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Semester 2: MICROECONOMICS-II
Perfect Competition, Features, Equilibrium of Firm and Industry, Short Run and Long Run Analysis, Time Element
Perfect Competition
Definition of Perfect Competition
Perfect competition is a market structure characterized by a large number of small firms producing identical products, where no single firm can influence market prices.
Features of Perfect Competition
Equilibrium of Firm and Industry
Short Run Analysis
Long Run Analysis
Time Element in Perfect Competition
Monopoly and Price Discrimination, Demand and Marginal Revenue, Dead Weight Loss, Policies to Control Monopoly, First/Second/Third Degree Price Discrimination, Dumping
Monopoly
Monopoly refers to a market structure where a single seller dominates the market with no close substitutes for the product or service. Characteristics include high barriers to entry, price maker behavior, and the ability to influence market prices.
Price Discrimination
Price discrimination occurs when a seller charges different prices to different consumers for the same good or service, based on their willingness to pay. This can happen when a firm has some market power and can segment the market.
Demand and Marginal Revenue
Demand is the quantity of a good that consumers are willing and able to purchase at different prices. Marginal revenue is the additional revenue that a firm earns by selling one more unit of the good. In monopoly, marginal revenue is less than the price due to the downward-sloping demand curve.
Dead Weight Loss
Dead weight loss is the loss of economic efficiency when the equilibrium outcome is not achievable. In monopolies, this occurs due to reduced output and higher prices compared to competitive markets, leading to a loss in consumer and producer surplus.
Policies to Control Monopoly
Governments may implement various policies to control monopolies, such as antitrust laws, price regulation, and encouraging competition through subsidies or deregulation.
First Degree Price Discrimination
First-degree price discrimination, also known as perfect price discrimination, occurs when a firm charges each consumer the maximum price they are willing to pay. This is often impractical but can maximize profits.
Second Degree Price Discrimination
Second-degree price discrimination involves charging different prices based on the quantity consumed or the product model. Examples include bulk pricing or versioning products.
Third Degree Price Discrimination
Third-degree price discrimination occurs when different consumer groups are charged different prices based on identifiable characteristics, such as age or location.
Dumping
Dumping refers to the practice of selling a product at a price lower than its cost of production in a foreign market. This can be a strategic move to gain market share or eliminate competition in that market.
Monopolistic and Oligopoly Competition, Product Differentiation, Market Equilibrium, Barriers to Entry, Excess Capacity, Oligopoly Kinked Demand, Cartels, Price Leadership, Game Theory
MICROECONOMICS-II
B.A.
ECONOMICS
2
PERIYAR UNIVERSITY
Core Course - III
Monopolistic and Oligopoly Competition
Monopolistic Competition
Characterized by many firms producing differentiated products. Each firm has some market power to set prices above marginal cost. Examples include restaurants and clothing brands.
Oligopoly Competition
Few firms dominate the market. Products may be homogeneous or differentiated. Key features include strategic interactions and interdependence among firms.
Product Differentiation
Crucial in monopolistic competition. Firms attempt to make their products distinct through branding, quality, features, etc. Helps to gain market power.
Market Equilibrium
Occurs when quantity demanded equals quantity supplied. In monopolistic and oligopoly markets, equilibrium is affected by the strategic decisions of firms.
Barriers to Entry
These can be natural (high startup costs) or artificial (patents, licenses). Barriers protect existing firms from new entrants.
Excess Capacity
In monopolistic competition, firms operate below capacity due to product differentiation. This leads to inefficiency and higher prices.
Oligopoly Kinked Demand
A model suggesting that demand for a firm's product is elastic for price increases and inelastic for price decreases. Explains price rigidity in oligopolistic markets.
Cartels
Agreements between firms to limit competition by fixing prices or production levels. Cartels reduce market supply to raise prices.
Price Leadership
Occurs when one firm sets the price for the market, and other firms follow. Typically seen in oligopoly markets.
Game Theory
Analyzes strategic interactions among firms. Concepts include Nash Equilibrium and dominant strategies which explain decision-making in competitive environments.
Distribution Theory, Functional and Personal Distribution, Marginal Productivity Theory, Product Exhaustion Theorem, VMP and MRP
Distribution Theory
Overview of Distribution Theory
Distribution theory examines how income and wealth are distributed among individuals and groups in an economy. It focuses on the implications of distributional outcomes for economic behavior and welfare.
Functional Distribution of Income
Functional distribution relates to how total income is divided among the factors of production: labor, capital, and land. It helps to understand how payments to each factor are determined by their contribution to the production process.
Personal Distribution of Income
Personal distribution looks at how income is distributed among individuals or households in a society. It reveals disparities and can influence social policy decisions.
Marginal Productivity Theory
This theory states that in a competitive market, each factor of production is paid according to its marginal productivity, or the additional output produced by employing one more unit of that factor.
Product Exhaustion Theorem
The product exhaustion theorem suggests that in equilibrium, total income generated by production is completely distributed to the factors of production, ensuring no surplus exists.
Value of Marginal Product (VMP)
VMP measures the additional revenue generated by employing one more unit of a factor of production. It is crucial for firms in determining how much to pay labor and capital.
Marginal Revenue Product (MRP)
MRP is the additional revenue earned from the sale of the output produced by an additional unit of input. It is vital for firms to maximize profits, as they will hire inputs until MRP equals the cost of the input.
Welfare Economics and General Equilibrium, Welfare Criteria, Market Failure, Externalities, General Equilibrium for Consumption, Production, Distribution
Welfare Economics and General Equilibrium
Introduction to Welfare Economics
Welfare economics studies how the allocation of resources affects social welfare. It examines economic efficiency and equity, focusing on how individual preferences can lead to societal outcomes.
General Equilibrium Theory
General equilibrium refers to a state where supply and demand are balanced across all markets simultaneously. It considers the interconnections among different markets and how they adjust over time.
Welfare Criteria
Welfare criteria provide benchmarks to evaluate economic policies. Key criteria include Pareto efficiency, where no individual can be made better off without making someone else worse off, and Kaldor-Hicks efficiency, which allows for compensation among individuals.
Market Failure
Market failure occurs when the allocation of goods and services is not efficient. Causes include public goods, monopolies, and information asymmetry, leading to a welfare loss.
Externalities
Externalities are costs or benefits incurred by third parties not involved in a transaction. Positive externalities lead to societal benefits, while negative externalities, such as pollution, cause societal costs, necessitating intervention.
General Equilibrium for Consumption
In consumption, general equilibrium analyzes how consumers choose bundles of goods to maximize utility, considering their budget constraints and the prices of goods.
General Equilibrium for Production
Production general equilibrium looks at how firms decide on the allocation of resources to produce goods, focusing on technology, factor prices, and production functions.
General Equilibrium for Distribution
Distributional general equilibrium addresses how income and wealth are distributed across different groups in society, evaluating the impact of policies on equity and efficiency.
