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Economics 2151B - Lecture 1.docx

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Economics 2150A/B
Kristin Denniston

Economics 2151B Monday January 6 Lecture 1 Prof. Kristin Denniston Office W052 Office Hours: M 11:30 - 12:30 W 10:30 - 11:30 Contact Info: [email protected] Econ 2150 Overview: • Consumer Theory • Theory of the Demand Curve • Producer Theory (firms choosing the level of inputs and types of inputs based on minimizing costs) • Perfect Competition o What firms look like in a perfectly competitive environment Econ 2151 Overview: • Extend the model of Perfect Competition • Imperfect Competition • Special Topics o Modelling risk and uncertainty o Modelling general equilibrium o Externalities and Public Goods o Signalling Theory o Health Economics The lecture notes are a supplement to the textbook to show you what the professor thinks is important. You will be tested on: • Basic concepts o You will be asked multiple choice questions on these basic concepts • Math problems • Graphs It is a good idea to work through the exercises in the textbook (the problems and working through the graphs) to help prepare you for the exam. • At the end of each chapter, there is a list of summary questions that would be good to review for the exam • The answers for the review questions will be posted online on OWL Important Dates: • Assignments due on: o Jan. 20, Feb. 3, Mar. 5, Mar. 19, Apr. 2 o The first assignment will be posted next Monday (due Jan. 20) under ‘Tests and Quizzes’ and cover the ch. 9 review and ch. 10 • Midterm: February 10, 9:30-11:15 (in class) o The midterm will include chapters 9, 10, and 13 (if we get that far) • Final Exam: TBD o The final exam is cumulative Makeup Exams: • When you take a makeup exam, the professor can’t curve it (there is a risk because if you do poorly, your mark can’t be adjusted) • Makeup exams are usually one week after the original exam on Friday afternoons • If you are sick, notify the professor within 5 days of the missed exam (send an e- mail) so she can prepare a makeup for you Random attendance will be taken throughout the term. At the end of the term if you have a borderline grade, your mark may be boosted up a little based on your attendance. Overview of the Course: Review of Perfect Competition • Ch. 9 – Perfect Competition Basics • Ch. 10 – Partial Equilibrium analysis of Public Policies assuming perfect competition Imperfect Competition • Ch. 11 and 12 – Monopoly and Price Discrimination • Ch. 13 – Oligopoly and Monopolistic Competition o Eg. The price of chocolate has increased because the Competition Bureau found that the main chocolate makers in Canada were colluding and setting prices together (if large firms talk to each other and set prices together, they are breaking the law)  If these firms don’t talk to each other openly and are pricing off of each other (eg. Amazon and Chapters), they have not broken the law (this is natural oligopoly behaviour) o Canada experiences quite a bit of Oligopoly because we have a small population and a few large firms in most of our markets • Ch. 14 – Game Theory and Strategic Interaction Special Topics • Ch. 15 – Risk and Uncertainty o Affects us in the insurance and stock markets • Ch. 16 – General Equilibrium o Contrasts to what we’re studying in ch. 10 (partial equilibrium, one market in isolation) where ch. 16 looks at how prices in one market affects all markets • Ch. 17 – Externalities and Public goods • Other special topic: health economics or asymmetric info – time permitting o Signalling Theory: The harder it is to achieve a degree (eg. College degree), you are displaying that you are a person of higher talent  The problem is that we don’t have perfect information and the employer doesn’t know which candidate is the best hire, so the candidates distinguish themselves through their degree  Signalling Theory works when information is imperfect (when perfect competition breaks down) Ch. 9: A Review of Perfect Competition A Competitive Market: A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker. • Everyone who sells a product is taking the market price as given, and everyone who buys the product is taking the market prices as given. • Characteristics: 1. Fragmented – many buyers and sellers, no one has an ability to influence the market price 2. Undifferentiated Products – the products are identical (everyone’s selling an identical product), you won’t prefer one firm over another 3. Perfect information about prices and quality – we assume the consumer has perfect information about the price and quality of product  This is a strong assumption – we are not always informed consumers  Eg. You don’t know the car you’re buying is a lemon, you don’t know for sure that the job candidate is qualified 4. Equal access to resources – free entry/exit • Classic example of a perfectly competitive market: Commodities markets o No market is purely perfect competition, but the closest we can get is a commodities market o eg. Wheat – every farmer is selling the same product, there are many buyers and sellers that supposedly don’t influence the price, perfect information about prices and quality, equal access to resources (although land is expensive – it’s not costless to enter or exit the market) • Implications of a perfectly competitive market: o Law of one price for the whole market o All participants are price takers o Free entry/exit drives the profit to 0 in the long run  In the short run we can have positive or negative profits, but in the long run, the profits will be 0 (if you’re making money, someone will copy you and enter the market as well)  You need to differentiate your product or patent your product to keep your customer base Profit maximization by all firms: • Assume that firms try to maximize profits (analogous to minimizing costs) • Profit = TR(Q) – TC(Q) • Produce Q where MR = MC of last unit produced Profit maximization: Perfect Competitive Firm • Faces a perfectly elastic (horizontal) demand curve • This term we will say that the objective of all firms is to maximize profits • P = MC • Maximizes profit at Q where P = MC and where MC is rising o maxQ x π = TR(Q) – TC(Q) dπ dTR dTC dTR dTC o dQ = dQ - dQ = set 0  dQ = dQ  MR = MC (this is true for all firms) • Marginal = change total/change in Q ΔTR dTR o MR = = ΔQ dQ ΔTC dTC o MC = = ΔQ dQ • Under perfect competition (and only under perfect competition), MR = P and P = MC o The firm chooses a quantity, Q*, so that price in the market is equal to its marginal cost of production • Mar
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