Академический Документы
Профессиональный Документы
Культура Документы
Zvika Neeman
Spring 2015
Yale University
Outline
I. INDIVIDUAL CHOICE
I.1 The Basic Model of Consumer Choice
I.1.1 Modeling Choice: Preferences and Constraints
I.1.2 The Mathematics of Optimization
I.1.3 Demand Functions
I.1.4 Elasticity
I.1.5 Maximizing Utility
I.2 Applications
I.2.1 Labor Supply
I.2.2 Time
I.2.3 Consumer Surplus
I.2.4 Uncertainty
(Competitive) Markets
The market is not an invention of capitalism. It has existed for centuries.
It is an invention of civilization. (Mikhail Gorbachev, June 8, 1990)
The moment that government appears at market, the principles of the
market will be subverted. (Edmund Burke, 17291797)
We Are The 99% that will no longer tolerate the greed and corruption of
the 1%. (occupywallst.org)
Pm
k=1 xi (p1 , p2 , . . . , pn , I (k ), k ).
We will typically be interested in the case of two goods, so that the market
Pm
demand for good x1 equals k=1 x1(p1, p2, I (k), k).
We will typically write this market demand as x1(p1, p2). Notice that there
is no income variable here, which is the sign that this is a market demand
and not an individual demand.
Z p00
p0
x1(p1, p2)dp1
This differs from our pervious measure of consumer surplus by using market
rather than individual demand. It is the sum of the individual consumer
surpluses.
In the short run, the firms supply curve is given by the appropriate part
of its marginal cost curve. Market supply is the sum of the firms supply
curves. The firms profit maximization problem is
max pq C (q ),
q
dC (q )
p
= 0.
dq
C( )
C(q)
C( )
C(q)
q(p)
d2C (q )
>0
2
dq
Interiority condition:
In the long run, all inputs are variable. In particular, firms can enter and
exit the market.
The relevant cost curves are now long-run cost curves.
The short-run and long-run cost curves emerge from similar-looking maximization problems, with the difference being the variables over which the
maximization is performed.
Short run:
Long run:
Once we have the cost function, the long-run profit maximization problem
looks familiar:
max pq C (q )
q
dC (q )
= 0.
dq
C( )
C(q)
C( )
C(q)
]
p
q(p)
d2C (q )
>0
2
dq
pq (p) C (q (p)) 0.
The short-run and long-run also differ in terms of entry and exit decisions.
In the short-run, there is no entry and exit, and profits may be positive or
negative.
In long-run equilibrium, firms in a competitive market earn zero profits.
This initially sounds absurd. Why would firms earn negative profits, and
who would enter a market, only to earn zero profits?
The answer requires distinguishing normal from excess (or economic) profit.
Firms in a competitive industry earn zero excess profit.
What is the equilibrium long-run firm size, price, and number of firms?
This depends on the shape of the cost functions and whether there are
indivisibilities in inputs.
Do firms enter and leave markets? Some data:
R(q)
C(q)
Z p00
p0
C 0(q (p))dp.
Things to read:
Nicholson and Snyder cover this topic in chapter 12. Pages 409-431 develop the theory, and the remainder of the chapter explores some applications. See Chapter 8 in Perloff and Chapters 22-23 in Varian.
The organization of markets is a topic with important political as well as
economic implications. A nicely accessible and often entertaining discussion of how markets work is given by John McMillan in Reinventing the
Bazaar (Norton, 2002).