Microeconomics

in 25 Slides or Less

Professor Michael Gibbs

Overview

• Tools

• Industry Types

• Advanced Topics

• Notes
•
Capitalist Tools
Cost Curves
TC

VC

• TC = FC + VC
FC
• ATC = TC/Q = AFC + AVC
• MC = ∆TC/∆Q = ∆VC/∆Q
[ = dTC/dQ = dVC/dQ ] MC ATC
! " #
! " $%" $&"
AVC

AFC
Economies of Scale
• Economies of Scale: ATC declining with Q
• Dis-economies of Scale: ATC rising with Q
• EOS are driven primarily by FC
• EOS determines efficient size of firm
( )* + , -

/ /

$%"

$%"

# #
% . !
'
Economies of Scope

• Economies of Scope: producing one good lowers costs

of producing another (“synergies”)
• When a firm has economies of scope, it is often optimal
to produce both goods
• What can drive economies of scope?
1 2

0
Supply Curves

• In competitive industries,
firms are price takers
• Firm should only produce if
4≥ $&" 15 "
, - 2
4≥ $%"
• Continue selling if P > MC
! "
46 ! "
! " 6

3
Demand Curves

• DC’s plot what someone is

willing to pay for each unit
purchased

• Always slope down (why?)

• 2 useful properties

7
Elasticity of Demand

• ε = %∆Q/%∆P = (∆Q/Q)/(∆P/P) = (∆Q/∆P)(P/Q)

[ = (dQ/dP)(P/Q) ]
• Intuitively
9 9

• A units-free measure of how sales vary with price

:
; , - <
; , - ∞

8
Determinants of Elasticity of Demand

• Availability of substitutes

• Use with complements

• Budgets & incentives of customers

=>
Why Elasticity is Useful

ε
Monopoly
Oligopoly
Monopolistic Competition
Perfect Competition
• A simple, rough measure ε ∞
of monopoly power

• Very important in pricing

==
Consumer Surplus

• CS = difference between:
(
1 2
1 2
• Why do we care?

?
• PS

@ 5"

=
Market Equilibrium

• How does a market come to

equilibrium?
• How does it adjust if S,D shift?
• What are PS, CS before &
after?
• What happens if government
regulates P? Q?

=A
Industry Types

ε
Monopoly
Oligopoly
Monopolistic Competition
Perfect Competition
ε ∞
The Extremes

• Perfect competition

( :

; 4≥ $&": 4≥ $%"
; ! " 6 4
• 4 $%" 6 <
• Monopoly

)* +:

;
; ! " 6 ! B
• 4 6 ! B 1=C = ε2 4D ! " E >
;
='
Oligopoly

• Small # of firms w/ large market share

• Strategy becomes complex
F

; F

;
;
;
; ( :

=0
Monopolistic Competition

• Many firms, few if any dominate market share

;
• Firms too small to have large effects on each other

• Strategy
1 2

=3
Advanced Topics
Pricing Strategies

• Offering a single price ignores 2 profit opportunities

"+
F

• More elaborate pricing strategies allow the firm to

convert CS into PS: profits

=8
Two-Part Pricing

• One approach: charge fixed

entry fee F, & per-unit fee P
6 5 C 4G#
• For given P, largest possible
F = “CS”
6 5 C 14 ! " 2# 5 "
• Profit max at P=MC, F=“CS”
4 ( <

5 "+
• Problem: 2PP ineffective w/
heterogeneous customers

>
Price Discrimination

• Another approach: charge different

prices to different customers
=
; 4 : :
A :
1 4= 4 2
;
; 4 6 ! " 1=C = ε 2 E ! "
• 4 ! "
1 Hε H >2

=
Notes on Price Discrimination
• Requires 3 conditions

; IJ
;
;
;

;
;
;
• Special cases
@ 1 2
:
• Closely related: quality discrimination
Network Effects

• Network Effects exist if a product is more valuable to

consumers, the more others also use it

; K

• Strategic implications

, -
, -
• Monopoly network effects are often hyped too much

A
Notes
Economic Attitude

• Opportunity cost
• What’s your “market”? Think broadly!
• Competition always wins in the end, but exploit short-
run monopoly power
• The Coase Theorem: Let’s Make a Deal
• A little analytical thinking can go a long way

'
Good Luck!