AGEC 200 Lecture Notes - Marginal Utility, Monopolistic Competition, Perfect Competition

57 views2 pages
Published on 19 Nov 2012
Course
Professor
- In SR, monopolistic competition can make profit or loss
- LR: D shifts to the left so that P = ATC = 0 economic profits occur
o D touches LRAC, therefore P = LRAC leading to 0 profit
o Entry and exit occurs until P = ATC and profit = zero
o Markup = difference between MC and MR (where MC > MR). When produce at output less
than ATC min (left of), and P is marked up. Unused resources are idling
o Excess Capacity: producing at higher cost curve (downward sloping section of ATC curve),
due to price at less than cost maximizing output
- Is monopolistic competition efficient?
o Choose between differentiated goods at higher P or one product at lower P? variety
o In perfectly competitive environment (any agricultural environment), there are no ads
However in monopolistic competition, because trying to increase customer base.
BUT not present for perfectly monopolistic environment b/c no need to (only one)
How do Rational consumers choose what to spend money on?
- At higher price but relatively small difference (10 000 and 10 050), rationality breaks down
Utility and Consumers
1. All goods have utiliy utility is satisfaction
a. Marginal Utility = change in utility from consumer an additional unit
2. There is no saving all income is spent
3. Marginal Utility diminishes over time (diminishing marginal utility)
To choose between X and Y? (How many for gum, how many for ice cream?)
- Depends on 1. How much you like it (utility), 2. How much it costs (price)
- Need to figure out how much extra utility (MU) will you get from spending your next $1 on X? on
Y?
o Trying to maximize utility per $ spent
- Compare MU to price. If Pgum = $0.25, Picecream = $1.00, MUgum = 1, MUice cream = 2
o Compare MU and P for all goodsagainst spending toward goods give you more MU per $
o 
 
 , so buy more gum as it gives more happiness per dollar
- Optimal consumption bundle 
 
 
 ,
o to maximize total utility, allocate income so MU/$ is equal for all purchases
Budget
- How to maximize utility under limited budget?
- Budget constraint shows consumption bundles that consumer can afford given his/her income
and the prices
- Every point on curve provides affordable consumption bundles that cost all your income
- Increase in income shifts budget constraint outward
- If P changes, slope of budget constraint changes
- Slope of budget = Px/Py. Slope of budget constraint = amount of gas the consumer can afford if he
gives one pizza (similar to the PPC)
- Budget Constraint: I = PxX + PyY.
o Y = I/Py PxX/Py
- From Total Utility Curve, point of maximum utility, to see what budget allows @ C (on budget line)
- Therefore consumer can trade one product for another for increased total utility. However after a
point, you will have too little of the product, resulting in decrease in total utility
Unlock document

This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.

Already have an account? Log in

Get OneClass Notes+

Unlimited access to class notes and textbook notes.

YearlyBest Value
75% OFF
$8 USD/m
Monthly
$30 USD/m
You will be charged $96 USD upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.