Page 313 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes
Fig. 18.3

D P
Price and Cost B AC

D
1

O Q
Output

Because AC curve gets down in the is large range of production, so change in price is totally
opposite from production. When the production is level down, the average cost will be more and
price will be high. But Hall and Hitch do not agree on this possibility that oligopoly firm makes
less production and take more prices. For this they give 3 reasons (a) oligopoly firm gives priority
to price constant (b) they cannot raise the price due to kink and (c) they think, the plant will work
till maximum capacity.
Hall and Hitch have analyzed two exceptions of fixed price. (1) if a demand is low and so on, price can
be reduced for continuing the production level. It can be happened, as whatever said when lower part
of demand curve is become flexible. When the firm is in difficult condition, price is reduced and forces
for same to other firms. Any condition when the changes in technology, it influences the AC curve of
firm. So, full cost value QP(= OB) is evaluated.

Self Assessment

State whether the following statements are True/False:
7. In 1932, Barle and Means explained the purpose of management is totally separated from stockholders.
8. Modern firms are not motivated from the purpose related to internal corporation.
9. Oligopoly firm gives more priority to constant the price.
10. Kinkit demand curve makes complex to the analysis.

Andrews Version

The description of Hall and Hitch is based on assumptions that firm has already decided the price
which is to be taken in market then kinkit demand curve makes complex to the analysis. So for making
the description easy about full cost prices, Andrews’s explanation is given.
Prof. Andrews explained, how a firm fixes price on the bases of full cost and average cost. Firm divides
the current total cost from total production to know the average real cost (AVC). On the other hand,
curve is parallel to some parts of production axis, if price is shown.
Generally, a firm will state a price for a special product it will must equal to the real product making
cost plus costing margin or mark up. The cost decision boundary would generally fulfill the factors of
inputs and will provide the pure profit in terms of all industries.

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