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    9.6 Euler's Theorem Leonhard Euler (pronounced "oiler") was a Swiss mathematician who lived from 1707 to 1783. Euler's theorem is a mathematical relationship that applies to any homogeneous function. It has implications for agricultural economists who make use of homogeneous production functions. Euler's theorem states that if a function is homogeneous of degree n, the following relationship holds †9.42 (My/Mx1)x1 + (My/Mx2)x2 = ny where n is the degree of homogeneity. If the function is a production function, then †9.43 MPPx1x1 + MPPx2x2 = ny or †9.44 MPPx1x1 + MPPx2x2 = Ey where E is the returns-to-scale parameter or function coefficient. The equation can be multiplied by the price of the output p, with the result †9.45 pMPPx1x1 + pMPPx2x2 = npy Since total revenue (TR) is py, and pMPP is VMP, equation †9.45 can be rewritten as †9.46 VMPx1x1 + VMPx2x2 = nTR Euler was a mathematician and not an economist. Euler's theorem is a mathematical relationship that applies to all homogeneous functions, whether or not they represent production relationships. Euler's theorem has sometimes been interpreted as a rule to follow not only with respect to how the individual farm or nonfarm manager should reward factors of production, but also a rule to be followed with regard to how labor and capital should be rewarded within a society. The VMP of a factor of production represents the return from the use of the incremental unit of the factor. First consider the case in which the production function is homogeneous of degree 1, or constant returns to scale exist for the firm. Assume that the only two inputs used on the farm are labor and capital. Following Euler's theorem, the wage rate for each unit of labor on the farm would be equal to its VMP. Assuming that the farmer owned the capital, the return to each unit of owned capital would be the VMP of the last unit multiplied by the quantity that is used. Laborers would receive a wage rate equal to their VMP. There seems something "correct" and "decent" about the notion that laborers "ought" to receive a wage payment equal to their VMP or contribution to revenues to the firm. Moreover, such payments would just exhaust the total revenue produced by the firm, such that there would be no pure or economic profit that would suggest an exploitation of labor on the part of the manager. Now consider a similar case in which a society pays a wage rate to each laborer according to the respective VMP. Some have argued that such a society would be very good indeed in that labor would receive its just reward and therefore not be exploited. Consider a case in which the farmer has a production function homogeneous of a degree greater than 1. This would be considered to be a very desirable and productive production168 Agricultural Production Economics function in that a doubling of all inputs would result in a greater than doubling of output. If the degree of homogeneity of the function were 3, then if each factor of production were paid according to its VMP, total revenue would be more than exhausted (three times to be exact). The farmer would not have sufficient revenue to do this because the VMPs paid to each input or factor would be so very large. The society faced with a very desirable production function would be in the same predicament if it followed this rule. A final case is a relatively unproductive production function with a degree of homogeneity of less than 1. If the degree of homogeneity were 0.5, then paying each factor of production according to its VMP would exhaust only half the revenue that was produced. The rest would remain as a pure or economic profit. Society, too, would exhaust only half the revenue produced in a case such as this. Euler's theorem might have applicability only in an instance where the underlying production function was known to be homogeneous of degree 1. Even if this were the case, there is no built in assurance t

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    9.6 Euler's Theorem Leonhard Euler (pronounced "oiler") was a Swiss mathematician who lived from 1707 to 1783. Euler's theorem is a mathematical relationship that applies to any homogeneous function. It has implications for agricultural economists who make use of homogeneous production functions. Euler's theorem states that if a function is homogeneous of degree n, the following relationship holds †9.42 (My/Mx1)x1 + (My/Mx2)x2 = ny where n is the degree of homogeneity. If the function is a production function, then †9.43 MPPx1x1 + MPPx2x2 = ny or †9.44 MPPx1x1 + MPPx2x2 = Ey where E is the returns-to-scale parameter or function coefficient. The equation can be multiplied by the price of the output p, with the result †9.45 pMPPx1x1 + pMPPx2x2 = npy Since total revenue (TR) is py, and pMPP is VMP, equation †9.45 can be rewritten as †9.46 VMPx1x1 + VMPx2x2 = nTR Euler was a mathematician and not an economist. Euler's theorem is a mathematical relationship that applies to all homogeneous functions, whether or not they represent production relationships. Euler's theorem has sometimes been interpreted as a rule to follow not only with respect to how the individual farm or nonfarm manager should reward factors of production, but also a rule to be followed with regard to how labor and capital should be rewarded within a society. The VMP of a factor of production represents the return from the use of the incremental unit of the factor. First consider the case in which the production function is homogeneous of degree 1, or constant returns to scale exist for the firm. Assume that the only two inputs used on the farm are labor and capital. Following Euler's theorem, the wage rate for each unit of labor on the farm would be equal to its VMP. Assuming that the farmer owned the capital, the return to each unit of owned capital would be the VMP of the last unit multiplied by the quantity that is used. Laborers would receive a wage rate equal to their VMP. There seems something "correct" and "decent" about the notion that laborers "ought" to receive a wage payment equal to their VMP or contribution to revenues to the firm. Moreover, such payments would just exhaust the total revenue produced by the firm, such that there would be no pure or economic profit that would suggest an exploitation of labor on the part of the manager. Now consider a similar case in which a society pays a wage rate to each laborer according to the respective VMP. Some have argued that such a society would be very good indeed in that labor would receive its just reward and therefore not be exploited. Consider a case in which the farmer has a production function homogeneous of a degree greater than 1. This would be considered to be a very desirable and productive production168 Agricultural Production Economics function in that a doubling of all inputs would result in a greater than doubling of output. If the degree of homogeneity of the function were 3, then if each factor of production were paid according to its VMP, total revenue would be more than exhausted (three times to be exact). The farmer would not have sufficient revenue to do this because the VMPs paid to each input or factor would be so very large. The society faced with a very desirable production function would be in the same predicament if it followed this rule. A final case is a relatively unproductive production function with a degree of homogeneity of less than 1. If the degree of homogeneity were 0.5, then paying each factor of production according to its VMP would exhaust only half the revenue that was produced. The rest would remain as a pure or economic profit. Society, too, would exhaust only half the revenue produced in a case such as this. Euler's theorem might have applicability only in an instance where the underlying production function was known to be homogeneous of degree 1. Even if this were the case, there is no built in assurance t

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    Oligopoly 131015170132 Phpapp02

    Uploaded by

    mayankashra
    9.6 Euler's Theorem Leonhard Euler (pronounced "oiler") was a Swiss mathematician who lived from 1707 to 1783. Euler's theorem is a mathematical relationship that applies to any homogeneous function. It has implications for agricultural economists who make use of homogeneous production functions. Euler's theorem states that if a function is homogeneous of degree n, the following relationship holds †9.42 (My/Mx1)x1 + (My/Mx2)x2 = ny where n is the degree of homogeneity. If the function is a production function, then †9.43 MPPx1x1 + MPPx2x2 = ny or †9.44 MPPx1x1 + MPPx2x2 = Ey where E is the returns-to-scale parameter or function coefficient. The equation can be multiplied by the price of the output p, with the result †9.45 pMPPx1x1 + pMPPx2x2 = npy Since total revenue (TR) is py, and pMPP is VMP, equation †9.45 can be rewritten as †9.46 VMPx1x1 + VMPx2x2 = nTR Euler was a mathematician and not an economist. Euler's theorem is a mathematical relationship that applies to all homogeneous functions, whether or not they represent production relationships. Euler's theorem has sometimes been interpreted as a rule to follow not only with respect to how the individual farm or nonfarm manager should reward factors of production, but also a rule to be followed with regard to how labor and capital should be rewarded within a society. The VMP of a factor of production represents the return from the use of the incremental unit of the factor. First consider the case in which the production function is homogeneous of degree 1, or constant returns to scale exist for the firm. Assume that the only two inputs used on the farm are labor and capital. Following Euler's theorem, the wage rate for each unit of labor on the farm would be equal to its VMP. Assuming that the farmer owned the capital, the return to each unit of owned capital would be the VMP of the last unit multiplied by the quantity that is used. Laborers would receive a wage rate equal to their VMP. There seems something "correct" and "decent" about the notion that laborers "ought" to receive a wage payment equal to their VMP or contribution to revenues to the firm. Moreover, such payments would just exhaust the total revenue produced by the firm, such that there would be no pure or economic profit that would suggest an exploitation of labor on the part of the manager. Now consider a similar case in which a society pays a wage rate to each laborer according to the respective VMP. Some have argued that such a society would be very good indeed in that labor would receive its just reward and therefore not be exploited. Consider a case in which the farmer has a production function homogeneous of a degree greater than 1. This would be considered to be a very desirable and productive production168 Agricultural Production Economics function in that a doubling of all inputs would result in a greater than doubling of output. If the degree of homogeneity of the function were 3, then if each factor of production were paid according to its VMP, total revenue would be more than exhausted (three times to be exact). The farmer would not have sufficient revenue to do this because the VMPs paid to each input or factor would be so very large. The society faced with a very desirable production function would be in the same predicament if it followed this rule. A final case is a relatively unproductive production function with a degree of homogeneity of less than 1. If the degree of homogeneity were 0.5, then paying each factor of production according to its VMP would exhaust only half the revenue that was produced. The rest would remain as a pure or economic profit. Society, too, would exhaust only half the revenue produced in a case such as this. Euler's theorem might have applicability only in an instance where the underlying production function was known to be homogeneous of degree 1. Even if this were the case, there is no built in assurance t

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    of 22

    OLIGOPOLY

    PRESENTATION
    COLLUSIVE OLIGOPOLY
    PRICE LEADERSHIP

    CREATED BY
    PETER FRANCIS MILLANZI (BA-ECONOMICS)
    S T U D E N T AT T H E U N I V E R S I T Y O F D O D O M A

    OLIGOPOLY
    The term oligopoly has been derived from Greek words,

    oligi meaning few and polein meaning sellers for


    example automobiles company, soft drinks companies
    like coca cola and Pepsi, and oil companies.
    An oligopoly is a form of market structure characterized
    by:a) Few firms selling either differentiated or homogeneous
    products at the market, and how few are the sellers is
    not easy to tell or define numerically in the
    oligopolistic market structure due to the fact that
    economists are not specified about a definite number of
    sellers for the market to be oligopolistic in its form; it
    may be two, three, four, five or more.

    Characteristics of Oligopoly
    In addition to the point, few in their number brings oligopolist
    in intensive competition (in the form of non-price
    competition, that involves differentiation and advertisement)
    with one another; if we carefully observe other market
    structures like perfect competition, competition is nonexistent as the number of firms is so large and under
    monopoly, there is a single seller and therefore there is
    absolutely no competition, under monopolistic competition,
    where the number of firms is so large that a degree of
    competition is considerably reduced but under oligopoly, the
    number of sellers is so small that any move by one seller
    immediately affects the rival sellers as result firms keep watch
    on the activities of the rival firms and prepare itself with a
    number of aggressive and defensive marketing strategies.

    Characteristics of Oligopoly
    b)Interdependence of Business Decisions. The nature
    and degree of competition among oligopolists make
    them interdependent(mutually supporting or
    dependent) in respect of decision making. The
    reason for interdependence between oligopolists is
    that a major policy change in one firm affects the
    rivals seriously and immediately, thus it is a source
    of action and reaction, moves and counter-moves by
    the competing firms.

    Characteristics of Oligopoly
    c) Barriers to entry, in along run barriers are strong to
    entry of new firms to the industry. If entry is free,
    new firms attracted by super-normal profits, if it
    exists, enter the industry and the market eventually
    becomes competitive. Example of the common
    barriers that do exist are economies of scale, pricecutting, control over important inputs, patent rights
    and licensing, absolute cost advantage to old firms,
    indeterminate price and existence of excess capacity.
    Such factors prevent the entry of new firms and
    preserve the oligopoly.

    TYPES OF OLIGOPOLY KINDS OF OLIGOPOLY


    MODELS
    There are two types of oligopoly and that are
    NON-COLLUSIVE OLIGOPOLY
    COLLUSIVE OLIGOPOLY

    COLLUSIVE OLIGOPOLY
    In collusive oligopoly, firms are assumed to act in unison that is in
    collusion (knowledge or approval or agreement) with one another; this
    assumption is based on empirical facts, rather than being
    conjectural(hypothetical or imaginary).
    Or
    Refers to the oligopoly market in which the oligopolistic firms make jointpricing and output decisions where by the firms agreed to have a uniform
    price-output policy to be pursued by competition among themselves.
    WHY COLLUSION?
    It reduces the degree of competition between the firms and help them act
    monopolistically in their effort of profit maximization
    It forms a kind of barrier to the entry of new firms.
    It reduces oligopolistic uncertainty surrounding the market since in the
    cartel members are not supposed to act independently and in a manner
    that is detrimental(harmful or disadvantageous) to the interest of other
    firms.

    COLLUSIVE OLIGOPOLY
    How ever there are two main types of collusion oligopoly:
    CARTEL
    PRICE LEADERSHIP
    PRICE LEADERSHIP
    A price leadership is informal position of a firm in an oligopolistic
    setting to lead other firm in fixing or publishing price of their
    product ahead of its competitors who closely follow the prices
    already announced; it emerges spontaneously(instinctively or
    suddenly) due to technical reasons as size efficiency, economies of
    scale and ability of firm to make forecasting concerning market
    conditions accurately or out of explicit agreements between the
    firms to assign leadership role to one of the them.
    N.B
    Price leadership is possible under both product homogeneity and
    differentiation or heterogeneity.

    PRICE LEADERSHIP
    The price readership consist of several types such
    as: Price leadership by a low cost-firm
    Price leadership by the dominant firm
    The barometric price leadership
    The exploitative or aggressive price leadership

    Price leadership by a low cost-firm


    It occurs when the low cost firm sets a lower price
    than the profit maximizing price of the largest firm
    for the small firm to maximize its profit. Thus the
    high cost firms will not be able to sell their products
    at the highest price hence they are forced to agree to
    lower prices to such of the low cost firms.

    Price leadership by a low cost-firm


    Consider the figure below

    The figure shows two firms that face


    identical revenue curves i.e. AR =D
    and MR but the largest or l0w-cost

    P3
    P2

    H MC2 AC2
    L MC1
    AC1

    P1

    firm (L) has its cost i.e. AC1 and MC1,


    where the small firms have AC 2
    and Mc2. the largest firm has economies
    of scale and its cost of production is low

    MR

    Q 1 Q2

    and sell at quantity OQ2, and it is at this point

    AR = D

    lower than that of other firms,

    hence find it profitable to fix a price at

    OP2(=Q2H)

    where the level of output its MC=MR, hence maximum profit.

    Price leadership by a low cost-firm


    On the other hand the high-cost firms (H) would be in
    position to maximize profit at price OP3 and quantity
    OQ1, however the low-cost firms charge profit
    maximizing price OP2, the low-cost firms would lose
    their customers to high-cost firms charging low price
    OP2, and recognize the price leadership of the largest
    firm.
    Note:
    largest firm can eliminate other firms and become a
    monopolist, by cutting its price down to OP1 and still
    offer the same quantity OQ2 and make , only normal
    profit as AC1=OP1, but it may not do so for the fear of
    anti-monopoly laws.

    Price leadership by the dominant firm


    Happens when a dominant firm shares a large part of the
    market along with small firms by producing very large
    proportional of total production of the industry therefore
    dominate the market product. Hence, the dominant firm
    has the great influence over the market for the product as
    a result estimate its own demand curve and set the price
    which maximizes profit since small firms have no
    individual effects on the price of the products, therefore
    they follow the dominant firm and accept the price set
    and adjust their products as well just like a firm in a
    perfectly competitive market, assuming their demand
    curve is a straight horizontal line.

    Price leadership by the dominant firm


    This is common than the low-cost firm, in its analysis
    of price leadership, it is assumed that there exists a
    low-cost firms(largest firms) in the industry, which
    supply a large portion in the total market and its
    dominance is indicated by the fact that it can
    possibly eliminate all its rival firms in the market by
    price-cutting but later on they gain monopoly which
    may create legal problems, hence compromising the
    with the existence of the rival firms in the market as
    largest firms use their dominance to set profit
    maximizing price.

    Price leadership by the dominant firm


    The price leadership and market sharing between the
    largest firms and the small firms can be illustrated as
    follow.
    Price

    cost and price

    P3
    P

    P3

    P2 C
    P1

    P
    P2
    P1

    MCL ACL

    DM

    output (small firms)

    AR=MR=D

    DL
    output (dominant firms)

    QL

    MRL

    Price leadership by the dominant firm


    The above illustration shows the problem confronting
    the dominant firms when come to determine price and
    output to maximize their profits. Te dominant may
    decide to set price at OP = PQL and maximize profit, but
    also if the dominant firms set price at OP1 may get loss in
    a short run and eliminate small firms as they will fail to
    survive
    Note
    AB stands part of market demand that is unsupplied by
    the small firms, hence create market share of the
    dominant firms is zero (OP3 = P3E).
    The demand for dominant firms (AB or CF)= PB - PA

    Barometric Price Leadership


    Is the price leadership where the price leader is the one firm
    assumed to be either an old (established in the past) or experienced
    or largest (but it is not necessary) or most respected firm which
    assesses the changes and have better knowledge of prevailing
    market conditions in the most satisfactory way and has ability to
    predict the market conditions more precisely than any of its
    competitors with regard to the demand for the product, competition
    from the related product, cost of production and make changes in
    prices which are the best for the view point of all firms in the
    industry. Naturally other firms follow it willingly.
    Note
    Price decisions by a firm having the qualifications of price
    leadership is regarded as barometer which reflects the changes in
    the business conditions and environment of the industry.

    Barometric Price Leadership


    The barometric price leadership evolves for various reasons
    include: The rivalry
    between large firms lead to cut-throat
    (aggressive or competitive) competition that gives
    disadvantages to all firms but also may make them
    unacceptable as a leader, thus firm with a better predictive
    ability emerges as a price leader.
    Most of firms in the industry may have neither the capacity
    nor the desire to make continuous calculations of cost,
    demand and supply conditions, hence they find it
    advantageous to accept price changes made by a firm which
    have been proven able to make reasonably good forecasts.
    Barometric price leadership often develops as a reaction to
    long economic warfare in which all the firms are losers.(A. D.
    H. Kaplan, Joel B. Dirlam and Robert F. Lanzilotti, 1958)

    4. AGGRESSIVE PRICE LEADERSHIP


    It occurs when a very large or dominant firm establishes its
    leadership by following aggressive price policies and thus
    forces other firms in the industry to follow him in respect of
    price. Such a firm will often initiate a more threat to compete
    the other firms out of the market if they do not follow him in
    setting their prices.
    It is also known as exploitative price leadership.
    Note
    one big firm built its supremacy in the market by following
    aggressive price leadership. It compels other firms to follow it
    and accept the price fixed by it. In case the other firms show
    any independence, this firm threatens them and coerces them
    to follow its leadership.

    Difficulties of Price Leadership


    Difficulties of Price Leadership: The following are the
    challenges faced by a price leader:
    (a) It is difficult for a price leader to correctly assess the reactions of
    his followers.
    (b) The rival firms may secretly charge lower prices when they find
    that the leader charged unduly high prices. Such price cutting
    devices are rebates, favorable credit terms, money back guarantees,
    after delivery free services, easy installment sales, etc.
    (c) The rivals may indulge in non-price competition. Such nonprice competition devices are heavy advertisement and sales
    promotion.
    (d) The high price set by the price leader may also attract new
    entrants into the industry and these new entrants may not accept
    his leadership.

    REFERENCES
    PRINCIPLE OF ECONOMICS BY MANKIW N. G.

    5ed .
    WIKIPEDIA.

    END OF PRESENTATION

    THANK
    YOU

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