No free entry ( only entreprenuers in the market can trade in the market. )
Long run: Can make decisions about all inputs in the production function ( labour and capital etc) . Free entry ( any entrepreuneur can enter/exit the market)
What is an example of a monopoly?
Beer in north korea by kim
For taedongang beer that kim sells what questions as a monopolist should we ask?
How many bottles of Taedonnangang beet should i produce? At what price should i sell them?
The following shows kim ( monopolist) demand curve, the price depends on Q. If kim decides to produce £100 mil of beer what does this imply?
This implies that he will be able to get rid of them, only for a particular price which is p(q), which comes from the demand function.
How does the revenue curve look like for a simple monopolist taking account the price alos changes when you change the quantitiy you sell?
Why is the revenue curve for a simple monopolist that shape?
•To sell more output, the monopolist has to lower the price. Lowering price has two opposing effects on total revenue:
- Increases how much you can sell, so the firm sells more (“marginal units”) - the demand cuve is downward sloping
- The units you sold alreadu anyway when price was shigher, you are still selling now, but selling them for a lower price, implying you are losing some of your revenue.
Show graphically the lose in revenue for a simple monopolist?
Show the diagram graphically of the gain in revenue of the new units sold which were shown on revenue curve of a simple monopolist.
For which price, will the rectangle be the bigger?
TBA
In the textbook how is a simple monopolist diagram showing ( hint it has mc and mr)?
Well Marginal cost Mc(q) ( this is the derivative of c with respect to q)
Marginal revenue MR (q) ( this is the derative of R with respect to q
How would you show the diagram to the question how much taegdonnagang bear to produce? assuming the mc is fixed ( each bottle you produce you pay 3)
If kim is a simple monopolist and produces 4 million bottles at price 6 with marginal cost 3 what is the profit?
The total revenue would be 6 x4
and cost would be 3 x4 so profit would be
24 - 12 = 12
What is the first way Kim, as a simple monopolist) can make more profits ? ( hint first degree)
You produce at a point where the MC is higher or equal to the demand, so you charge every person their willingness to pay, instead of a q where mc = mr. at each price there is someone willing to pay, which is higer than MC.
How does the profit of a simple monopolist differ from first degree?
How can kim make profits using second degree price discrmination? e.g. buy a box of 12 bottles of beer for only 20 wan special offer.
If you buy separately iy is 4 won a bottle.
As not everyone is going to buy 12 bottles of beer, as some do not drink as much, you can segement these groups into 2, the market of people who buy the offer has its own demand function and those who buy it separately.
thus you can sustain these 2 prices as not everyone will buy bulk, thus you can sustain profits.
How can kim make more profits using 3rd degree price discrminiation e.g. Communist party members can buy beer at 3 won per bottle, others have to pay 4 won. ?
These 2 different prices give bigger profits than the profit of a simple monopolist
In a simple monopolist model what is the total surplus?
The triangle represents consumer surplus and the bottom rectangle represents the producer surplus
How can kim increase his total surplus?
He should produce greater than 4 pints of beer, the benefit of doing that would be given by demand, you should keep producing as long as the willingness to pay for the beer is higher than cost of producing another beer. So where D = MC
The fact that kim doesn’t produce at optimal total surplus shows what?
It shows a deadweight loss to society, from simple monopoly
Consider the following description of the market for Taedonggang beer in North Korea. Kim, the monopolist beer producer, faces a demand curve given by the equation p=100-3q, where p is the price of one bottle and q the quantity of bottles demanded for that price. Kim’s cost of producing q bottles is given by C=4q. Assume that Kim behaves as a simple monopolist.
Choose one or more correct options below.
Select one or more:
a. Kim’s profit maximising price is 55.
b. Kim’s profit maximising quantity is 16.
c. Kim’s maximal profits are 16.
d. It is always better for Kim to increase the price as much as he can.
B
As the derative of cost is 4 and the marginal revenue is twice as deep as demand curve so 100 - 3q
100-6q or Revenue = p(q) x q 100 x 3q xq = 100q - 3q^2
thus derative in respect to q is 100 - 6q
equate the two =
100 - 6q = 4
q = 96/6 = 16
We sub this into equation and get price to be
100 - 3(16) = 52
Now to find profits you do
(p -mc)x q
(52-4) x 16 = 768 which is greater than 16 so ONLY B IS CORRECT
Which of the following statements about a profit maximising Kim are true?
A. A fall in demand for beer in North Korea will reduce prices but increase Kim’s profit.
B. A fall in demand for beer in North Korea will reduce Kim’s profit.
C. A fall in demand for beer in North Korea will reduce prices and decrease Kim’s profit.
D. A fall in Kim’s marginal cost curve will make Kim produce more bottles and will increase the price he charges.
B and C
Which of the following statements about a profit maximising Kim are true? (Conitutation)
A. A fall in demand for beer in North Korea will reduce prices but increase Kim’s profit.
B. A fall in demand for beer in North Korea will reduce Kim’s profit.
C. A fall in demand for beer in North Korea will reduce prices and decrease Kim’s profit.
D. A fall in Kim’s marginal cost curve will make Kim produce more bottles and will increase the price he charges.
So d is wrong as it would reduce price chatge and increase profits
Consider the following description of the market for Taedonggang beer in North Korea. Kim, the monopolist beer producer, faces a demand curve given by the equation p = 100 − 3q , where p is the price of one bottle and q the quantity of bottles demanded for that price. Kim’s cost of producing q bottles is given by C = 4q . Assume that Kim behaves as a simple monopolist. Answer each of the following questions.
A. What is the marginal cost that Kim faces?
B. What is the marginal Revenue curve?
c.Compute kims profit as a simple monopolist
The marginal cost is the derative of the cost with respect to q
so mc = 4 ( it is fixed)
The marginal revenue is the derative of the demand or twice as steep so (100 - 3q)q = 100q - 3q^2 = 100 - 6q
100 - 6q =4 ( solve for q = 96/6 = 16
Plug into original equation 100 - 3(16) = 52
Profit = ( P - MC) X Q = 768 or TR-TC
100 - 3q x q = (100 - 3q^2) - 4q sub q in to get 768
