1. University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #26 Thursday, April 15, 2004

2. ANNOUNCEMENTS LAST LECTURE Tuesday, May 4, 2004, 12:00-1:15 PM, BIL 152 Review Session Thursday, May 6, 4:30-5:30 PM, BIL 152 FINAL EXAMINATION Thursday, May 13, 2004, 12:00-2:00 PM, BIL 152

3. Lecture 26 Oligopoly Dominant Firm Model Introduction to Factor (Input) Markets

4. Oligopoly Few Firms Price Makers (fringe takers) Barriers to Entry Homogeneous or Differentiated Product

5. Dominant Firm/Price Leader Model of Oligopoly One dominant firm acts as price leader. Competitive fringe acts like price taking competitive firms. Dominant firm takes the competitive fringe supply into consideration when maximizing profits by setting price.

6. $/Q Q 0 D S cf = Σ MC i Residual Demand Curve P0P0 P1P1 P2P2 Fringe Supply Residual Demand Fringe Supply Fringe Residual Demand

7. $/Q Q 0 D S cf = Σ MC i Residual Demand Curve P0P0 Residual Residual Demand

8. $/Q Q 0 D S cf = Σ MC i Residual Demand Curve P0P0 Residual Demand Residual Residual Demand

9. $/Q Q 0 D Industry S cf = Σ MC i Residual Demand Curve D dominant firm MR dominant firm

10. $/Q Q 0 D Industry S cf = Σ MC i Dominant Firm/Price Leader Model of Oligopoly D dominant firm MR dominant firm ATC dominant frim MC dominant firm Q df P* Q cf Q Industry

11. $/Q Q 0 S cf = Σ MC i Dominant Firm Model MC dominat firm ATC dominat frim P* Q cf Q df Q Industry

12. Labor Markets Production Theory Total Product Average Product Marginal Product Labor Demand Marginal Revenue Product (MRP) Value of the Marginal Product (VMP)

13. L L Q Q/L L0L0 L1L1 L2L2 TP AP L MP L STAGE III THREE STAGES OF SHORT-RUN PRODUCTION STAGE I STAGE II

14. Marginal Revenue Product (MRP) Marginal Revenue Product of Labor equals the Marginal Revenue times the Marginal Product of Labor MRP L = MR*MP L Units of Measure: $/L = ($/Q)*(Q/L)

15. Value of the Marginal Product (VMP) The Value of the Marginal Product of Labor equals the output Price times the Marginal Product of Labor VMP L = P*MP L Units of Measure: $/L = ($/Q)*(Q/L) For a competitive firm P=MR, therefore MR*MP=MRP=VMP=P*MP For a monopolistic firm P>MR, therefore P*MP=VMP>MRP=MR*MP

16. FACTOR COST Marginal Factor Cost (MFC) Average Factor Cost (AFC) Under a rule of one price (wage), the wage rate, W, equals the average factor cost, AFC W=AFC

17. $/L L MRP=VMP 0 DLDL Labor Market Competitive Input Market/Competitive Output Market $/L L 0 Competitive Firm SLSL W L* W=AFC=MFC=MRP=VMP

18. $/L L MRP L 0 DLDL Labor Market Competitive Input Market/Monopolistic Output Market $/L L 0 Monopolistic Firm SLSL W L* W=AFC=MFC=MRP<VMP VMP L