Week 5

1
Week 5 Week 6

• Perfect Competition, Imperfect Competition
  Externalities

2
Profit Maximization in Short Run

• Golden Rule of Profit Maximization MR MC
• Several Scenarios for the Car Wash example
• Price Level 5 per car wash, Economic Profit
• Price Level 3 per car wash
• Shut down
• Operate at price 3
• Net Operating Profit

3
Bankruptcy

• Define Bankruptcy
• What about Net Revenue?
• Reorganize the debt Equity Claims to the firm
• Accounting picture

4
Long Run Adjustment to Short Run Conditions

• Short Run Profits Expansion of the industry in
  the long run.
• Short Run losses Contraction of the Industry.
• Long run adjustment mechanism.
• Investment Disinvestments occur.

5
Long Run Equilibrium Profit Maximization

• Presence of economic Profit attracts entry of
  other firms.
• Entry causes Supply to shift to the right.
• Price drops economic profit is eliminated.
• P Min ATC curve

6
Perfect Competition and Efficiency

• What is Productive Efficiency?
• Implication of Productive Efficiency.
• What is Allocative efficiency?
• Same as The Efficient Output Mix.
• Implication of Allocative efficiency.
• Key Question 10.7/23.7

7
What is a Monopoly

• Define Monopoly Pure Near
• Characteristics of a pure Monopoly
• Single seller
• No close substitutes
• Price maker?
• Entry by other firms is blocked.
• Examples of monopolies

8
Barriers to Entry

• What are barriers to entry?
• Government franchises
• Patents
• Economies of scale
• Ownership of a scarce resource

9
Decision Making in Monopoly

• Output Decision by a monopoly
• Same as Perfectly Competitive (p.c.) firm?
• Price Decision by a monopoly
• Different from a Perfectly Competitive firm.

10
Market Structures Comparison
11
Critical evaluation of Some Statements

• Monopolistic competition is monopoly up to the
  point at which consumers become willing to buy
  close-substitute products and competitive beyond
  that point.
• Competition in quality and in service may be
  just as effective in giving the buyers more for
  their money as is price competition.

12
Oligopoly

• What is an Oligopoly?
• Industries in which Oligopoly exists?
• Barriers to entry(Again!)
• Economies of Scale
• High cost of entry
• Key feature Interdependence between the firms
  actions.

13
Predict Pricing Outcome

• What kind of Pricing mechanism can exist in an
  Oligopoly?
• Difficult to Predict?
• Why?
• What is a Cartel?
• Examples

14
Prisoners Dilemma Oligopoly Model

• Game Theory Model Prisoners Dilemma
• Strategy Decision Making
• Individual Decision Versus a Joint Decision.
• Choices Payoffs.

15
Price Leadership Model

• When does Price Leadership exist?
• Price Leadership Tactics
• Change in Cost Demand Conditions
• Communicate Price Adjustment
• Discourage new Entrants
• Price War

16
Kinked Demand Curve Model

• Firms belief about the rivals Price Cut
• What about a Price rise?
• Features of a Kinked Demand Curve
• Different Demand segments
• Rigid Prices
• Criticisms of the Model
• Oligopoly Advertising

17
Externalities

• What are externalities?
• Examples
• Positive Externalities Negative Externalities
• Spillover Costs and Spillover Benefits

18
Optimum Allocation of Resources

• Social optimum achieved in a Perfectly
  competitive economy with rule for optimum
  allocation of resources MB MC.
• Social optimum rule in the presence of
  Externalities is given by MSB MSC
• Example
• Graph

19
Internalizing Externalities

• Coase Theorem Individual Bargaining Approach
• Assignment of Liability through Lawsuits.
• Taxes Subsidies

20
Some more Solutions

• Pollution Permits A market for Externality
  Rights
• Supply is perfectly inelastic
• Demand is downward sloping
• Government Policy with regard to Recycling.
• Global Warming Issues

21
Externalities

• What are externalities?
• Examples
• Positive Externalities Negative Externalities
• Spillover Costs and Spillover Benefits

22
Optimum Allocation of Resources

• Social optimum achieved in a Perfectly
  competitive economy with rule for optimum
  allocation of resources MB MC.
• Social optimum rule in the presence of
  Externalities is given by MSB MSC
• Example
• Graph

23
Internalizing Externalities

• Coase Theorem Individual Bargaining Approach
• Assignment of Liability through Lawsuits.
• Taxes Subsidies

24
Some more Solutions

• Pollution Permits A market for Externality
  Rights
• Supply is perfectly inelastic
• Demand is downward sloping
• Government Policy with regard to Recycling.
• Global Warming Issues