Recht und Ökonomie (Law and Economics) LVA-Nr.: 239.203 WS 2011/12 Microeconomics (Repetition Part 2) 1 of 20 Prof. Dr. Friedrich Schneider Institut für

Recht und Ökonomie (Law and Economics)

LVA-Nr.: 239.203

WS 2011/12

Microeconomics (Repetition Part 2)

1 of 20

Prof. Dr. Friedrich Schneider

Institut für Volkswirtschaftslehre

http://www.econ.jku.at/schneider

2 of 20

Recht und Ökonomie WS 2011/12 Microeconomics – Repetition Part 2 Prof. Dr. Friedrich Schneider

Outline of the Section on Microeconomics

1 Basic concepts and tools

2 Consumer theory

3 Theory of the firm

4 Interactions of households and firms

(Imperfect Competition, Consumer & Producer Surplus)

3 of 20


4 Imperfect competition

Monopoly

— just one supplier (firm) in a market

Monopolistic competition

— many firms with differentiated products

Oligopoly

— only a few firms (2, 4, 7, …?) in a market

Other forms, e. g. price leadership, spatial competition,

…

4 of 20


4.1 Monopoly

The monopolist faces the market demand curve.

A monopolist maximizes her profit by producing a quantity

where

MC = MR

The price will be higher than MC (and MR).

The price (quantity) will be higher (lower) than the price

(quantity) under perfect competition >> deadweight loss (=

lower welfare).

5 of 20


Lost profit

P1

Q1

Lost profit

MC

AC

Quantity

€ perunit of output

D = AR

MR

P*

Q*

4.2 Profit maximizing monopolist

P2

Q2

6 of 20


4.3 Measuring welfare

Consumer surplus

— equals total consumption benefit minus total cost of

purchases;

— equals the area below the demand curve and above the

market price.

Producer surplus

— equals the area below the market price and above the

supply curve;

— equals profits plus fixed cost.

7 of 20


Demand Curve

Consumer surplus

Actual Expenditure

€19.50014)x6.5001/2x(20

4.4 Consumer surplus

Rock Concert Tickets

Price (€ perticket)

2 3 4 5 6

13

0 1

14

15

16

17

18

19

20

Market Price

8 of 20


DD

PP**

QQ**

Producer Producer SurplusSurplus

4.5 Producer surplus for a market

Price(€ per

unit of output)

Output

SS

9 of 20


ProducerSurplus

ConsumerSurplus

4.6 Consumer and producer surplus

Quantity0

Price

S

D

5

Q0

Consumer C

10

7

Consumer BConsumer A

10 of 20


BA

Lost Consumer Surplus

Deadweight Loss

C

4.7 Deadweight loss from monopoly power

Quantity

AR

MR

MC

QC

PC

Pm

Qm

€/Q

11 of 20


4.8 Monopolistic Competition

In a competition surrounding a large number of firms

sells differentiated products. Monopolistic competition

means:

Firms face a downward sloping demand curve.

Profit maximum at MR = MC, with P > MC.

Positive profits will attract additional firms.

In the long run profits will be zero with still P > MC.

thus: no Pareto-efficient allocation.

12 of 20


4.9 A monopolistically competitive firm in the short and long run

Quantity

€/Q

Quantity

€/QMC

AC

MC

AC

DSR

MRSR

DLR

MRLR

QSR

PSR

QLR

PLR

Short run Long run

13 of 20


Deadweight- lossMC AC

4.10 Comparison of monopolistically competitive equilibrium and perfectly competitive equilibrium

€/Q

Quantity

€/Q

D = MR

QC

PC

MC AC

DLR

MRLR

Qmc

Pmc

Perfect competition Monopolistic competition

14 of 20


4.11 Oligopoly Characterized by a ‚small‘ number of firms.

Consequence: the action of one firm will be noticed by the

other firm(s).

The other firm(s) will react.

Essentially how to model this action and reaction of the small

number of competitors.

Example: Cournot model.

Two firms decide (simultaneously) how much to produce

treating the other firms output as given.

15 of 20


MC1

50

4.12 Firm 1‘s output decision

Q1

P1

D1(0)

MR1(0)

If firm 1 thinks, firm 2 will produce nothing at all, its demand curve, D1(0), is the market demand curve.

D1(50)MR1(50)

25

If firm 1 thinks, firm 2 will produce 50 units its demand curve, D1(1), will beshifted to the left by this amount.

16 of 20


Firm 2‘s reactioncurve Q2*(Q1)

4.13 Reaction curves and Cournot equilibrium

Q2

Q1

25 50 75 100

25

50

75

100

Firm 1‘s reactioncurve Q*1(Q2)

x

x

x

x

Firm 1‘s reaction curve shows how much it will produce as a function of how much

it thinks firm 2 will produce.

Cournot-equilibrium

17 of 20


4.14 Cournot and Nash equilibrium

In Cournot equilibrium, each firm correctly assumes the

amount that its competitor will produce and thus

maximizes its own profit.

Cournot equilibrium is an example of a Nash equilibrium.

Nash equilibrium: Each firm is doing the best it can, given

what its competitors are doing.

18 of 20


4.15 Duopoly example

Q1

Q2

Firm 2‘s reaction curve

30

15


15

30

10

10

Cournot equilibrium

Market demand is equal to P = 30 – Q, and both firms‘ marginal cost are equal to 0.

19 of 20




4.16 Competition, oligopoly, and collusion

Q1

Q2

30

30

10

10

Cournot equilibrium15

15

Competitive equilibrium (P = MC, profit = 0)

Collusion curve

7.5

7.5

Collusive equilibrium

Collusion is best for the firms,followed by Cournot equilibrium.

20 of 20


4.17 Other market forms

Cartels: see collusive equilibrium above

Price leadership: leader and follower(s)

Dominant firm(s): by size (market share)

Spatial competition: additional dimension, competition may not lead to efficiency

Monopsony (or oligopsony): one (or a small number of) buyer(s)

Bilateral monopoly: one seller and one buyer

Documents

Recht und Ökonomie (Law and Economics) LVA-Nr.: 239.203 WS 2011/12 Microeconomics (Repetition Part 2) 1 of 20 Prof. Dr. Friedrich Schneider Institut für