Marginal Revenue (MR) = Δ๐๐ Δ๐ = Price = AR If TR is a straight ็ด็บฟ upward sloping line, then the increase of TR due to increase of Q is constant ไธๅ, the firm must be a price-taker since the increase of TR due to increase of Q is Price. P 5 5 5 5 Q 1 2 3 4 TR 5 10 15 20 MR 5 5 5 5 Price-maker P 5 4 3 2 1 Q 1 2 3 4 5 TR 5 8 9 8 5 MR 5 3 1 -1 -3 Q Q1 Q2 Q3 Q4 At Q1, MR = MC (If MR > MC, Q↑ => profit↑; IF MR < MC, Q↓ => profit↑), profit maximization for price maker At Q2, AC = MC, QP.E. (productively efficient output)็ไบงๆไผ ~ ACmin ~ no waste of resources ๆ ่ตๆบๆตช่ดน At Q3, MC = P (profit maximization for price-taker ไปทๆ ผๆฅๅ่ ็ๅฉๆถฆๆๅคงๅไบง้), for the last unit, consumers are not over-paying ่ฟๅบฆๆฏไป and not under-paying ่ฟๅฐๆฏไป for the resources used and for what they desire ๆณ่ฆ็, QA.E. (allocatively efficient output)ๅ้ ๆ ไผไบง้ At Q4, AC = P, QB/E (breaking even output)็ไบๅนณ่กก, normal profit ็ปๆตๅฉๆถฆไธบ้ถ Perfect competition Monopoly Many sellers No barriers to entry or exit Identitcal goods Price-takers one seller high unique goods price maker Monopolistic competition Many sellers No barriers to entry Differentiated ้ๅ่ดจ products Price makers Long Run equilibrium P = ATC Normal profit New entry of competitors => D for individual firms’ goods decreases => QM and PM decrease => subnormal profit => some firms will exit Abnormal profit => new competitors enter the market Accounting ไผ่ฎก profit vs Economic ็ปๆต profit ============================================================ Accounting profit = total revenue – explicit ๆพๆง cost Economic profit = accounting profit – implicit ้ๆง cost Implicit cost = opportunity cost Oligopoly Characteristics - A few sellers - High barriers to entry - Price makers - Inter-dependent price-making Example question: In the market, there are only two firms. Two firms agree to raise the price and limit output to exploit ๅๆฆจ consumers ~ collusion ~ illegal ้ๆณ (anti-trust ๅๅๆญ law) If P = 5, the total sales in the market = $100 If both A and B raise the price to 5, A earns 50, B earns 50. If A decreases the price to 4, and B raises the price to 5, then A earns $90, B earns $0 If A raises the price to 5, and B decreases the price to 4, then A earns 0, B earns $90 If A and B both decrease the price to 4, A earns 45, B earns 45 For A, regardless of whether B chooses to raise the price or decrease the price, A is always better off if A chooses to decrease the price. Decreasing the price is dominant ไธปๅฏผ strategy ็ญ็ฅ. For B, decreasing the price is dominant strategy. Both decreasing the price is the Nash equilibrium of the situation. Labor market If employer ้ไธป is a price taker in labor ๅณๅจๅ market and a price taker in output ไบงๆๅ market, Then marginal revenue of output is the price of output ๐โ๐๐๐๐ ๐๐ ๐๐ MR = =๐ ๐โ๐๐๐๐ ๐๐ ๐ Marginal cost of hiring one unit of labor is wage rate ๅทฅ่ต็ of labor MCL = ๐โ๐๐๐๐ ๐๐ ๐๐ถ =๐ค ๐โ๐๐๐๐ ๐๐ ๐๐ฟ The change of profit of hiring one more labor is change of profit = MR of product of L − MC of hiring L Marginal revenue product of labor is ๐โ๐๐๐๐ ๐๐ ๐๐ ๐โ๐๐๐๐ ๐๐ ๐๐ ๐โ๐๐๐๐ ๐๐ ๐ MRPL = = ∗ = MR ∗ MPL = ๐ ∗ ๐๐๐ฟ ๐โ๐๐๐๐ ๐๐ ๐๐ฟ ๐โ๐๐๐๐ ๐๐ ๐ ๐โ๐๐๐๐ ๐๐ ๐๐ฟ MRPL = ๐ ∗ ๐๐๐ฟ change of profit = MRPL − ๐๐ถ๐ฟ = ๐๐๐๐๐ ∗ ๐๐๐ฟ − ๐ค๐๐๐ The last unit of labor hired must lead to Price ∗ MPL = ๐ค๐๐๐ Price ∗ MPL = ๐๐ฟ ๐๐๐ฟ 1 = ๐๐ฟ ๐ Profit is maximized. Demand for labor ๅฏนไบๅณๅจๅ็้ๆฑ ~ Derived ่ก็ๆง demand (from demand for goods and services) If wage rate increases, then w > P*MPL, employer isn’t profit-maximizing Employer must decrease QL to increase MPL so that w = P*MPL Demand for capital follows similar rule to demand for labor rent for capital = P ∗ MPK P ∗ MPK = PK ๐๐๐พ 1 = ๐๐พ ๐ For a rational producer, when hiring QL and QK, profit is maximized when the combination of QL and QK satisfies ๐๐๐ฟ ๐๐๐พ = ๐๐ฟ ๐๐พ For a rational consumer, when consuming Qx and Qy, total utility is maximized when the combination of Qx and Qy satisfies ๐๐๐ฅ ๐๐๐ฆ = ๐๐ฅ ๐๐ฆ
