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23 Cards in this Set
- Front
- Back
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Assumptions neoclassical theory
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- Technology is given , black box
- Boundaries are given: no mergers, diversifications: all firms are identical - Goals: profit maximization - Firm is pricetaker in factor markets - Decisions can be reversed - Perfect & free information |
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4 market structures
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Perfect Competition
Monopoly Monopolistic Comp Oligopoly |
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Perfect Comp
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- Large # firms
- Homogeneous products that are perfect substitutes of each other - Free and easy entry |
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Monopoly
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- 1 Firm, large # buyers
- No product differentiation between firms - Blockaded entry |
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Monopolistic comp
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- Large # firms, larg # buyers
- Somewhat differentiated products - Free and easy entry |
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Oligopoly
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- Small # firms , large # buyers
- Imperfect Comp - Homogeneous or differentiated products |
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5 causes monopoly
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- Ownership strategic raw mmaterials / exclusive knowledge/ production technology
- Patent rights (temporary monopoly) - Government licensing / international trade barriers - Size of market cannot support more firms; technical entry barriers - High entry barriers created nby monopolist: advertising / limit pricing |
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Firm Demand curve
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X = b0 -b1P
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Revenue
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R = PX
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Average Revenue AR
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b0 - b1X = P
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Marginal Revenue MR
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dR / dX
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Total Costs
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TX = a0 + a1X
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Average Costs AC
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TC / X = a0/X + a1
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Marginal Costs
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MC = dTC/dX = a1
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Profit
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Pi = R-TC
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First order Profit maximization condition
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MR = MC
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Profit Maximizing Price
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1/2 b0+ 1/2 a1
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Second Order Profit maximization Cond
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Slope MR < Slope MC
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TWO Decisions Monopolist
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- Set P
- Set X These decisions are coupled |
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Fundamental Uncertainty
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it is impossible to attach probabilities to possible future events; not all possible events are known; hence, it is not possible to calculate the expected value of returns on investment.
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Risk
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it is possible to attach probabilities to future events, which are known; calculation of expected value of returns is possible; risk attached to an economic action is measured by the dispersion of the probability distribution of its returns in all possible future states of the world.
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When does a firm replace functions of society
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• where assets (including human capital) are highly specific, transactions will be internalised in firms.
• when transactions are frequent, internalisation may be more efficient (and reduce opportunism). • when uncertainty is high, internal supply may be more efficient than market transactions. |
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Differences Neoclassical / Institutionalist Firm
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Neoclassical Institutionalist
Profit Maximisation Satisficing (as a way of dealing with uncertainty) • instrumental rationality: the choice of the best means to specified ends. • bounded rationality due to (1) limited information, and (2) limited cognitive capacity of economic actors. Emphasis on outcomes Emphasis on decision-making processes within the firm • choices • routines: operating rules; investment rules; search routines. Decision are reversible. Decisions are not reversible. |
