Week 4 Flashcards
So far, we have seen what from the opposite side of the spectrum?
We see that a monopoly chooses quantity in order to decide how much to produce
In a competitive market can firms control price?
No they cannot
Where does a competitive firm produce?
they produce where the price = Marginal cost
There are to places where P = MC but in this case we choose the optimal
Why does the Microbrewer or a perfectly compeititve firm produce at Q WHERE P = MC
If you produce where MR>MC, you still can make more revenue from producing one more unit of beer
If you produce where MC>MR you have no incentive to produce there as for the next unit sold, you are making a loss.
When the price increases we see that the quanitiy being produced increased, what does the increasing bit show?
The supply curve of microbrewer beer ( this gives us the answer to the question for a given price p, what would the firm be willing to produce) this provides the answer
We see that below a certain price firms do not produce anything what is this price?
This price depends on our distinctions between the long vs short run.
How is the price determined in the whole market of microbrewer beer?
We need to think of the aggregrate supply in the market, with AD to predict the what the price of beer will be in london
Lets think or the market for microbrewer beer in London, there is many of these beers, they do not have control of price and lets assume like we always that the firm is controlled by one agent that wants to maximise profits what are the revenue, profit and MR, Cost and Mc functions?
Profit (q) = R (q) - C (q) R (q) = p x q ( no control over price) This implies the MR = P C (q) cost of producing quantity q Marginal cost same as monopoly
How do we aggregrate the supply of market of microbrewer beer?
You choose different prices and aggregrate them. However it increasing above some price but zero otherwise, in which the company is not producing anything
We have already computed AD using aggregation, how do we find equlibirum?
When price is high we have excess supply ( this is not a stable situation as this will put pressure for the micro brewers to try to get rid of their stock, lowering their price) and when price is low we have excess demand this will put upward pressure to put up price as for e.g. people crowd out these micro brewers. The only price which is stable is where D=S where there is no pressure.
With supply curve we assume that producer surplus is below the equilbria price and above the supply curve, this is an apporixmate of producer surplus/ profits however how does it ideally look( we dont need to know) we saw it on the microbrewer beer
The little blip is so small that we use the the orginal demand and supply as a very good estimate for sum of profits in the economy
How would we show producer surplus under a monopoly?
So you draw normal monopoly and optimal point mc=d, plot p* and q* and normal q where mc=mr and draw producer surplus.
Is there a tradeoff between efficiency and equity?
Economic answer, say they shouldn’t
What is equity?
Equity is concerned with how resources are distributed throughout society.
When talking about efficiency what do we do we talk about?
The first and second welfare theorem.
First of all what does the demand curve represent?
It encodes information about the marginal benefit of consumption on an additional unit of the good for an individual
What is the aggregrate demand?
this encodes information about the marginal benefit of consuming an additional unit of good to society.
What does the MC curve ( increasing supply function encode)?
What does the Aggregrate supply encode?
If i was to produce one more unit of good, how much would it cost be to produce it
The AS curve encodes information about the MC to society of producing additional units.
When you put the AD and AS together what do you get?
You get an intersection of demand and supply.
PS ignore black dotes
IS IT WISE TO PRODUCE HERE
No if you produce at that quanitiy the MB to society is greater than the cost, so welfare suggests you should produce more.
Is it wise to produce here
No as the cost of producing to society is greater than the marginal beneift of consuming the good
Would it be wise to produce at the equilibrium point?
(imagine this is at equilibrium)
Yes it is as you are indifferent as someone will like the product to the tune of that price but also cost to produce at that price, hence indifferent.
What notion of normative efficiency does the the equibirum we just described fall under?
Pareto efficiency - an allocation of goods in society is Pareto efficient, if for any other allocation of goods in which someone is better off, there is someone who is worse off. ( another way to think about it is maxmises total surplus) WE DONT TALK ABOUT PRICES!!
Where is Pareto efficiency in a AD/AS diagram?
Where D=S
So what is the first welfare theorem?
Under some conditions,( perfect information, no externalitites, no frictions etc) any allocation of goods that arises as a perfectly comeptitive equilbirum is Pareto efficient.
What do Monopolists do to surplus?
They decrease total surplus
The difference between the maximal total surplus and monopolist total surplus is called what?
Deadweight loss to society due to monopoly, society wants to produce more, but monopoly doesn’t do that. Total surplus went down as the Q went down.
What are the caveats of the first welfare theorem ?
1) What is the rationally of looking at total surplus, it doesn’t tell us anything about looking at individual people, why do we treat it equally. ( we dont know about the disturbtional affects)
2) What about inequality?
3) Can free markets be fair ( equity vs equality)
What does the demand curve for labour show?
How many workers will be hired at any given wage rate over a given period of time.
What is the supply of labour?
Is the number of people who are willing and able to supply at a given wage rate.
What is the diagram for a minimum wage introduced by goverment?
Describe the national minimum wage diagram
The equilbirum wage rate depicts, employees being hired up to the point where the extra cost of hiring an employee is equal to the extra sales revenue from selling output. An NMW would cause excess supply of labour, higher price will motivate workers to enter the market, leading to unemployment from Qd to QS
The effect of Employment depends on what, as Proffessor Manning research states?
It depends on the elasticity of supply of labour and demand of labour. If both are inelastic, ,the effect on unemployment is reduced, there is a less than proportional increase in unemployment when inealstic, compared to when the supply of labour and demand of labour was elastic
Describe the backward bending supply curve
As a rational consumer, when wages increase, you would want to supply more hours, this shows that the income effect>subsitution effect. The opp cost of not working is high. However at a certain wage , facing decision of working or lesiure, individuals pick lesiure, known as the subisutution effect>income effect. This is because you have hit your target income, so you can work less hours and still get high wages.
- Assume two people, A and B
- Assume two goods, X and Y
- Two-dimensional Edgeworth box
- Rectangle, sides measuring total quantities of two commodities (X, Y) available to an economy
- Under pure exchange, quantities of X and Y exogenous
Draw the edgeworth box diagram
X bar and Y bar denotes how much X and Y we have ie fish and cocounuts.
We measure eveerything for person X from bottom handside and B is upside down on the top right hand side.
As there are fixed goods e.g. 50 fish. if X has 40 fish it must mean Y has 10 fish.
Endownments show what x and y have if they do not trade
As we known each point of endownments denote an allocation of fish or cocunts, draw person X and Y’s indifference curve?
Person Y is looking upside down
What does this indifference curve show in the edgeworth box diagram?
Now both are consuming at endownments, so you draw utlitiy of X that goes through point E and did the same of for Y. the indifference curve shows how much both like consuming E.
Why would both X and Y prefer consuming at G
They are both better off on the island, there are gains from trade. If you draw equal line of preferences passing throughg the point G, person X is bettter of as the curve is higher and person Y is better off as indifference curve is higher. So E is not pareto efficent as everything in the region is better than E.
Is F pareto efficient?
At point F both x and y are tangent to each other, at point F, there is no region in between, that would make them better off, if i move in any different direction e.g. trade of fish and cocunuts, it will make one of them worse off. Thus is F is pareto efficient
From the edgeworth box, we can connect all endownments which are pareto efficient to get what? Draw a diagram?
At each pareto efficient point, there is efficient exchange, at any indifference curve, the MRS is equal to the slope.
Magically what emerges on a particular endownment point?
A price ratio will emerge, thus a budget line will emerge passing through the endownment E, which will allow them to trade and that price will be such that they end up trading at point c, which is pareto efficient. This shows First welfare theorem, which we haven’t stated its fair or not. C is pareto efficient as there is no region. remember.
Suppose the goverment want to implement C, as if we look about to the ccc, the endowment closer to A is unfair as B is more happy than A and the endownment closer to B makes A more happier than B, so C is halfway, how do we get from E to C.
The second welfare theroem says if you want to get to C you have to change the endownment to G, ie come with a helicopter an take some cocunut trees aways and fish. Meaning prices can emerge magically, so they can treat to C pareto efficiently and fair
Question 1 Which of the following statements are true?
A. In a competitive equilibrium the price is determined by the intersection of the demand curve and the supply curve.
B. In a competitive equilibrium the price is lower than the price that would arise if there was a monopoly in this market.
C. In a competitive equilibrium the quantity of the goods sold is less than in the case of a monopoly.
D. The total surplus under competition is equal to the total surplus under a 1st degree discriminating monopoly.
E. The total surplus when the monopolist is a third degree discriminator is higher than in the perfect competition equilibrium.
A B and D
E is wrong as for a monopolist as The total surplus when the monopolist is a third degree discriminator is LOWER than in the perfect competition equilibrium as the perfect equilibrium maximises the total surplus
Suppose a factory pollutes, reducing yields on a nearby farm. • The factory’s marginal profits decline linearly as its output increases, while the marginal damage costs on the farm increase linearly as output increase, show this on a graph
the marginal benefits to factory decreasing ( its like marginal revenue
Where does the factory just maxmises profits, where would they produce up to? Not sure here
Where the mB is 0, because as long as it is 0, as if the MB is greater than 0 they should keep on producing.
Suppose that supply in a market is Qs = p/3, and demand Qd = 100 - p.
Which of the following is true in a competitive equilibrium?
Select one or more:
a. Consumer surplus is 25.
b. Consumer surplus is 625.
c. Consumer surplus is 312.5.
d. Consumer surplus is 100.
c) 312.5
Suppose that supply in a market is Qs = p/3, and demand Qd = 100 - p.
Which of the following is true in a competitive equilibrium?
Select one or more:
a. Producer surplus is 937.5.
b. Producer surplus is 1875.
c. Producer surplus is 5625.
d. Producer surplus is 2812.5.
A) 937.5
Suppose that the market for pink lady apples has 10 farms, each with a supply curve given by Qs = 6, and 10 consumers, each with an individual demand curve given by Qd = 10 - p. Note that the marginal cost for producing an additional apple for each farm is zero as long that they are producing less than 6 apples and is 200 pounds for any apple above 6 (simple explanation for this, each farmer owns one tree, producing 6 apples, to produce more they need to buy a new tree from Australia, and pay the shipping costs etcetera…).
C. Compute the perfectly competitive equilibrium price and quantity in this market. What is the profit of each farm? What is the total profit of all farms together?
Suppose now that all the farms get together and decide to act as one big monopoly. Note that the marginal cost for producing an additional apple is zero as long that they are producing less than 60 apples and is 200 pounds for any apple above 60 (simple explanation for this, all together the farmers have 10 trees, each producing 6 apples, to produce more they need to buy a new tree from Australia, and pay the shipping costs etcetera…)
D. How many apples will this new monopoly produce? What is the Monopoly’s profit? Is the Monopoly better off than when they were operating as ten independent farms (assume that they divide the profits equally within the monopoly)?
