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LECTURER

Dr Nguyễn Thị Tường Anh

Head of Microeconomics section

Teaching:+ Microeconomics for bachelor courses (FTU)

+ Internat ional Econom ics and Trade for master course inInternational Business (La Trobe University – Australia)

+ Econom ics for manager for VCCI

+ Microeconomics and Marketing for FPT University

Email: [email protected]

Cell phone: 0904 221816

mailto:[email protected]

mailto:[email protected]



Textbook

1. Princ ip les o f econom ics, GregoryMankiw, Worth Publishers, 2007

2. Exercise books



Lecture

3 credits

Twice per week, 7.5 weeks

Timetable: every Monday and Thursday

10 minutes break



Assessment

Class participation: 10%

- by random check

2 midterm tests: 30% (15% each):

- 3 Short-answer questions and 1 exercise (30 min)

- to be announced in advance

Final test: 60%:

- multiple choice questions (50 min)

- covers ALL contents discussed in the class

- according to university’s schedule



Assessment (cont.)

Presentation or essay is encouraged- Group or individual

- works on one Vietnamese current economics andtrade issue

- good quality will get bonus mark added to the finalresult

- Chosen topic must be announced to lecturers inadvance and be approved by lecturer

- Submit 1 week before the last lecture



Regulation

No chatting

No sleeping

No ringing

No late coming



CHAPTER 1

INTRODUCTION TO MICROECONOMICS



Content

Microeconomics

Basic questions

Economic choice



Chapter 1: Introduction

I. Microeconomics

1. The economy

Household

Government

Firm

Output marketInput market



I. Microeconomics

1. The economy

- There are at least 3 members in any economy, which interactingwith each other in a certain economic mechanism.

Economic mechanism:- market economy (1)

- planning economy (2)

- mixed economy (3)

2 3 1

Cuba US, UK,Japan...

HongKong



Map of Cuba



Hong Kong notes



I. Microeconomics

2. Some definitions

Scarcity: When the need is greater than the

supplying ability

Commodities: Tools to satisfy needs

Resources: Inputs used to produce commodities to

satisfy needs, including:

+ Labour (L)+ Materials (M)

+ Capital (K)



I. Microeconomics3. Microeconomics and macroeconomics

Economics: study how society allocates scarce

resources for competitive goals

Microeconomics:study the behavior of each

member in an economy Macroeconomics: study the economy as a whole

Microeconomics Macroeconomics Econometric

ECONOMICS



II. Basic questions

3 questions

WHAT?

HOW?

FOR WHOM?

TO PRODUCE

WHERE?



III. Economic choice

1. Choice’s principles

- Need to choose because of scarce resources. If resource isalready spent on A it can not be spent on B

- Many ways to spend resources → easy to choose

2. Choice’s target- Household: Optimize benefit

- Firm: Optimize profit

- Government: Optimize social welfare



III. Economic choice

3. Choosing tool- Opportunity cost (OC): The value of the best missed opportunity

when making a choice

- Marginal thinking

+ Marginal cost (MC): The change in total cost resultingfrom a change from quantity

+ Marginal benefit (MB): The change in total benefitresulting from a change from quantity

)(' QTC Q

TC MC

)(' QTBQ

TB MB



Alfred Marshall

(1842 - 1924)

British economist

One of the greatestmicroeconomist



Chapter 2

DEMAND AND SUPPLY



Content

+ Demand

+ Supply

+ Market equilibrium



I. Demand

1. Definitions

2. The law of demand

3. Demonstrating demand

4. Determinants in demand function

5. Movement and shift of demand curve



I. Demand

1. Some definitions- Demand (D): The quantity of goods and services that consumer is

willing to buy and afford to buy at various price level in a certain time,ceteris paribus.

- Quantity demanded (QD): The quantity of goods and servicesthat consumer is willing to buy and afford to buy at a price level in acertain time, ceteris paribus.

- Individual demand

- Market demand



I. Demand

2. The law of demand

P

QDP

QD



I. Demand

3. Demonstrating demand

- Demand schedule

- Demand curve

- Demand function

P = - aQD + b

QD = - aP + b

QD = f (Px, Py, I, T, E, N)

P

Q

P1

P2

Q1 Q2

A

B



I. Demand

4. Determinants in demand function4.1. Price of related goods (PY)

- Substitutes goods: A and B are substitutes if theusage of A can be replaced by the usage of B, provided that the initial consumption target is

unchanged

P S ↑ → QS ↓ → QR ↑

P S ↓ → QS ↑ → QR ↓



I. Demand


4.1. Price of related goods (PY)- Complementary goods: A and B are complementary if the usage

of A must go together with the usage of B to ensure the initialutility of both goods

P C QC QR

P C QC QR



King Camp Gillett (1855 - 1932)



I. Demand


4.2. Income of consumer (I)

I QD

I QD

I QD

I QD

Normal goods

Inferior goods



I. Demand


4.2. Income of consumer (I)

- Engel curve: Attitude

toward any goodsdepends on buyer’s

income, not on goods’ quality

I

Q

I1

I2

I3

Q1 Q3 Q2

Inferior

Normal

I*



I. Demand


4.3. Taste of consumer (T)

4.4. Expectation of consumer (E)

4.5. Number of consumer (N)



I. Demand


4.3. Taste of consumer (T)

Gender

Age

Culture

Religion

….



I. Demand

5. Movement and shift of the demand curve

- Movement: PX - endogenous variable

- Shift: The rest determinants – exogenousvariables

P P

QQ

P1

P2

Q1 Q

2

P

Q1 Q2

A

B



Questions

1. Chicken and fish are substitutes goods.

a. The decrease in chicken’s price causes a

movement in fish’s demand curve

b. The increase in chicken’s price causes a left shift infish’s demand curve



II. Supply

1. Some definitions

2. The law of supply

3. Tools to demonstrate supply

4. Determinants in supply function

5. Movement and shift of supply curve



II. Supply

1. Some definitions

- Supply (S): The quantity of goods and services thatsupplier is willing to supply and able to supply at various pricelevel in a certain time, ceteris paribus.

- Quantity supplied (QS): The quantity of goods andservices that supplier is willing to supply and able to supply ata price level in a certain time, ceteris paribus.

- Individual’s supply (firm’s supply)

- Market supply



II. Supply

2. The law of supply

P QS

P QS



II. Supply

3. Tools to demonstrate supply

- Supply schedule

- Supply curve

- Supply functionP = aQS + b

QS=aP + b

QS = f (Px, Pi, G, Te, E, N)

P

Q

P1

P2

Q1 Q2



II. Supply

4. Determinants in supply function

4.1. Price of inputs (Pi)

4.2. Government’s policies

4.3. Technology

4.4. Expectation4.5. Number of supplier

Pi C Profit QS

Pi C Profit QS



II. Supply

5. Movement and shift of the supply curve- Movement: PX: endogenous variable- Shift: The rest factors – exogenous variables

-

P

P2

P1

Q1 Q2

P

P1

Q1 Q2 Q Q

SS1

S2

A

B



III. Market equilibrium

1. Equilibrium status

2. Surplus and shortage

3. Price controlling




1. Equilibrium status

- Status in which quantitydemanded equals to

quantity supplied- - Merger demand schedule

and supply scheduleP = -aQD + b

P = cQS + dE (PE, QE)

- Intersection of (S) and (D)

-

D

S

EPE

QE

P

Q





- Shortage

+ P 2 < P E

+ QS < QD => shortage

+ Appear market’s

pressure to make P 2

return to the equilibrium price

Shortage

Shortage

PE

P2

QS QD QE





- Surplus:

+ P 1 > P E

+ QS > QD => surplus

+ Appear market’s

pressure to make P 2return to the equilibrium

price

Surplus

Surplus

PE

P1

QD QS QE





- Controlled by the Government

- Ceiling price (PC)

+ The highest price allowedin the market

+ For the sake of buyer

+ Appear shortage

+ Government’s responsibility

EPE

QE QS QD

(G)

PC





- Floor price (PF)

+ The lowest price allowedin the market

+ For the sake of supplier

+ Appear surplus

+ Government’s responsibility

PE

QE

PF

QD QS

(G)



Quantity

Price

10%

?%

A

B



How to

calculate thechange?



ELASTICITY



Contents

Elasticity of demand

Elasticity of supply

El i i f d d




*Price elasticity of demand (EDP)

*Income elasticity of demand (EDI)

*Cross elasticity of demand (EDPy)




Price elasticity of demand (EPD)

- The percentage changed in quantitydemanded resulting from 1% change in price

-

P

Q E

D

P

%

%





Point elasticity

E.g: Demand curve: P = 18 – 2Q and point A (P=6,Q=6)

What is price elasticity of demand at point A

P

P

Q

Q :

Q

P

QQ

P

P

Q

P .'. )(

P

Q E

D

P

%

%



EDP= -1/2 . 6/6= -1/2

Conclusion:

-

-





Arc elasticity

Eg: At price P=7.000VND, consumer buys 10kilos ofpork/ month. At price P= 6.000 VND, consumer buys

15kilos/ month. What is price elasticity of demand?

2

2

21

21

21

21

P P

P P

QQ

QQ

E

D

P AB




Conclusion: Price elasticity of demandalways:

- Unit – free and negative value

- Usually use absolute value




Price elasticity of demand(EP

D)

• /E/ < 1: Inelastic demand• - steep demand curve

- large change in price, smallchange in quantity demanded

- Consumers are not very sensitiveto the change in price

- the goods is hard to replaceor necessity

P

Q

P1

P2

Q2 Q1





• /E/ > 1: Elastic demand,

• - flat demand curve

- small change in price, largechange in quantity demanded

- Consumers are very sensitiveto the change in price

- the goods is easy to replace

P

Q

P1

P2

Q2 Q1





• /E/ = 1: Unitary-elastic demand

• - slope down demand curve- %change in price equal to %

change in quantity demanded





• /E/ = 0: Perfectly Inelastic demand

• - Demand curve is parallel to the

vertical axis- Change in price doesn’t affect

quantity demanded

- Consumers are not sensitive

to the change in price- The good is irreplaceable

P

Q




Price elasticity of demand(EP

D)

• /E/ = ∞: Perfectly elastic

demand

• - Demand curve is parallel to

the horizontal axis- Change in price affects totallyon quantity demanded

- Consumers are perfectly

sensitive to the change in price





• Factors ef fect ing on E P D

- The availability of substitutes goods

- More substitute: E>1, less substitute: E<1

- The characteristic of the goods

- Necessities: E<1, Innecessities: E>1- The time needed to find out the substitutes goods

- Long time: E>1, Short time: E<1

- The ratio of the spending in total income

- Big ratio: E>1, Small ratio: E<1




* The relationship

between EP

D

, P andTR

E<1 E=1 E>1

P

P





• The relationship betweenEP

D, P and TR

/E/<1: P ↓ TR ↓

P1

P2

Q1 Q

2

Minus

Plus

A

B

O




* The relationship

between EP

D

, P andTR

E<1 E=1 E>1

P

P

TR

TR





* The relationship between EPD, P and TR /E/>1: TR ↑ when P↓ Minus

Plus




• The relationshipbetween EP

D, P and

TR

E<1 E=1 E>1

P

P

TR

TR

TR =

const

TR =

const

TR

TR




Income elasticity of demand (EID)

- The percentage changed in quantitydemanded resulting from 1% change inincome

-

- EID <0: Inferior goods

- EID >0: Normal goods- EI

D >1: Luxury goods

Q

I Q

I

Q E I

D

I .'%

%)(




Cross-elasticity of demand (EPyD)

- The percentage changed in quantity demandedresulting from 1% change in price of related goods

EPyD

> 0 : Substitutes goods

EPyD

< 0 : Complements goods

EPyD

= 0 : Independent goods

-

Q P Q

P Q E Y

P

Y

D

P Y Y .'

%%




Price elasticity of supply (EPS)

- The percentage changed in quantity suppliedresulting from 1% change in price

-

P

Q E S S

P

%

%




E=0: Perfectly inelastic supply

E<1: Inelastic supply

E>1: Elastic supply

E=1: Unitary elastic supply

E=∞: Perfectly elastic supply



Elasticity of supply Factors affecting on elasticity of supply:

- Time needed to find substitutes resources forinputs

- Availability of inputs

Questions:



Questions: 1. If 10% increase in A’s price leads to 2% increase in total

revenue, A is elastic – demand

2. Decrease in gasoline’s price makes the demand curve ofmotorbikes ( D1) shift to the right to ( D2) and this ( D2) is moreelastic than ( D1) at any quantity level (in absolute value)

3. All points in a demand curve has the same value ofslope and price elasticity of demand ( point elasticity )

4. “Food” is less elastic demand than “Kinh Do soft cake”

5. Per-unit tax imposed on producer of good, whichdemand is more elastic than supply will makes thatproducer bear the smaller part in total tax amount incomparison with consumer’s part.



CHAPTER 4THEORY ON CONSUMER’S BEHAVIOR

Content



Content

Theory on consumer’s utility

The principle of diminishing marginal utility

Consumer’s surplus

Consumer’s preferences

Budget constraint

Maximizing utility (Optimal decision with budget

constraint )

I Theory on consumer’s utility



I. Theory on consumer s utility

1. Some definitions1.1. Utility (U)- The benefit or satisfaction a person gets

from consuming goods or services- An abstract concept

- Unit – free

- Depends on consumer’s perception(subjectivity)





1. Some definitions1.2. Total utility (TU)

- The total benefit or satisfaction a person gets from

the consumption of goods and services- Depends on the person’s level of consumption –

more consumption generally gives more total utility





1. Some definitions

1.3. Marginal utility (MU)

- The change in total utility resulting from the change in thequantity of consumed goods and/ or services

)(' QTU Q

TU MU





2. The principle of diminishing marginalutility

- In a certain time period, continuous consumption will

lead to the increase in total utility but a decrease inmarginal utility

* Application

I. Theory on consumer’s utility




3. Consumer’s surplus (CS) - The difference between

the market price and the price buyer willing to pay

- The area below demandcurve and above themarket price line

P

Q

P*

CS

II Theory on consumer’s choice



II. Theory on consumer s choice

1. Consumer’s preferences

- Some assumpt ions :

+ Preferences do not depend on good’s price or income

+ People can sort all the possible combinations of goods that mightbe consumed into 3 groups: preferred, not preferred andindifferent

+ Consumers prefer more to less

+ Consumer’s preference is transitivity

II Theory on consumer’s choice




1. Consumer’s preferences

AB

C D

A (preferredarea)

C (lesspreferred

area)

II. Theory on consumer’s choice




1. Consumer’spreferences

Indifference curve:

shows the variouscombinations of consumption

quantities that lead to the

same level of well-being or

happiness I1

I2

Better

A

B

C

Movie

Food





1. Consumer’s preferences Indifference curve’s characteristics - Downward sloping, the closer to the right hand-

side, the higher utility consumer can gain- Never intersect

X.MUx + Y . MUy = 0

- → -MUx / MUy = Y / X

- → -MUx / MUy : the slope of Indifference curve =The marginal rate of substitution (MRS)





1. Consumer’s preferences MRS: reduce gradually as

the quantity consumedincreases

A

B

CD

Y

X





MRS reveals consumer’s preference towardgood and service

A

B

A

B

Y

X

Y

X





*Special indifference curvePerfect substitute goods

vs

Mc Donald’s vs Burger King

vs

MRS = const





*Special indifference curvePerfect Complement goods




. T eo y o co su e s c o ce

2. Budget constraint

- Budget line (BL): shows the various

combinations of consumption that consumercan get from the available income

I=P X .Q X +P Y .QY

→ QY

= I/P Y

– (P X

/P Y

).Q X

→ - P X /P Y : the slope of budgetconstraint or price line

Area C: can not afford

A

B

Movie(Y)

Food

C

D




y

2. Budget constraint- I, PX= const, P Y changes

P Y decreases: BL1 → BL2

P Y increases: BL1 → BL3

BL1

BL2

BL3

Y

X




y

2. Budget constraint- I, P Y= const, PX changes

PX decreases: BL1 → BL2

PX increases: BL1 → BL3

BL1

BL2

BL3

Y

X




y

2. Budget constraint- PX, P Y= const, I changes

I increases: BL1 → BL2

I decreases: BL1 → BL3

BL1 BL2

BL3

Y

X




y

3. Optimal consumption combination

I1

I2

I3

A

B

C

D

Y

X




y

3. Utility maximizing choice- At point C, the indifference curve’ slope is equal to the

budget line’s slope

- In case of many goods and services:Y

Y

X

X

Y

X

Y

X

P

MU

P

MU

P

P

MU

MU

Z

Z

Y

Y

X

X

P MU

P MU

P MU .....

Chapter 3: Review



p

A consumer decides to spend his income of 200$on X and Y.

a. PX = 4$, PY = 2$. Draw this consumer’s budget line

b. Due to the decrease in quantity supplied, Y’s price goes up to 4$.Draw new budget line

c. There is a promotion from the seller. Buying 20 units of Y at priceof 2$, consumer will get 10 units more free of charge. This is

applied on the first 20 units of Y only. The following units arestill applied the price of 2$ (except the bonus). Draw newbudget line



CHAPTER 5

THEORY ONFIRM’S BEHAVIOR

Content



*Theory on production- Production and Production function

- Short run &Long run

*Theory on cost - Total, average and marginal cost

- Economic, Accounting and Sunk cost

*Theory on profit- Total and marginal revenue

- Profit maximization

I. Theory on production



y p

1. Some definitions- Production

INPUTS OUTPUTSPRODUCTION

M(Material)

L(Labour)

K(Capital)

Goods

(Tangible)

Services

(Intangible)




y p

1. Some definitions- Short run and long run

+ Short run: is a period of time in which the quantity of at least

one input is fixed (fixed input) and the quantities of the otherinputs can be varied (variable inputs)

+ Long run: is a period of time in which the quantity of all inputscan be varied

* No specific time that can be marked on the calendar

to separate the short run from the long run




y p

Photocopy shop




y p

2. Production function

- The maximum quantity of outputs gained from

certain quantity of inputs at current technologyconstraint in a certain time period

Q = f (Xi)




y p

Charles W. Cobb Paul H. Douglas, 1892-1976.




y p

2. Production function- Cobb-Douglas production function For production, the function is

Q = ALαK β,where:

Q = output

L = labour input

K = capital input

α and β = labour and capital's share of output.




p

According to Cobb& Douglas:

US economy’s production functionfrom 1899 - 1912:

Q = L0.25K 0.75

→ conclusion:




3. Production in short-run- Average Product of an input (AP) : is equal to total

product divided by the quantity of the inputemployed

- Average Product of labour (APL)

- Average Product of capital (APK)

i X

Q AP

L

Q AP L

K

Q AP K




3. Production in short-run- Marginal Product of a input (MP ) is the increase in total

product divided by the increase in the quantity of the inputemployed, holding the quantity of all other inputs constant

- Marginal Product of labour (MP L)

- Marginal Product of capital (MP K )

)(' Xii

Q

X

Q MP

)(' L L Q L

Q MP

)(' K K Q K

Q MP




What is the

relationshipbetween MP

and AP?

Capital(K)

Labour(L)

Output(Q)

APL MPL



( ) ( ) ( )

4 0 0

4 1 70

4 2 150

4 3 75

4 4 288

4 5

4 6

4 7 52

}

}

52

10

Capital(K)

Labour(L)

Output(Q)

APL MPL



( ) ( ) ( )

4 0 0 0 -

4 1 70 70

4 2 150 75

4 3 225 75

4 4 288 72

4 5 340 68

4 6 354 59

4 7 364 52

70}

}

}

}

}

}

}

80

75

63

52

14

10



3. Production in short-run- The law of diminishing marginal returns: occurs

when the marginal product of an additional input(e.g. worker) is less than the marginal product of

previous input (i.e. previous worker)

II. Theory on cost



1. Cost in short-run

1.1. Fixed cos t, variable cost, total cost

- Fixed cos t (FC): the cost of a fixed input, independent withthe output level

- Examples:

C

Q

FCFC

II. Theory on cost



1. Cost in short-run

1.1. Fixed cos t, variable cost, total cost

- Variable cost (VC): the cost of a variable input, varies withthe output level

- Examples:C

Q

VC

II. Theory on cost



1. Cost in short-run1.1. Fixed co st, variable

cos t , total co st

- Total cost (TC): is the sum of

total fixed cost and totalvariable cost

TC = VC + FC

C

Q

FCFC VC

TC

II. Theory on cost



1. Cost in short-run1.2. Average co st

- Average fixed cost (AFC): is total fixed cost per unit ofoutput

AFC

C

Q

Q

FC AFC

II. Theory on cost




- Average variable cost (AVC): is total variable cost per unitof output

- Note: Average curves (except AFC) are U-shaped

AVC

Q

VC AVC

C

Q

II. Theory on cost




- Average total cost (ATC): istotal cost per unit of output

C

Q

AFC

AVC AFC Q

TC ATC

AVC

ATC

II. Theory on cost



1. Cost in short-run1.3. Marginal co st (MC): is

the change in total costresults from a unitincrease in output

MC intersects AVC and ATC attheir minimum points

C

Q

AVC

ATC

MC

AVCmin

ATCmin

)()( '' QQ VC TC Q

TC MC

Fill in the blank



Q FC VC TC AVC ATC MC

1 15 -

2 36 15.5

3 5 52

4 83



Q FC VC TC AVC ATC MC

1 5 15 20 15 20 -

2 5 31 36 15.5 18 16

3 5 52 57 17.3 19 21

4 5 83 88 20.75 22 31

II. Theory on cost



2. Economic cost, Accounting cost and Sunk cost

- Economic cost: Total amount paid for inputs used inproduction, includes:

- Explicit cost: Amount paid for inputs that do not belong to the firm’sowner

- Implicit cost: Amount paid for inputs that belong to the firm’s owner

Economic Cost = Explicit Cost + Implicit cost

II. Theory on cost



2. Economic cost, Accounting cost and Sunk cost

- Accounting cost: Amount paid for inputs used inproduction and reported in accounting notes

- Sunk cost: Amount paid for inputs used in

production which neither be refundable norchangeable by future decisions/ actions

Economic Cost = Accounting Cost + Opportunity cost

III. Theory on profit



1. Definition- Profit ( ): is the difference between total revenue and

total cost

- Factors affect on profit:

- + P, Q, ATC

- +

TC TR

)(.. ATC P Q ATC Q P Q

II. Theory on profit



1. Definition- Average revenue: is total revenue per unit of output

- Marginal revenue: is the change in total revenueresults from a unit increase in output

Q

TR AR

)(' QTR

Q

TR MR




2. Profit maximization

0)'( )( QTC TR

0 MC MR MAX

0' )( Q MAX

0'' )()( QQ TC TR

MC MR MAX




3. Revenue maximization0' )( Q MAX TRTR

0 MR

0 MRTR MAX

Review



Answer true or false with short explanation anduse diagram if necessary

1. When quantity increases, average product neverincreases

2. When marginal cost increases, average costs alsoincrease

3. If marginal cost is decreasing, total cost will go downas well.

4. Maximizing total revenue happens only whendemand’s price elastic is unitary

Exercise



Firm A’s demand curve are: P = 40 – Q

and average total cost is 10$ at any level of quantity

a. What is firm A’s fixed cost?

b. State out the optimal quantity and price for firm A

Exercise



Firm A’s demand and total cost functions are as

follows:

a. State out optimal Q,P, and TR to prove that profit

maximization and revenue maximization are quitedifferent

b. Firm A’s strategy is to earn as much revenue aspossible provided that profit always equal to 10$.

State out optimal Q,P and TR

Q P 4.012

546.0 2 QQTC



CHAPTER 6

MARKET STRUCTURE

Content



Perfect competition

Monopoly

Monopolistic competition Oligopoly

MARKET STRUCTURE



1. Market- Where suppliers and consumers meet

- Where demand and supply exist

??????

- Where all activities in economy are price-led

MARKET STRUCTURE



MARKETSTRUCTURE

PERFECTCOMPETITION

IMPERFECTCOMPETITION

MONOPOLY

MONOPOLISTICCOMPETITION

OLIGPOLY

MARKET STRUCTURE



Types of market

Perfectcompetition

Monopolisticcompetition Oligopoly Monopoly

Number of suppliers

Products

Entry barrier

Market power

Non-pricecompetition

Unlimited Several Few One

Identical Different Identical/Different Unique

Veryhigh

HighLowNone

Very

strong

StrongWeakNone

None Little NoneMuch

I. PERFECT COMPETITION



1. Definition- A type of market where there are unlimited

suppliers and their products are identical

- Examples: Agricultural products ....

PERFECT COMPETITION



2. Characteristics

- Suppliers are price-taker

- No entry barrier

- No market power

- Symmetric information

- No non-price competition (no advertisement)

- Not necessary to choose supplier



OPEC: Organization of Petroleum Exportingcountries:

OPEC



OPEC



- 1950s: Petroleum was exploiting by some bigfirms, using dumping price to compete →very low price, just 1,5 – 2USD/ barrel

- OPEC found on 14 Sep 1960 with 11

members in order to keep petroleum’s pricenot very low

- Sep 1973: increase price by 70%,

- Dec 1973: increase price by 130%- Using price as a weapon to against Western

countries who supporting Israel

PERFECT COMPETITION



3. Demand and marginalrevenue curves

- Demand curve: parallelwith horizontal axis

- Marginal curve: coincidingwith demand curve

- → MR = P

P =MR

P

Q

P*

PERFECT COMPETITION



4. Maximizing profitMAX: MR=MC

In perfect competition: MR = P

MAX in perfect competition:

P=MC

MC

P=MRP*

Q* Q

P

PERFECT COMPETITION



5. Break-even, shut down point

= TR – TC = Q (P - ATC)

P> ATCmin → > 0 → profit

P= ATCmin → = 0 → break-even point

P< ATCmin → < 0 → loss

AVCmin< P < ATCmin → continue producing P < AVCmin → shut down

PERFECT COMPETITION



5. Break-even, shutdown point

P> ATCmin

TR = P*AQ*OTC = OCBQ*

→ = P*ABC

MC

P=MR

P*

Q* Q

P

A

O

ATC

BC

max

PERFECT COMPETITION




P= ATCmin

TR = P*AQ*O

TC = P*AQ*O

= 0

Q*: break-even point

MC

P=MRP*

Q* Q

P

A

O

ATC

PERFECT COMPETITION



MC

P=MRP*

Q* Q

P


P< ATCmin

TR = P*AQ*O

TC = OCBQ*

→ - = P*ABC

CB

O

A

-

ATC

PERFECT COMPETITION



MC

P=MR

P*

Q* Q

P


AVCmin < P < ATCmin

TR = P*AQ*O

TC = OCBQ*

* Continue: Lose - = P*ABC

* Stop: Lose FC = BCEF

FC > -

Continue producing

BC

A

E F

AVC

ATC

PERFECT COMPETITION



5. Break-even, shut downpoint

P < AVCmin

TR = P*AQ*O

TC = OCBQ*

* Continue: Lose - = P*ABC

* Stop: Lose FC = BCEF

FC < -

→ Stop producing(shut down point)

MC

P=MRP*

Q* Q

P

AVC

ATC

F

A

O

E

CB

PERFECT COMPETITION



6. Supply curve

- Coinciding with MC,but from AVCmin

MC

P=MRP*

Q* Q

P

AVC

PERFECT COMPETITION



7. Producer’s surplus(PS)

- The area below priceline and above marginal

cost curve

PS = TR – VC

= + FC

PS

P

QQ*

P*P=MR

MC

EXERCISE



Total cost function of a perfect competition firm is:

TC = Q 2 + Q + 100

a. At P = 27$, state out Q* and

MAX

b. State out the break-even point of this firm

c. At P = 9$, should this firm close its business?

d. Show this firm’s supply curve

MONOPOLY



1. Definition- A type of market where there is only one supplier

and the product is unique

- Examples:

2. Reasons of monopoly- Economy of scales

- Stipulated by government

- Owning patterns, license….

- Monopoly in inputs

- Monopoly in location

MONOPOLY



MONOPOLY



CULLIAN

3.106 carat

Found in 1905

Largest in the world

MONOPOLY



MONOPOLY



3. Demand and marginalrevenue curves

- Demand curve: downwardsloping and relatively steep

- Marginal revenue curve:downward sloping, is twiceas steep as the slope of thedemand curve (and the

same intercept)P = -aQ + b

MR = -2aQ + b

P

Q

DMR

MONOPOLY



4. Maximizingprofit

MAX: MR=MC

P

Q

DMR

MC

Q*m

P*m

max: MR=MC

ATC

MAX

MONOPOLY



P

Q

DMR

MC

Q*m

P*m

P*c

Q*c

P*m>>P*c

Q*m<<Q*c

max: MR=MC

MONOPOLY

5. Supply curve of a monopolist



P changes, Q is constant P is constant, Q changesP

Q

D1 MR1

MC

P

D1 MR1

MC

MR2

D2

Q*

P*1

P*2

P*

MR2

D2

Q*1 Q*2

MONOPOLY

5. Supply curve of a monopolist



- No 1:1 relationship between price and

quantity

- → No functional relationship between priceand quantity

- → No supply curve in monopoly

pp y p

MONOPOLY



6. Market power- Found in 1934 by Abba Lerner

(0 ≤ L ≤ 1)

- In perfect competition: P = MC → L = 0

- The higher value of L is, the stronger market power a firmcan gain

P

MC P L

EXERCISE



A monopolist is facing with a demand curve:

P = 18 – 2Q

and total cost function: TC = Q2

a. State out P*, Q* and * MAX

b. Government imposes 3$/ unit tax on producer. What is

new P**, Q** and ** MAX

c. Government imposes a fixed tax amount of 10$ on producer. Compare P***, Q*** and *** MAX with P*, Q*

and * MAX in question a

Imperfect competition

Monopolistic competition



Definition- A type of market where there are a lot of suppliers

but their products are relatively different-

Example:Demand and marginal revenue curves- Demand curve: Downward sloping (each firm is a

mini-monopolist) but more elastic thanmonopolist’s demand curve

- Marginal revenue curve: downward sloping, hastwice the slope of the demand curve

p p


Monopolistic competition



p p

Maximizing profit

MAX: MR=MC

P

Q

DMR

MC

Q*

P*

max: MR=MC

ATC

MAX


Oligopoly



g p y

Definition:- A type of market where there are some suppliersbut holding total or at least a very large part ofmarket share- Example:

Characteristics:- Firms depends closely on each other → join in a

game and competitors act as players- Firms are relatively powerful in market- Entry barrier is relatively high- Firm can either be cartelized or leading-price


Oligopoly



g p y

Cartelized (public collusion):- Firms may merger and act as a monopolist → help

reduce competing cost

- Cartel will agree about price and quantity, then

allocate quota for each member

- Harmony among members is in top priority

- Transparency in information is importance to avoid

member’s fraudulent

OREC???




Oligopoly



g p y

Price leadership (Non-public collusion)

-

Occurs when cartelization is illegal- One firm will act as leader and sets up price, the

others are followers

- The leader must be strong enough to punish the

others, which do not follow his price, by pushing tothe lowest level so that that firm will go bankruptcy


Oligopoly



g p y

A kinked demand curve

→ Oligopolies never compete

each other by price

Q

P

D1

D2

MR1

MR2

MC1

MC2

Q*

P*


Oligopoly – Game theory – Prisoners’ dilemma



g p y y

A

Acknowledge

Does notacknowledge

B

Acknowledge A: -5, B: - 5 A: - 10, B: 0

Does not

k l d A 0 B 10 A 2 B 2

comprehensive slide micro 1

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