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Economics

Lesson 2

By – Yashh Gupta
WhatsApp
Structure
 Welcome to Lesson 2!

This lesson will continue the Economics Midterm training Course to prepare for
the Midterm on Thursday 25TH November!

A few remarks: 

 You will receive these slides after this lesson

 Message me on WhatsApp if you have any questions or need extra practice
Qs :))
 Please fill out the feedback form which will show up at the last session !!
 The whole training is divided into 3 sessions, this session will focus on
chapters from week 2
 GOALS FOR TODAY
Reviewing some important exam segments from these chapters + practice questions

Chapters we will review:

Chapter 13: Monopoly
Chapter 15: Oligopoly
Chapter 16: Competing For Monopoly
Chapter 17: Monopolistic Competition
Chapter 18: Labor Market

Questions will be discussed after each chapter. We will cover the important portions
and have 1 break.

Tomorrow we will be working on the week 3 chapters and some extra quesitons :))
 Chapter 13: Monopoly

Market Power
 The power to raise prices above marginal
cost without fear that other firms will
enter the market. 

 Marginal cost (MC):the change in total

cost from selling an additional unit

 Marginal revenue (MR):the change in

total revenue from selling an
additional unit.
 To maximize profit monopolists
produce till MR=MC. While Profit is
found as
( P – AC ) X Q
 Monopoly and Elasticity
The MR Shortcut
 MR curve begins at the same
point on vertical axis as Demand
 But it has twice the slope of the
Demand curve
Monopoly Markup
 The mark-up represents the difference
between the minimum price (P0=MC) and
the price charged by the monopolist
 The more inelastic the Demand curve the
more Mark-up the monopolist charges.
 Deadweight Loss in Monopoly
 Compared to competition, monopolies reduce total consumer surplus. 

 Under a Monopoly the price increases from Pc to Pm, creating a Profit for the monopolist. 

 Under monopoly P > MC. Because of this, monopolies also create deadweight loss.

 Monopolists gain less than what consumer loses due to Monopoly Pricing.
 Natural Monopoly
 A Natural Monopoly is when a single firm can supply the entire market at a lower
cost than two or more firms.
 This can happen due to Economies of Scale which is when large scale production
reduces the average cost.
 This can lead to a price lower than in a competitive market
 When government introduces price control then the output of the monopolist
increases.
 Practice Time..
1. Assuming the same cost structure, a competitive market produces _____ output at _____ prices than a monopoly market.
A) less; lower
B) more; lower
C) less; higher
D) more; higher

2. To maximize profit, the monopolist increases output:

A) until it is using full manufacturing capacity.
B) until marginal cost is equal to marginal revenue.
C) to the same amount it would produce if the firm was competitive, but maximizes price.
D) as long as the marginal revenue curve is higher than the demand curve.

3. Refer to the figure. The monopolist will maximize its profit by charging a price equal to ___
and producing a Quantity of _____:
A) P1, Q2
B) P2, Q2
C) P3, Q1 1. B, 2. B. 3. B
D) P4, Q4
 Chapter 15: Oligopoly and Game Theory

 Oligopoly is an industry dominated by a

small number of firms.

 They work together (collude) and form a

cartel and try to act as if they were a
monopolist.

 This is formed by mutual agreement where

every firm in the cartel cooperates and
shares profits.

 An oligopoly charges a price higher than a

competitive market
 The Incentive To Cheat
 Members of a cartel have an incentive to cheat.
 They cheat by not reducing production according to cartel’s agreement
and sell the product at a lower price
 This causes a loss to the whole cartel while the cheater gets all the
gains.
 The Cheating Game and Prisoner’s Dilemma

o In a pay off table, both the

persons have 2 choices either
to cheat or cooperate. Person A 
Cooperate Cheat
o Both gain the most if they Person B 

cooperate, but if one cheats the

other person also has the
incentive to cheat. Cooperate (6, 6) (7, 2)
o A dominant strategy is the one
that has a higher payoff than
any other strategy no matter
what the other person choses. Cheat (2, 7) (5, 5)
 Practice time…
1. Two firms in an industry act as a cartel, with each firm agreeing to charge a price of $16 and sell two units of
output. If one of them cheats and produces two more units of output, the cheating firm's total revenue increases
by _____ and the other firm's total revenue decreases by ______ .
A) $28; $4
B) $28; $14
C) $84; $32
D) $12; $8
2. Which of the following statements is TRUE?
I. A cartel is a single firm with competitive market power.
II. A cartel is a group of firms that practice price discrimination in competitive markets.
III. A cartel is a group of firms that attempt to reduce market output.
IV. A cartel acts as if it were a monopolist in that market.
A) I only
B) II, III, and IV only
C) II only
D) III and IV only 1. A, 2. D
Time for a Well Deserved Break..

See You Guys in 10 minutes

 CHAPTER 16: Competing For Monopoly
Network Goods
A good whose value to one consumer increases the more that
other consumers use the good. E.g. Facebook, Instagram, google
sheets

 Usually sold by monopolies or oligopolies

In network goods market there are few sellers

 The “best” product may not always win (i.e. accidents in

history) 

 Competition is “for” not “in” the market

 Contestability: Despite the market having few firms
(monopoly/oligopoly), competitors could still enter and
take away business. Competition is on entering the market
and taking away the market share.
 The “Best” Product May Not Always Win

Coordination game:
 When players are better off if they choose the
Person A 
same strategies  iPhone Android
- And when there may be 1 or more strategy Person B 
to coordinate!

 When there are more than 1 strategies, the

final Eq. is determined by “accidents of iPhone (12, 12) (4, 4)
history”
 
Nash equilibrium:  
Android (3, 3) (10, 10)
 No player has an incentive to change
strategy  unilaterally. 
 Practice Time…
1. Network goods are usually sold by:
A) monopolistically competitive firms or monopolies.
B) oligopolies or perfectly competitive firms.
C) perfectly competitive firms or monopolistically competitive firms.
D) monopolies or oligopolies.
2. When players are better off using the same strategy rather than different strategies, economists refer to this as:
A) Nash equilibrium.
B) coordination game.
C) dominant strategy.
D) prisoner's dilemma.
3. The Nash equilibrium is (are):
A) (50, 50) and (48, 60).
B) (0, 45).
C) (45, 45).
D) (48, 60) and (45, 45).

1. D, 2. A,B; 3, A
 Chapter 17:Monopolisitc Competition

Meaning
 A market with large number of firms selling similar, but not identical, products. It combines features
of competitive markets with some features of monopoly markets

Features
 Many sellers: there are a lot of firms in the market and a lot of potential firms. 

 Free entry: firms can enter or exit the market without restriction.  
-  Firms will enter when P > AC
-  Firms will exit when P < AC

 Product differentiation: each firm produces a product that is somewhat different from its
competitors. Thus, each firm faces a downward-slope demand curve
 Monopolistic Competition Model

 It works like a standard monopoly model

but allows free entry.

 With entry demand curve moves left till P =

AC thus zero economic profits in long run.

 Firms always sell their products at P > MC

 They can charge a higher price because of

product differentiation

 They have some market power in long run

but even consumers are better off.
 Practice Time..
1. In a monopolistically competitive market, new firms will enter the market as long as:
A) P > AC. B) P = AC. C) P < AC. D) P = MC.

2. Refer to the figure. Suppose the figure represents a firm that operates in a monopolistically competitive market. In the long run you
would expect:
A) prices to increase.
B) demand to become more inelastic.
C) less quality and innovation.
D) more firms to enter the market.

3. What is the main difference between a perfectly competitive industry and a

monopolistically competitive firm?
A) the number of firms in the market
B) product differentiation
C) zero economic profit
D) no barriers to entry 1. A, 2. D, 3. B
 Chapter 18: Labor Markets
Marginal Product of Labor
The increase in the firm’s revenues created by hiring an additional worker. The curve thus formed is a
downward sloping curve, just like a demand curve. After a point there is no gain from hiring another
worker.
Supply of Labor
It is an upward sloping supply curve. This is because as wages rise more people are willing
to work.
An individual’s labor supply curve need not be sloping upwards throughout.
People can have different wages which is affected by the productivity in that country.
 Compensating Differentials
It is a difference in wages that offsets differences in working conditions.
• A risky condition can reduce the supply of workers
• Wages and fun in a job can be balanced
• Wealthy people prefer safe working conditions while poor people are willing to take the
risk and work in risky conditions
Do Unions Increase Wages?
Unions can generally cause a higher wage which might even cause unemployment. Strikes
can reduce the supply of labor leading to rise in price but also a decrease in employment.
 Practice Time…
1. The marginal product of labor is:
A) the revenue created by a firm's entire workforce.
B) the revenue created by the average worker.
C) the increase in a firm's revenues created by hiring an additional laborer.
D) the decrease in a firm's revenues created by hiring an additional laborer.

2. Why might an individual's labor supply curve bend backwards?

A) As wages rise above a threshold level, the individual will decide to work harder.
B) As wages rise above a threshold level, the individual may opt for more leisure time.
C) As wages rise above a threshold level, firms limit the amount of hours that a worker can work.
D) When wages rise, firms hire fewer workers.

3. A firefighter is likely to earn _____ than a receptionist because _____.

A) more; the job is more fun.
B) more; the job is more prestigious.
C) more; the job is more dangerous.
1. C, 2. B, 3. C
D) less; the job has unattractive characteristics.
 What we accomplished..

 Went through the chapters of Week 2 Microeconomics.

 These 5 chapters are approximately 12 - 15 questions of the
exam so you are 75% ready.
 These chapters are the foundation of the other chapters as well
 Now we are left with only one-third of Microeconomics
This is the end of today’s Lesson

 Take good rest (you deserve it)

 Come back with your doubts
 Lecture slides will be provided on WhatsApp
 Tomorrow we meet at 15:00 Ams time, we work on
week 3