Page 217 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes To find the kink, or point of intersection of demand curves D and D , we set Q = Q = Q and

1 2 1 2
get
7 – 0.025Q = 10 – 0.1Q
0.075Q = 3
Q = 40
and
P = 7 – 0.025(40) = ` 6

The upper and lower limits of the MR gap are
MR = 7 – 0.5(40) = 7 – 2 = 5
1
MR = 10 – 0.2(40) = 10 – 8 = 2
2
Since
MC = 2 + 0.05(40) = 4

The MC curve intersects the vertical portion of the MR curve. The total profi ts (π) of the fi rm are
π = TR–TC = PQ–2Q–0.025Q 2
= 6(40)–2(40)–0.025(40) = `. 120
2
The level of π could also have been found from

π = (P–ATC)Q
TC 2Q+0.025Q 2
ATC = = =2+0.025Q=0+0.025(40)=3
Q Q
so that
π = (6–3) (40) = ` 120

Did u know? Is there any non-price competition among oligopolists?
Oligopolists are, in general, reluctant to lower prices for fear of starting a price war and
prefer instead to compete on the basis of quality, advertising, service and other forms of
non-price competition. To be sure, oligopolists are also likely to react to increased
expenditures on product differentiation, advertising and service by competitors. But
the response time is much longer than for price changes because it takes time to plan
and introduce a variant of the product, a major advertising campaign, or a new service

programme. This allows the oligopolist to reap the benefi ts (profits) from the changes
introduced, at least in the short run, and at the same time avoid the possibility of triggering
off a ruinous price war with price competition. Non-price competition in oligopolistic
markets can be examined with game theory. With this approach, an oligopolist assumes
that its competitors choose the optimal strategy and then develops its own best counter
strategy.

13.4 Market Structure and Barriers to Entry

Many factors can contribute to the existence of a particular market structure. However, in the
long run, conditions of entry may be the most important determinant. Difficulties encountered in

entering an industry are often referred to as barriers to entry. It has been defined in two alternate
way.

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