Structure
Learning Objectives
People who trade stocks, trade based on what they feel will move and they can trade for profit. Nobody makes investment decisions based on reading financial filings. Whether a company is making millions or losing millions, it has no impact on the price of the stock. Whether it is analysts, brokers, advisors, Internet traders, or the companies, everybody is manipulating the market. If it wasn't for everybody manipulating the market, there wouldn't be a stock market at all…
Jonathan Lebed, statement to his lawyer, (Lewis 2001)
Structure
Learning Objectives
Which are the most common production factors?
A function that transforms amounts of input factors to the maximum amount of output that can be produced for a given technology is called a production function.
Structure
Learning Objectives
Mr. Cook replied –with an uncharacteristic display of emotion–that a return on investment (ROI) was not the primary consideration on such issues. "When we work on making our devices accessible by the blind," he said, "I don't consider the bloody ROI." It was the same thing for environmental issues, worker safety, and other areas that don’t have an immediate profit. The company does "a lot of things for reasons besides profit motive. We want to leave the world better than we found it."
Why Tim Cook Doesn't Care About 'The Bloody ROI', (Denning 2014)
Profit = Revenue - Cost
\[\pi(q, K, L) = \underbrace{p q}_{Revenue} - \underbrace{(r K + w L)}_{Cost}\]
How much from each factor would a profit maximizing firm like to use?
For which price level is an input factor choice profit maximizing?
Since \((q_{1}, K_{1}, L_{1})\) is profit maximizing under prices \((p_{1}, r_{1}, w_{1})\), then
Since \((q_{2}, K_{2}, L_{2})\) is profit maximizing under prices \((p_{2}, r_{2}, w_{2})\), then
Adding these two inequalities gives
If the prices of input factors remain constant (i.e., \(\Delta r = \Delta w = 0\)), then
If the output price and the price of an input factor remain constant (say \(\Delta p = \Delta w = 0\)), then
Structure
Learning Objectives
\[E(K, L) = r K + w L\]
\[q = \sqrt{L}.\]
\[K = \frac{1}{r}\hat c - \frac{w}{r} L\]
\[q = K^{1/2} L^{1/2}.\]
\[\mathrm{MRTS}(K, L) = \frac{\partial f(K, L) / \partial K}{\partial f(K, L) / \partial L} = \frac{r}{w}\]
\[\frac{L}{K} = \frac{r}{w} \implies L = \frac{r}{w} K\]
\[q = \left(\frac{r}{w}\right)^{1/2} K \implies K = \left(\frac{w}{r}\right)^{1/2} q\]
\[L = \left(\frac{r}{w}\right)^{1/2} q\]
\[c(q) = r \left(\frac{w}{r}\right)^{1/2} q + w \left(\frac{r}{w}\right)^{1/2} q = 2 \left(r w\right)^{1/2} q\]
Profit Maximization | Cost Minimization | |
---|---|---|
Objective | Maximize profits | Minimize costs |
Controls | Input factors | Input factors |
Parameters | Input prices, output price | Input prices, output quantity |
Optimal Control | Factor demand | Conditional factor demand |
Value function | Profit function | Cost function |
\[c(q) = \alpha + \beta q\]
\[\bar{c}(q) = \frac{Total\ cost}{\#Produced\ units} = \frac{c(q)}{q}\]
Structure
Learning Objectives
Assume that you have spent \($100\) on a ticket for a weekend ski trip to Michigan. Several weeks later you buy a \($50\) ticket for a weekend ski trip to Wisconsin. You think you will enjoy the Wisconsin ski trip more than the Michigan ski trip. As you are putting your just-purchased Wisconsin ski trip ticket in your wallet, you notice that the Michigan ski trip and the Wisconsin ski trip are for the same weekend! It’s too late to sell either ticket, and you cannot return either one. You must use one ticket and not the other. Which ski trip will you go on?
(Arkes and Blumer 1985 Experiment 1)
Choices | Nobs | Sample% |
---|---|---|
\($100\) ski trip to Michigan | 33 | 54.10 |
\($50\) ski trip to Wisconsin | 28 | 45.90 |
Total | 61 |
Group | Average No. Visits |
---|---|
No discount | 4.11 |
\($2\) discount | 3.32 |
\($7\) discount | 3.29 |
A variable cost component that depends on the level of produced output.
Case | Cost Type |
---|---|
Real estate rents | Fixed |
Direct materials used for a product | Variable |
Salaries (fixed employee compensation) | Fixed |
Piece Rate (variable employee compensation, e.g., bonuses) | Variable |
Production supplies (e.g., machine oil) | Variable |
Utilities (e.g., electricity, telecommunication) | Fixed/Variable |
Property taxes | Fixed |
Sale taxes | Variable |
Insurance | Fixed |
Depreciation | Fixed |
Shipping costs | Variable |
Average variable cost is the component of the total cost that changes with the production level (i.e., variable cost) per unit of produced output.
Cost type | Cost expression |
---|---|
Total cost | \(c(q) = 3 + 2 q^{2}\) |
Variable Cost | \(\mu(q) = 2 q^{2}\) |
Fixed Cost | \(\sigma(q) = 3\) |
Average Total Cost | \(\bar{c}(q) = \frac{3}{q} + 2 q\) |
Average Variable Cost | \(\bar{\mu}(q) = 2 q\) |
Average Fixed Cost | \(\bar{\sigma}(q) = \frac{3}{q}\) |
Marginal Total Cost | \(c'(q) = 4 q\) |
Marginal Variable Cost | \(\mu'(q) = 4 q\) |
Marginal Fixed Cost | \(\sigma'(q) = 0\) |
Structure
Learning Objectives
\[\max_{q} \left\{ 8 q - 2 q^{2} \right\}.\]
\[8 - 4 q \overset{!}{=} 0 \implies q = 2.\]
\[\pi = 16 - 8 = 8.\]
Structure
Learning Objectives
Price | Firm 1 Supply | Firm 2 Supply | Firm 3 Supply | Market Supply |
---|---|---|---|---|
50 | 4 | 7 | 10 | 21 |
100 | 5 | 9 | 20 | 34 |
150 | 6 | 11 | 30 | 47 |
200 | 7 | 13 | 35 | 55 |
250 | 8 | 14 | 40 | 62 |
300 | 9 | 15 | 45 | 69 |
A competitive equilibrium is an equilibrium where
An excess supply or market surplus is a market state where the supplied quantities exceed the demanded quantities.
An excess demand or market shortage is a market state where the demanded quantities exceed the supplied quantities.
\[\mathrm{Supply}_{it} = \beta_{0} + \beta{_1} \mathrm{Price}_{it} + \dots + u_{it}, \] we will not obtain the correct coefficient for \(\beta_{1}\) because the exogeneity condition is not satisfied.
install.packages('markets')
library(markets)
houses
dataset (https://markets.pikappa.eu/reference/houses.html).ls <- lm(HS ~ RM + TREND + W + L1RM + MA6DSF + MA3DHF + MONTH, fair_houses())
summary(ls)
eq <- equilibrium_model(
HS | RM | ID | TREND ~
RM + TREND + W + CSHS + L1RM + L2RM + MONTH |
RM + TREND + W + L1RM + MA6DSF + MA3DHF + MONTH,
fair_houses(), correlated_shocks = FALSE)
summary(eq)
plot(eq)
abline(ls)
Structure
Learning Objectives
Market Structure | Quantity | Price |
---|---|---|
Monopoly | \(q_{m}= 7\) | \(p_{m} = 70 - 21 = 49\) |
Competition | \(q_{c}= 10\) | \(p_{c}= 40\) |
The monopolist makes profit
In the competitive equilibrium, profit is
Structure
Learning Objectives
Profit
Structure
Learning Objectives
The extensive form depicts more information than the normal form:
Structure
Learning Objectives
WILSON: The only thing we need to talk here because we are gonna get manipulated by these God damn buyers, they're sh, they can be smarter than us if we let them be smarter.
MIMOTO: (Laughs).
WILSON: Okay?
MIMOTO: (ui).
WILSON: They are not your friend. They are not my friend. And we gotta have 'em. Thank God we gotta have 'em, but they are not my friends. You're my friend. I wanna be closer to you than I am to any customer. 'Cause you can make us, I can make money, I can't make money. At least in this kind of a market. And all I wanna is ta tell you again is let's-let's put the prices on the board.
Co-conspirator explains how end-of-year compensation scheme eliminates incentives to cheat on cartel
\[c(q_{i}) = 4 q_{i}.\]
\[p(q_{i} + q_{j}) = 28 - 2 \left(q_{i} + q_{j}\right).\]
\[\max_{q_{i}} \left\{ \left( 28 - 2 \left(q_{i} + q_{j}\right) \right) q_{i} - 4 q_{i} \right\}.\]
\[28 - 2 q_{j} - 4 q_{i} = 4\]
\[q_{i} = \frac{24 - 2 q_{j}}{4}.\]
\[q_{i} = 4 = q_{j}.\]
\[\pi_{i} = 32.\]
Let the demand for firm \(i\) be
Structure
Learning Objectives
Moreover, the cotton producer would like to choose \(q_{c}\) such that
The merged firm chooses
Now, the cotton producer would like to choose \(q_{c}\) and \(\xi\) such that
With first order conditions
The fishery chooses
Structure
Learning Objectives
Excludable | Non Excludable | |
Rivalrous | apples, oranges | natural resources |
Non Rivalrous | theaters, concerts | open-source software, public television |
Excludable | Non Excludable | |
Rivalrous | private goods | common goods |
Non Rivalrous | club goods | public goods |
The total welfare in the market is determined by (why?)