AP经济学复习整理（4）

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　　Chapter 10 Perfect Competition

　　●Demand Curve

　　The demand curve of market is downward sloping to the right but the demand curve of the firm is horizontal (the price is perfectly elastic).

　　Therefore, P=MR.

　　In the LR(Long Run) equilibrium, each firm will take its price from the market. Thus, regardless of the quantity produced and sold, the price for the firm remains constant with the only decision being the optimal quantity to produce given a price.

　　●Several Implications

　　P=MR implies that there is no pricing strategy; the demand curve is horizontal.

　　P=MC implies that the price of the product is equal to the extra cost incurred by the seller in producing the marginal or extra unit of production.

　　P=Minimum AC implies that the firm is operating at zero economic profits. Efficiency has been attained.

　　● Short Run

　　In the short run, the price curve remains horizontal but can increase or decrease in the short run. The optimal output is where MR=MC (P=MR intersects the MC). If there is no level at which MR=MC, select the highest level of output at which MR>MC.

　　●AVC, ATC and MC

　　MC intersects AVC and ATC at the minimum because when MC> AVC for example, them AVC will rise and vice versa.

　　●Conditions under perfect competition

　　1. P=MR. No pricing strategy. Firms are price-takers.

　　2. P=MC.Prices at which the product sells equals the extra cost incurred.

　　3. P=Minimum average cost.

　　4. Firms realize zero economic profit, or normal profits.

　　5. Firms have no incentive to price their goods and services below the market price.

　　6. The demand function for each firm is horizontal.

　　g. Products are homogeneous; no purpose for advertising.

　　●Shut Down

　　1. If P

　　2. If P>AVC, firm continues to produce as long as MR>MC up to the level of output profits are maximized or losses minimized – MR=MC.

　　●Elasticity

　　Under perfect competition, price elasticity of supply is greater in the long run than in the short run since there are more opportunities for substitution of inputs.

　　●The firm is a price-taker because:

　　1. if the price is above the equilibrium price, the firm will lose almost all its customers;

　　2. if the price is below the equilibrium price, it will incur the losses and won’t increase its sales significantly since the market share is small.

　　●Total Profits

　　Total Profits= Q*(P-ATC) in which Q is optimal output.

　　Optimal output is at the point where MC=MR or zero when the price is less than average total costs.

　　Even though there are losses, as long as P>ATC, it’s better to produce because the loss can be minimized.

　　Profit Maximization

　　Loss Minimization

　　●The Long Run

　　Perfect Competition Adjustment:

　　1. The adjustment made as demand changes is that new firms enter or the current producers increase production.

　　2. The firms’ new average cost curves are identical with the present firms and unaffected by the adjustment process.

　　3. The new firms are attracted by the short run profits when demand increases and will exit from the industry when demand decreases due to the excess of supply, leading to short run losses.

　　●Consumer and Producer Surplus

　　Consumer and producer surplus results directly from a perfectly competitive market.

　　The gain in utility or satisfaction over costs is the consumer surplus.

　　The market is willing to pay the supplier more than one is willing to pay.

　　Chapter 11 Monopoly

　　●Two Important Indexes

　　Lerner Index: (P-MC)/P. Used to ascertain this pricing power – the greater the value, the greater the pricing power.

　　Herfindahl Index: the sum of the squares of the market shares of firms in a particular market or industry, to measure the concentrated power generated by shares of the market.

　　●The Nature Of Monopoly and its types

　　Monopoly is a single firm sells a product for which there are no close substitutes. Thus the firm is the industry – the other end on the spectrum.

　　The demand curve of the monopoly is downward sloping to the right implying that P>MR and a pricing strategy ensues.

　　The output of monopoly is the intersection of MR=MC.

　　The price of monopoly is the corresponding price on the Demand curve of the output on the intersection – profits are maximized.

　　●The Dead Weight Loss

　　Dead weight loss is represented in the graph – the purple area, which accrue to the profits of no one. Dead weight loss is due to inefficiency of monopoly.

　　●Price Discrimination

　　The firm doesn’t always charge the highest price that each customer would be willing to pay. Sometimes, the identical goods are transacted at different prices.

　　Price discrimination works best if the following conditions are operative:

　　1. Customers with higher price elasticity of demand have more choices of substitute products.

　　2. No opportunity for reselling.

　　3. The price differences are not based on cost differences.

　　4. The firm is a price-maker.

　　●Types of monopolies and their potential regulation

　　·Natural Monopoly

　　Certain industries could best operate as monopolies in order to create a power authority or a public service commission. E.g. Electricity.

　　·Regulated Monopoly

　　Price at the intersection of ATC and D. This price will cover average costs.

　　Fair rate return: the utility firm needs to get a return on its investment at least equal to what investors could receive elsewhere at the same level of risk.

　　·Unregulated Monopoly

　　Price at the highest price – the monopolist is a profit maximizer.

　　·Other Regulated Monopolies

　　Socially optimal price: the intersection of D and MC. Since the price is below the ATC, the government could provide subsidies.

　　Chapter 12 Imperfect Competition: Monopolistic Competition, Oligopoly

　　●Monopolistic Competition

　　Under monopolistic competition, there are many sellers and buyers.

　　In order for a firm to gain an advantage, it is often necessary to innovate.

　　The barrier is relatively weak.

　　The monopolistic firms have a downward sloping demand curve. P > MR; P > MC.

　　The demand curve is still above the MR curve as in the monopoly.

　　·Short Run

　　Identify the loss or profit.

　　Dynamic: The curve of demand may shift to reverse the profiting or losing situation.

　　·Long Run

　　There is a long run tendency for monopolistic competition to produce at zero or normal economic profits but not at minimum average total cost – the demand curve tangents the ATC curve at the producing point, which coincides with the level of optimal output(MR=MC).

　　Inefficient: underutilization or excess capacity.

　　●Oligopoly: The non-collusive kinked demand model

　　Interdependence of rival oligopolist.

　　Kinked demand oligopoly curve: rivals may base their strategies on the anticipated reactions of other firms.

　　The non-collusive interdependence may actually lead to lower price but no increases in prices.

　　Rivals will only price decreases but not follow price increases.

　　The kinked demand curve takes on the following assumptions:

　　1. No collusive activities among the rival oligopolists.

　　2. No price leader.

　　3. Relatively equal market share.

　　The price will remain at the kink.

　　The left part is the demand curve of not following the price change and the right is the following the price change.

　　●Other Oligopoly Models

　　1. Price leadership: there is a price leader dominating the market share so that other firms will follow the price change.

　　2. Cooperative non-collusive activities: based on interdependence of tacit understandings.

　　3. Collusive oligopolies: Rivals may divide markets among themselves according to regional areas or product specialization and charge the same or higher prices based on agreements. Fewer members, more practical.

　　●Game Theory

　　The theory involving choices made by players based on the reaction expected by opponents as in oligopolies.

　　If one can always increase its profits whatever the competitor does under one policy, one should practice the policy.

　　NashEquilibrium: a kind of game theory in which the strategy of each player is the best choice based on the strategy of the other payer – the action depends on the action of the opponent.