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Final

BUS 207 Study Guide - Final Guide: Oligopoly, Transaction Cost, Cadency


Department
Business Administration
Course Code
BUS 207
Professor
Bernie Maroney
Study Guide
Final

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Chapter 8: PERFECT
COMPETITION
_Buyers and sellers, homogenous product,
perfect info, no transaction cost, free entry and
exit. Individual firm D curve is perfectly elastic
(horizontal line), either sell at the same price or
sell nothing = Market price.
SHORT-RUN MAXIMIZING π
-Df=P= MR; P= MC=MR ( P.max)
- = P.Q – C(Q); slope C(Q) = MC Π
SHORT RUN OPERATING LOSSES
- P< ATC BUT > AVC -> should continue
SHUT DOWN CASE when P <AVC -> fixed
cost loss only if exit.Short run S curve is its MC
curve above min point on the AVC curve.
LONG RUN Equilibrium is where Econ = 0, PΠ
= MC = Min of AC.
MONOPOLY:sole seller, no close substitutes.
Market D curve = D curve for product
(downward sloping)
MONOPOLY MAXIMIZING :π
- Monopolist’ MR = P x
1+E
E
- Inverse D-func: P(Q)= a +bQ
- MR = a+ 2bQ
- maximizing at ΠMR = MC < P
No supply curve for monopolists
MONOPOLIST COMPETITION: many
buyers and sellers, differentiated product
(slightly different) , free entry n exit. Downward
D curve. Maximizing where ΠMR = MC
LONG RUN EQUILIBRIUM:
P> ATC -> (+) – more firms enter – D curve π
shift left until its tangent to ATC ->
P = ATC -> 0 econ prof it -> no incentive to
entry. If losses occur, firms will exit -> Demand
for remaining firms products increase -> π
increase -> firms stop leaving until firms earn 0
. M.c firms produce lv of output at P > π
MC(industry output is below the socially
efficient level), P=ATC > min ATC ( do not take
full advantage of econ of scale).
CHAPTER 9: OLIGOPOLY 1. Sweezy
Oligopoly: differentiated products, rivals cut
their price i.r.t price reduction but x increase P
when P increases
_a range where changes in MC will not affect the
pro-max lvl of output (different from P.C, M.C
and M firm) _have incentive not to change price
behavior with MC constant
2. Cournot Oligopoly: differentiate/identical
products (*), believes rival will hold output
constant while it changes its output. MR of each
firm is impacted by other firms output decision.
Firm 2’s greater output -> lower the market P ->
firm 1’s MR lower.
P = a-b(Q1+Q2); Q1= r1x Q2=
ac1
2b
- ½
Q2
Q2= r2xQ1=
ac2
2b
- ½ Q1(**),
MR1= a-bQ2-2bQ1; MR2= a-bQ1-2bQ2
Max when πMR= MC
Isoprofit curve: a combination of outputs of all
firms that yield a given firm the same lv of s. π
Iso curve closer to mono point generates more . π
Iso curve’s peak when intersects Firm’s reaction
func.
3. StackelBerg Oligopoly: (*), A leader firm
chooses an output b4 all other firms choose their
outputs. All followers firms choose outputs that
max s given the leader’s.π
max level of output:Π
Q1=
a+c2+2c1
2b
(leader) ; Q2=
ac2
2b
-
½ Q1 (**)
4. Bertrand Oligopoly: produce identical
products at a constant MC, firms engages in
price competition and react optimally to prices
charged by competitors, consumers have perfect
info, no transaction cost. -> Consumers go for
lowest price. Firms will undercut one another to
capture the entire market, leaving rivals no . π
In equilibrium, P1=P2=MC(socially efficient lv
of output)
CHAPTER 10: GAME THEORY
Nash Equilibrium: given strategies of other
players, no player can improve her payoff by
unilaterally changing her own strategy.
Randomized strategy: a player mixes over
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