04 MicroEconomics R1

Introduction to Microeconomics
for Electricity Markets
A. J. Conejo
Univ. Castilla La Mancha, 2011
Definitions
qi
quantity produced by producer i
q q1 q n
total quantity produced by all producers
pq1 q n pq price as a function of quantity
ci q i production cost of producer i
d ci q i
m i q i
marginal production cost of producer i
d qi
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Definitions
ri pq q i
revenue of producer i
i ri ci q i pq q i ci q i profit of producer i
d ri
mri
marginal revenue of producer i
d qi
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Price vs. quantity
price
Price increases as quantity decreases
quantity
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Competitive model
Price does not depend on quantity
i p q i ci q i
d i
d ci q i
p
0
d qi
d qi
p m i q i ; i 1,, n
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Quasi-competitive model
Dependency ignored
i pq1 q n q i ci q i
i p q i ci q i
d i
d ci q i
p
0
d qi
d qi
p m i q i ; i 1, , n
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Cartel model
All producers act together
n
pq1 q n q1 q n ci q i
i 1
company i results :
d
pq
pq q1 q n
m i q i 0
d qi
qi
pq
p m i q i q
; i 1,, n
qi
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Conjectural variation model

The production of each producer depends on the
production of all other producers
i pq1 q 2 ,, q n q n q1 ,, q n 1 q i ci q i
pq
d i
pq q j
pq q i
m i q i 0
d qi
q i
j i q j
q i
pq
pq q j
pq m i q i q i
; i 1,, n
q i
j i q j
q i
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Cournot model
pq
0,
qi
but
qj
qi
0 i j
i pq1 q n q i ci q i
d i
pq
pq q i
m i q i 0
d qi
qi
pq
pq m i q i q i
; i 1,, n
qi
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Price leadership model

Producer 1 is the leader, producers 2,..., n are price - takers
1 pq1 q n q1 c1 q1
pq n pq q j
d 1
m1 q1 0
pq q1
d q1
q
j
2
1
j
1
pq n pq q j
pq m1 q1 q1
q
j
2
1
j
1
pq m j q j ; j 2, , n
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10
Market equilibrium
Social welfare
Accepted bids
Price
Consumers surplus
Market
clearing price
Producers surplus
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Energy
11
Example
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12
Models
- Competitive
- Cartel
- Conjectural variations
- Leader
- Cournot
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13
Data
4 producers:
c1 0.05q1 0.0003q
2
1
c 2 0.2 0.07q 2 0.0005q
2
2
c3 0.5 0.02q 3 0.004q 32

c 4 0.2 0.007q 24
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14
Models
Producers:
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15
Models
Demand to be supplied:
q1 q 2 q3 q 4 q Total
Demand vs. price:
p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total

Sentitivies production - production:
p
0.001
q j
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q j
q i
0.001
16
Competitive model
Producer i
i p qi ci (qi )
di
dci (q i )
p
0
dq i
dq i
Thus
dci (q i )
p
dq i
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Competive model
Thus:
p 0.05 0.0006q1
p 0.07 0.001q 2
p 0.02 0.008q3
p 0.014q 4
Demand:
Price demand:
p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total

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18
Models
Solution:
p 0.05
q1
0.0006
p 0.07
q2
0.001
p 0.02
q3
0.008
p
q4
0.014
and:
p 0.05 p 0.07 p 0.02

p
q Total
0.0006
0.001
0.008 0.014
p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total

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Modelo competitivo
Results:
p 0.090817
q Total 109.18
Total 1.7671
q1 68.028
q 3 13.852
q 2 20.817
q 4 6.4869
1 1.3883
2 0.016666
3 0.26752
4 0.094559
Profits:
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Modelo competitivo
COMPETITIVE
q Total
109.18
q1
q2
q3
q4
68.028
Precio
0.090817
Total
1
2
3
4
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CARTEL
CONJECT
LEADER
COURNOT
20.817
13.852
6.4869
1.7671
1.3883
0.016666
0.26752
0.094559
21
Cartel
Total profit:
4
p(q1 , q 2 , q 3 , q 4 ) q Total ci (q i )
i 1
Maximizing:
d
p(q)
dci (q i )
p(q )
q Total
0
dq i
q i
dq i
Thus:
dci (q i ) p(q)
p
q Total
dq i
q i
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con
p(q)
0.001
q i
22
Cartel
Equations:
p 0.05 0.0006q1 0.001q Total
p 0.07 0.001q 2 0.001q Total

p 0.02 0.008q3 0.001q Total
p 0.014q 4 0.001q Total
Additonal equations:
p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total
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Cartel
Solution:
p 0.13729
q Total 62.708
Total 4.3042
q1 40.973
q 3 11.823
q 2 4.5841
q 4 5.3274
Profits:
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1 3.073
2 0.097965
3 0.80053
4 0.33274
24
Cartel
TABLA 1
COMPETITIVE
CARTEL
q Total
109.18
62.708
q1
q2
q3
q4
68.028
40.973
20.817
4.5841
13.852
11.823
6.4869
5.3274
Precio
0.090817
0.13729
1.7671
4.3042
1.3883
3.073
0.016666
0.097965
0.26752
0.80053
0.094559
0.33274
Total
1
2
3
4
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CONJECT
LEADER
COURNOT
25
Conjectural variation
Profit:
i pq1 (q 2 , q3 , q 4 ), q 2 (q1 , q3 , q 4 ), q3 (q1 , q 2 , q 4 ), q 4 (q1 , q 2 , q 4 ) qi ci (qi )

Maximizing:
p(q)
di
p(q) q j dci (q i )
p(q ) q i
dq i
q i
dq i
i j q j
q i
i 1,..,4
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Thus:
p(q)
dci (q i )
p(q) q j
p
qi
dq i
q i
ji q j
q i
i 1,..,4
Algebra:
p(q) p(q) q 2 p(q) q 3 p(q) q 4

dc1 (q1 )
p
q1
dq1
q
1
2
1
3
1
4
1
Production production dependency
p
0.001
q j
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q j
q i
0.001
27
Solution:
p 0.05 0.0006q1 q1 0.001 (0.001)0.0013
p 0.07 0.001q 2 q 2 0.001 (0.001)0.0013
p 0.02 0.008q3 q3 0.001 (0.001)0.0013

p 0.014q 4 q 4 0.001 (0.001)0.0013
p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total
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Solution:
p 0.11471
q Total 85.294
Total 3.5597
q1 40.366
q 3 14.962
q 2 22.32
q 4 7.6456
1 2.1231
2 0.54875
4 0.26781
Profits
3 0.62004
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COMPETITIVE
CARTEL
CONJECT
q Total
109.18
62.708
85.294
q1
q2
q3
q4
68.028
40.973
40.366
20.817
4.5841
22.32
13.852
11.823
14.962
6.4869
5.3274
7.6456
Precio
0.090817
0.13729
0.11471
1.7671
4.3042
3.5597
1.3883
3.073
2.1231
0.016666
0.097965
0.54875
0.26752
0.80053
0.62004
0.094559
0.33274
0.26781
Total
1
2
3
4
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LEADER
COURNOT
30
Leader
Leader in producer 1
Leader profit:
1 pq1 (q 2 , q3 , q 4 ), q 2 , q3 , q 4 q1 c1 (q1 )
Other producers:
2 p q 2 c2 (q 2 )
3 p q3 c3 (q3 )
4 p q 4 c4 (q 4 )
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Leader
Maximizing:
p(q) p(q) q 2 p(q) q 3 p(q) q 4 dc1 (q1 )

d1
p(q) q1
dq1
q 2 q1
q 3 q1
q 4 q1
dq1
q1
d2
dC (q )
p 2 2 0
dq 2
dq 2
d3
dC3 (q 3 )
p
0
dq 3
dq 3
d4
dC (q )
p 4 4 0
dq 4
dq 4
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Leader
Solving:
p 0.05 0.0006q1 q1 0.001 (0.001)0.0013
p 0.07 0.001q 2
p 0.02 0.008q3
p 0.014q 4
p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total
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Leader
Solution:
p 0.10591
q Total 94.091
Total 2.7212
q1 34.878
q 3 15.739
q 2 35.909
q 4 7.5649
1 1.5851
2 0.44474
3 0.49082
4 0.2006
Profits:
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Leader
COMPETITIVE
CARTEL
CONJECT
LEADER
q Total
109.18
62.708
85.294
94.091
q1
q2
q3
q4
68.028
40.973
40.366
34.878
20.817
4.5841
22.32
35.909
13.852
11.823
14.962
15.739
6.4869
5.3274
7.6456
7.5649
Precio
0.090817
0.13729
0.11471
0.10591
1.7671
4.3042
3.5597
2.7212
1.3883
3.073
2.1231
1.5851
0.016666
0.097965
0.54875
0.44474
0.26752
0.80053
0.62004
0.49082
0.094559
0.33274
0.26781
0.2006
Total
1
2
3
4
8/6/2011
COURNOT
35
Cournot
Profits
i pq1 , q 2 , q3 , q 4 qi ci (qi )
Maximizing:
di
p(q)
dci (q i )
p(q )
qi
0
dq i
q i
dq i
dci (q i )
p(q)
p
qi
dq i
q i
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Cournot
Solving:
p 0.05 0.0006q1 0.001q1
p 0.07 0.001q 2 0.001q 2

p 0.02 0.008q3 0.001q3
p 0.014q 4 0.001q 4
p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total
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Cournot
Prices and quantities:
p 0.11466
q Total 85.344
Total 3.5574
q1 40.41
q 3 14.962
q 2 22.328
q 4 7.6437
1 2.1229
2 0.54782
3 0.61928
4 0.26742
Profits:
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Cournot
COMPETITIVE
CARTEL
CONJECT
LEADER
COURNOT
q Total
109.18
62.708
85.294
94.091
85.344
q1
q2
q3
q4
68.028
40.973
40.366
34.878
40.41
20.817
4.5841
22.32
35.909
22.328
13.852
11.823
14.962
15.739
14.962
6.4869
5.3274
7.6456
7.5649
7.6437
Precio
0.090817
0.13729
0.11471
0.10591
0.11466
1.7671
4.3042
3.5597
2.7212
3.5574
1.3883
3.073
2.1231
1.5851
2.1229
0.016666
0.097965
0.54875
0.44474
0.54782
0.26752
0.80053
0.62004
0.49082
0.61928
0.094559
0.33274
0.26781
0.2006
0.26742
Total
1
2
3
4
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39
Comparison
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40
Comparison
Competitive model
q1
6,4869
13,852
q2
q3
q4
20,817
8/6/2011
68,028
41
Comparison
Modelo com petitivo
Cartel
q1
6,4869
q2
q3
13,852
5,3274
q4
20,817
68,028
11,823
40,973
4,5841
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42
Comparison
Modelo com petitivo
6,4869
13,852
q1
q2
q3
7,6456
q4
20,817
68,028
14,962
40,366
22,32
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43
Comparison
Modelo com petitivo
6,4869
Leader
q1
13,852
q2
q3
7,5649
q4
20,817
68,028
15,739
34,878
35,909
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44
Comparison
Modelo com petitivo
Cournot
q1
6,4869
q2
13,852
q3
7,6437
q4
20,817
68,028
14,962
40,41
22,328
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45
Comparison
Competitve model: profits
0,094559
0,26752
Beneficio 1
0,01666
Beneficio 2
1,3883
Beneficio 3
Beneficio 4
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46
Comparison
Beneficios m odelo com petitivo
Beneficio 1
Cartel profit
0,09455
9
Beneficio 2
Beneficio 3
Beneficio 4
0,26752
0,33274
0,01666
0,80053
1,3883
0,097965
8/6/2011
3,073
47
Comparison
Beneficio 1
Conjectural variation profit
Beneficio 2
0,26752
Beneficio 3
Beneficio 4
0,09455
9
0,01666
0,26781
0,62004
1,3883
2,1231
0,54875
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48
Comparison
Beneficio 1
Leader profit
0,09455
9
Beneficio 2
0,26752
Beneficio 3
Beneficio 4
0,01666
0,2006
0,49082
1,3883
1,5851
0,44474
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49
Comparison
Cournot profit
0,09455
9
Beneficio 1
Beneficio 2
0,26752
Beneficio 3
Beneficio 4
0,01666
0,26742
0,61926
1,3883
2,1229
0,54782
8/6/2011
50

04 MicroEconomics R1

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04 MicroEconomics R1

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Introduction to Microeconomics

for Electricity Markets

quantity produced by producer i

total quantity produced by all producers

pq1 q n pq price as a function of quantity

ci q i production cost of producer i

Price vs. quantity

Price increases as quantity decreases

Conjectural variation model

Price leadership model

c 2 0.2 0.07q 2 0.0005q

c3 0.5 0.02q 3 0.004q 32

p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total

p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total

p 0.05 p 0.07 p 0.02

p(q1 , q 2 , q3 , q 4 ) 0.2 0.001q Total

p 0.05 0.0006q1 0.001q Total

p 0.07 0.001q 2 0.001q Total

i pq1 (q 2 , q3 , q 4 ), q 2 (q1 , q3 , q 4 ), q3 (q1 , q 2 , q 4 ), q 4 (q1 , q 2 , q 4 ) qi ci (qi )

p(q) p(q) q 2 p(q) q 3 p(q) q 4

Production production dependency

p 0.05 0.0006q1 q1 0.001 (0.001)0.0013

p 0.07 0.001q 2 q 2 0.001 (0.001)0.0013

p 0.02 0.008q3 q3 0.001 (0.001)0.0013

p(q) p(q) q 2 p(q) q 3 p(q) q 4 dc1 (q1 )

p 0.05 0.0006q1 q1 0.001 (0.001)0.0013

p 0.05 0.0006q1 0.001q1

p 0.07 0.001q 2 0.001q 2

Conjectural variation profit

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