Microeconomics Flashcards
Definition of Centralised and Decentralised markets
Centralised market:
- A financial market structure that consists of having all orders routed to one central exchange with no other competing market
- Quoted prices listed represent the only price that is available to consumers seeking to buy or sell the good
- No other competing market
Decentralised market:
- A market structure without a centralised location
- Price from around the world can be taken
- Prices determined by local bargaining
Centralised and Decentralised market characteristics and implications
Centralised market:
- Less dispersion in trade prices
- Prices are close to CE prices
- Trade volume is close to CE trade volume
- Surplus is closer to CE surplus
- Low cost units sold first, high valued units purchased first -> surplus increases
- Efficient trade
Decentralised market:
- Set of feasible transactions is constrained
- Prices are determined by local bargaining
- Trade limitations are a key determinant of price variation
- Limited trade relative to CE
- Higher prices relative to CE
- Smaller total surplus relative to CE
- Transaction costs sap surplus
- Does not affect quantity of trade
Consumer surplus equation
Vi - nP
e.g. for 3 units
(V1 + V2+V3) - 3P
(for AD - the equation doesn’t change, only the quantities)
Producer surplus equation
nP - Ci
e.g. for 3 units
3P - (C1+C2+C3)
Tax incidence: on an ELASTIC supply curve and implications
ALL the incidence of a tax falls on the BUYER, regardless of wether the tax is imposed on the buyer or seller
Tax incidence: on INELASTIC supply curve and implications
ALL the incidence of a tax falls on the SELLER, regardless of whether the tax is imposed on the buyer or the seller
Tax incidence: ELASTIC demand curve and implications
ALL the incidence of a tax falls on the SELLER, regardless of whether the tax is imposed on the buyer or seller
Tax incidence: INELASTIC demand curve and implications
ALL the incidence of a tax falls on the BUYER, regardless of whether the tax is imposed on the buyer or seller (TRY IT!?)
Tax incidence: generalised rule
Tax revenue is: Unit tax x Quantity
The least elastic group bares more of the cost, BUT, the burden if equal if supply and demand in symmetrical
(When tax is imposed on the seller, price rises)
(When tax is imposed on the buyer, price falls)
A new function will be found, Sub in new P after tax into new function or the other function, don’t use the original!
Tax incidence: Lump-sum taxation and implications
- A lump sum tax will not shift a supply a demand curve because it is unrelated to quantity produced or demanded
- Equilibrium price and quantity stay the same
- No dead-weight loss
- If tax is imposed on producers, they bare all the burden
- If tax is imposed on consumer, they bare all the burden????
Game theory: Nash equilibrium
Occurs when each player chooses an action that gives him/her the highest payoff, given the action taken by the other player in a game
- Set of actions taken by both players
- Arises from rationality assumption as players eek to maximise their own payoff
- Self-enforcing, does not necessarily maximise collective payoff
Game theory: strict domination
- An action dominates another action of a player if it always gives a better payoff to that player, regardless of what other players are doing
- If a strict domination action exists, the player will always play that action, any other actions are thus dominated
- When dominant actions exist for both players, they will only play their dominant action
- If both players have a dominant strategy, it will generate a strict domination pure strategy Nash equilibrium
Game theory: pure strategies
- Playing a single action such that the probability of them both playing their particular action is one
- If no equilibrium exists in pure strategy, one must exist in mixed strategies
Game theory: mixed strategies
- In the absence of a dominant strategy NE (may be a third NE)
- An active randomisation, with given probabilities that determines the players’ decision
- Player desires to be unpredictable so that his opponent can’t guess his decision
- Both actions equally as good to the player
E.g. set E(action 1) = E(action 2)
Game theory: probabilities
E(action) -> P(happening) x payoff + P(not happening) x payoff
E(A1) = E(A2) -> resolve
Game theory: 3 by 3 games
*IF P1, DO WE MULTIPLY IN ROWS OR COLUMNS?
P(happening) x payoff + P(happening 2) x payoff + (not happening) x payoff
R=r, P=p, S=1-r-p
As E(A) = E(B) = E(C) Equate and make either r or p the subject Sub into remaining equations to find answers
Monopoly: profit maximisation: price, quantity, profit
1) Using inverse demand
2) Using MR = a - 2bq
3) Set MR = MC
4) Resolve to find Q
5) Sub Q into original function (not MR) to find P
6) Sub (P-MC)Q to find profit
Duopoly: profit maximisation: reaction function, price, quantity, profit
1) Using inverse demand and cournot equation
2) Understand Q = q1 + q2 -> P = X-b(q1+q2)
3) Find reaction function
4) Invert q1 and q2 and then sub in
5) Find total quantity -> q1+q2
6) Sub into original function to find price
7) Sub into (P-MC)Q to find profit
Triopoly etc……..
Let Q = (q1+q2+….+qn)
Use the same method as before
*Remember it is always q1 x 2
Price setting with differing MC
Find reaction function for firm 1
This will be in form q1 = ……
For firm 2: it will be inverted for q2 = ….
But numbers will be slightly different because of differing MC
Solve simultaneously to find the 2 quantities
Monopoly vs CC**
- MRcc > MRm because the elasticity of the entire demand is lower (more inelastic). When Firm 1 increases q, it doesn’t take into account that this reduces p for firm 2
Because monopolies have power to restrict output they have less MR to act as an incentive to sell - CC produces more than a monopoly
- CC charges lower prices
- Shown in payoff matrix!!!
- Monopoly has no supply curve because supply and demand are endogenously determined.
