Key Concepts in Microeconomics: Market Structures and Resource Demand
Chapter 3: Supply and Demand Fundamentals
An increase in income decreases the demand for an inferior good. A surplus refers to an excess supply. Excess demand situations push prices up toward equilibrium. The ceteris paribus clause in the law of demand allows only the price of the good to change. Changes in the price of a good change the quantity demanded of a good, not the demand for the good. An increase in the price of a substitute good will increase the demand for a good. A decrease in the price of a complementary good will increase the demand for a good. A supply curve shows a positive relationship between prices and quantities supplied. As the number of suppliers increases, the supply curve will increase (move to the right).
Chapter 13: Market Structures – Monopolistic Competition and Oligopoly
A monopolistically competitive firm has a more elastic demand curve than a monopolistic firm. Entry barriers are insignificant in monopolistically competitive industries. The greater the number of firms in an oligopolistic industry, the harder it is for the firms to collude. The highest possible value of the Herfindahl index is 10,000. In the kinked demand curve model, the firm’s marginal revenue curve is downward sloping and lies below its demand curve. A monopolistically competitive firm’s marginal revenue curve is downward sloping and lies below its demand curve.
Determining Price, Output, and Profit in Monopolistic Competition
It is important to understand how to find a monopolistically competitive firm’s short-run level of price, output, and profit or loss.
Mutual Interdependence in Oligopolies
Mutual interdependence in oligopolies means that a firm must consider the reactions of its rivals when it sets its pricing policies. By ignoring imported products, concentration ratios may understate the true degree of competition in an industry. Game theory can be used to analyze the behavior of oligopolistic firms. In the kinked-demand curve model, rival firms are assumed to follow a firm’s price reductions but not its price increases. The price and output levels achieved by a cartel approximate those of a purely monopolistic firm. Advertising can enhance economic efficiency if it allows a firm to expand its sales to where the firm can achieve economies of scale. Non-price competition is important in both forms of imperfect competition.
Chapter 14: Resource Demand and Market Dynamics
The marginal revenue product curve of a purely competitive seller declines because of the law of diminishing returns (declining Marginal Product). The more elastic the demand for a good, the more elastic will be the demand for the resources used in producing that good. A decrease in the price of one resource will increase the demand for a complementary resource. An increase in the price of one resource will decrease the demand for a complementary resource. The demand for any resource depends primarily on the demand for the good it helps to produce. The marginal revenue product schedule is the firm’s resource demand schedule. The demand curve for a resource of a purely competitive seller is downward sloping because of diminishing marginal productivity. A profit-maximizing firm uses resources up to where MRP = MRC. A purely competitive seller sells all units of the good at a constant price. A competitive seller hires workers as long as MRP > MRC (wage rate). An imperfectly competitive seller’s labor demand curve is downward sloping because of diminishing returns (declining MP) and because of the need to lower the price to sell more output.
Factors Shifting Resource Demand
A shift in the demand for any resource is caused by things other than a change in the price of that resource. Factors leading to changes in the demand for a resource (shifts of the demand schedule) include income, prices, preferences, and population shifts. The substitution effect induces a firm to use more of an input whose price has fallen and less of other inputs in producing a good.
Elasticity of Resource Demand
A measure of the responsiveness of firms to a change in the price of a particular resource they employ or use is called measuring the elasticity of resource demand. It is calculated as:
% change in resource quantity / % change in resource price
Cost Minimization Rule
The cost-minimization rule for producing output for a firm hiring resources in perfectly competitive input markets is:
Where A and B are two separate resources.