Unit 4 (Micro) Flashcards
(41 cards)
Tit for Tat
We keep going until we figure out where they will settle in the game theory boxes “multiple shot game”
Oligopoly models
- Type of decisiion
- type of combination
- type of cooperations
Competition
- Individual decision
- Dominant strategy
- Non-Cooperative EQ (One-shot game where I figure out what I’m going to do and do it no matter what)
Collusion
- Combined decision (decide together)
- Optimal combination
- Tacit: unspoken (both companies realise what the other is doing and decide what to do but don’t talk about it)
- Ouvert: spoken
- “Multiple shot game”
Dominant strategy
You figure out what will benefit no matter what the other side does
Why is MR less than Demand
-For monopolies other than price discriminatory
-You can’t price discriminate, so you lose money when you drop the price to get more people to buy.
Ex: can sell to 5 people for $10, then sell to 10 people for $9. You lose the 10->9 amount
-Price DOES NOT equal MR
Price = demand curve (how much ppl are willing to pay and for how many units)
Price> MR because you lose money on all the previous units that could have been sold at a higher price
Elasticity and inelasticity in monopolies
It is elastic when MR is positive (and TR is increasing) and inelastic when MR is negative (an TR is decreasing)
- The quantity effect dominates price effect when elasitc so at lower levels of production
- The price effect dominates quantity effect when inelastic so at higher levels of production
How to draw a monopoly graph
Find the point where Mr and MC intersect. From from that point straight up until it hits the demand curve (this is the price). Where the verticle line hits the ATC curve
Regular monopoly vs price discrimatory
- MR and D relationship
- how they work
- What does MR equal
Regular monopoly
- MR does not = D
- Must lower the price to sell more and foreit price of the previous units
- MR= Price of the next unit-money could have made selling at higher prices for lower quantities
Price discriminatory
- Demand=MR
- Don’t lower price of previous units and change dif prices
- Price is nowhere and everywher (bc of discriminatory price)
- There is no consumer surplus (bc ppl purchase where they want)
- Profit is positive and quantity is where mr=mc
Perfect competition vs monopolistic competition
- Quantity and price behavior
- profits/losses/zero
- deadweight loss
monopolistic- mr does not equal demand(aka price)
- Quantity goes down, price goes up
- Economic profits (in short and long run)
- Dead weight loss
Perfect competition- can sell as many as I want for the price MR=price
- Quantity up and price down
- Zero economic profits in the long run
- No deadweight loss
Constant cost monopoly
- Exampkes
- explaination
- economic profit/gain/loss
- graph characteristics
-ComED and NiCor
(Once ComEd builds transformers, poles, etc, there is no more fixed costs, we are ignoring “start up costs” same for NiCore. Once the gas pipes are built, no more fixed costs)
-No fixed cost, there is ONLY variable cost
-Let’s say NiCor bringing gas to a new neighborhood. It costs $100 to have first person, $100 for second person, $100 for third person and so on
-There is no long-run zero economic gain. Monopolies earn a PROFIT in the long-run
-MC=ATC and it is a straight line like a fixed cost line
What would happen if a monopoly was forced to act like a perfect competition
Price goes up and quanitiy goes down
The MC=ATC
The Demand=MRDARP
-ignore the og monopolistic mr line
Increasing cost monopoly
- Now have both fixed and variable cost
- Have those ATC and AVC curves from perfect competition
- Deadweight loss is triangle between points of where MR=MC, Where price is, and where MC crosses the demand curve
Decreasing cost monopoly
- Type of economy of scale
- What does atc and MC look like
- Explain how costs go
- characteristics
- Aka NATURAL monopolies (AmTrak, Postal service)
- Economies of scale, more I produce, costs go down
- ATC looks like a decreasing exponential graph (like a soft L)
- MC is also a fixed cost (a straight line)
- FIrst customer has a tremendously high cost that goes down more and more as more customers are taken on
- High startup cost
- Often times decreasing cost monopolies are government regualted
- THE DIFFERENCE BETWEEN THIS MONOPOLY AND THE OTHER TYPES IS THE ATC CURVE
How monopolies are regulated
!.) regulated where they are allowcatively efficent * Price goes up and quantity goes down. No economic profits but there are accounting profits)
- Make them produce/price where ATC=Price/Demand
2. ) regulated at the profit maximizing level (Perfect competition where MR=MC)-> economic losses - Make them produce/price at where MC=Demand/price line and price is less than ATC, so economic losses
- Government has to finance the US postal service and Amtrak bc it generates economic losses
Monopolistic competition
- What kind of products do they have
- Economic losses/profits
- why can they operate like a monopoly
- Barriers to entry
- What would happen if more companies move to the area
- Graph
-They have product differentiation (Different products)
-Profits/losses in the short run and zero economic profits in the long run
-They can all operate like a monopoly because they are fundamentally different
-There are no to limited barriers to entry
- Let’s say 10 new restaurants enter LZ when before there was 10. The ppl per restaurant went from 100 ppl/restaurant to 50 ppl/restaurant. THERE ARE LESS PPL/RESTAURANT SO MR and D SHIFT LEFT
-the point of tangency should be where mr=mc and p=d
In the long run..
p= ATC
ATC min at MC
***draw atc last bc p=atc and atc must be at minimum when cross MC
-They have excess capacity
Excess capacity
- They could produce at minimum atc where ATC =MC, but they produce where MR=MC because they act like a monopoly to limit quantity produced and keep the price high
- Not operating at a quanitity of minimum ATC
What makes collusion difficult in oligopy markets
- Antitrust laws
- Trust/cheating
- Large numbers of firms
- Complexity of products and pricing
- Digervent goals and interests of firms
- Buyer power (buyers negociating price)
What does it mean to be allocatively efficent and where do we see it
Price = ATC
-See it in perfect compeition and regulated monopolies
Is a monopolistically competitive market efficent
No, there is deadweight loss
How do we calculate what the price effect is of moving from producing 3 to 4 is for a monopoly
(Price at 4 -Price at 3) x 3 units sold
Suppose that a monopolist increases production from 10 to 11 units. IF the market price decliens from $30 per unit to $29 per unit, the marginal revenue for the eleventh unit is
(11 x 29) - (30 x 10)= 19
You find the total profit of the first one and subtract it from the total product of the second one divided by number of units changed
($amt of 1st * unit amt of 1st) - ($amt of 2nd * unit amt of 2nd)
If the marginal cost is always $2 where would the profit maximizing output be?
Where the marginal revenue is $2 or a little more
MR= MC
A cartel is an example of what type of collusion
Overt collusion
What does “optimal combination” tell us for the Payoff matrixes
- The firms are colluding together and the firms and oligopolies
- It means we pick the box that ends up with the most combined money
What does “Nash equilibrium” tells us for the Payoff matrixes
- The firms are not colluding and they are independently decided what to do
- You keep going around deciding what each company would do to try to maximize profit until you reach a box where neither company would move
