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Economics for IB samenvatting
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An imperfectly competitive firm is a firm that has at least some latitude to set its own price.Their products are different from the products of their rivals.
- The pure monopolist, the lone seller of a product in a given market
- The oligopolist, one of only a few sellers of a given product
- The monopolistic competitor, one of a relatively large number of firms that sell
similar though slightly differentiated products.
Whereas the perfectly competitive firm faces an infinitely elastic demand curve for its
product, the imperfectly competitive firm faces a downward-sloping demand curve.
Market power from:
- Economies of scale
- Patents
- Government licences
- Franchises
- Network economies
Perfectly competitive firm:
profit = Marginal revenue equals market price
- Firm has no market power
- Sales will not increase with lower price
- Demand curve is a horizontal line at market price
- Deadweight loss, no social optimum
Monopolist (imperfect)
profit: Marginal cost equals marginal revenue -> Marginal revenue always less than its price
- This shortfall reflects the fact that, to sell more output, the monopolist must cut the
price not only to additional buyers but to existing buyers as well.
- The result is an output level that is best for the monopolist but smaller than the level
that would be best for society as a whole.
Both the monopolist and its potential customers can do better if the monopolist can grant
discounts to price-sensitive buyers.
One common method of targeting discounts towards price-sensitive buyers is the hurdle
method of price discrimination, in which the buyer becomes eligible for a discount only after
overcoming some obstacle, such as mailing in a rebate coupon. This technique works well
because those buyers who care most about price are more likely than others to jump the
hurdle. While the hurdle method reduces the efficiency loss associated with single-price
monopoly, it does not completely eliminate it.
Price discrimination: Charging different buyers different prices for the same good/service
Perfectly discriminating monopolist charges each buyer exactly his or her reservation price.
-> Such producers are socially efficient, because they sell to every buyer whose reservation
price is at least as high as the marginal cost.
Governments policies to mitigate concerns about fairness and efficiency monopol:
- State ownership
- Management of natural monopolies
, - State regulation
- Private contracting
- Vigorous enforcement of anti-trust laws.
Hoofdstuk 9
Economists use the mathematical theory of games to analyse situations in which the payoffs
of one’s actions depend on the actions taken by others.
Games have three basic elements:
- The players
- The list of possible actions or strategies, from which each player can choose
- The payoffs the players receive for those strategies.
The payoff matrix is the most useful way to summarise this information in games in which
the timing of the players’ moves is not decisive. In games in which the timing of moves does
matter, a decision tree summarises the information in a much more useful format.
A dominant strategy is one that yields a higher payoff regardless of the strategy chosen by
the other player. In some games, such as the prisoner’s dilemma, each player has a
dominant strategy.
A dominated strategy is the one that always yields a lower payoff
Nash equilibrium = Any combination of strategies in which each players strategy is her best
choice given the other players strategies.
Solve a game using iterated elimination -> Delete all dominated strategies, the strategy that
is left = unique strategy. -> Dominance solvable. (Unique strategy = nash equilibrium)
The equilibrium occurs in such games when each player chooses his or her dominant
strategy. In other games, not all players have a dominant strategy.
Example:
Bob & Sara A B
C 3, 2 4, 1
D 2, 5 3, 2
The dominant strategy of Bob is C because there the payoff is always higher, for Sara it is A.
The Equilibirium thus occurs with the strategy (C, A)
Although the equilibrium outcome of any game is any combination of choices in which each
player does the best he can, given the choices made by others, the result is often
unattractive from the perspective of players as group. The prisoner’s dilemma has this
feature.
Individuals can often resolve these dilemmas if they can make binding commitments to
behave in certain ways. Moral sentiments such as guilt, sympathy and a sense of justice
often foster better outcomes than can be achieved by narrowly self-interested players. For
this type of commitment to work, the relevant moral sentiments must be discernible by
one’s potential trading partners.
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