Swerdlow and Hoffer
I. Elasticity
Important Terms:

Elasticity - How demand changes with price

Determinants of price elasticity of demand:
1) Number of close substitutes
2) Proportion of income 3) Time
4) Luxury vs. Necessity

Coefficient Ed -


Ed>1 is elastic
Ed<1 Is inelastic
Ed=1 Unit elastic

Elastic Demand


Inelastic Demand

Unit Elastic


Total Revenue = P x Q

Elastic: Price goes down, TR goes up
Inelastic: Prices goes down, TR goes down
Unit Elastic: Price goes down, TR does not change

Price Elasticity of Supply

price elasticity
of supply


percentage change
in quantity supplied----
percentage change
in price

Market Periods:
Immediate market period
Short Run / Elastic Supply Curve
Long Run / Very Elastic

Cross Elasticity

Substitute good = Positive Coefficient
Complementary good = Negative Coefficient
Independent good = 0 Coefficient

Income Elasticity of Demand

Normal goods = Positive Coefficient
Inferior goods = Negative Coefficent

II. Consumer and Producer Surplus
III. Consumer Behavior
IV. Costs of Production
V. Four Market Models: PC, MC, OL, M - Characteristics, profit max
Pure Competition
Very large number of firms
Standardized product with a high degree of substitutability
Price takers
Free entry and exit
Demand is perfectly elastic
MR = Change in TR / Change in Q
P = MR = AR
Profit Max: MR = MC

Firm will shut down when MR = AVC
Normal Profit at MR = ATC

Pure Monopoly
Single Seller
No close substitute
Price Maker
Blocked Entry-legal, technological, control of key resources
non-price competition-advertising

MR is less than price
because as more units of output are produced, the marginal revenue is equal to the price of the unit minus the price cuts of all the units before it.
Because the monopoly produces at MR = MC, it produces at a lower quantity and higher price than a purely competitive firm, so an efficiency loss occurs.

Price discrimination
Ability to segregate buyers
No resale
At least some monopoly power

Regulated Monopoly

Socially optimal price is P = MC
Fair-return price is P = ATC
Monopoly price is MR = MC

**Monopolistic Competition

Relatively large number of sellers-
  • Each firm has limited control over market price

  • No collusion possible

  • Firms not interdependent
Product differentiation-
  • Product attributes
  • Service
  • Location
Brand names and packaging
Easy entry and exit

Herfindahl Index = (%Firm A)^2+(%Frim B)^2+(%Firm C)^2...


Monopolistically Competitive firms only earn normal profit in long run.


Few large producers
Can be homogenous or differentiated
Price control by mutually interdependent

If there is collusion, monopoly graph applies.

1) Predict the changes in TR.
A) Price falls and demand is elastic
B) Price Rises and demand is elastic
C) Price falls and demand is inelastic

2) Which of the following has the most elastic demand coefficient
A) Cheese
B) Muenster Cheese
C) Boars Head Muenster Cheese

3) Which of the following statements is true regarding a perfectly competitive firm

A) Marginal revenue differs from average revenue
B) Demand is downward sloping
C) Average revenue differs from price
D) Price is determined by the equilibrium in the entire market
E) The demand curve lies above the marginal revenue curve

4) In order to establish a socially optimal price, the government should select a price at which-

A) Marginal revenue equals marginal cost
B) Demand curve intersects the total cost curve
C) Average revenue equals zero
D) Marginal cost intersects demand curve

5) In the long run a monopolistically competitive firm

A) Earns a positive economic profit
B) Earns zero economic profit
C) Has a vertical demand curve
D)Earns a negative economic profit

6) In order for a monopoly to price discriminate, it must

A) Be able to prevent resale of its products
B) have market power
C) have buyers with different elastic demand curves
D) All the above

7) The concentration ratio for a monopoly is

A) 0
B) 5
C) 100
D) 10

8) In an oligopoly market firms

A) have no market power
B) are interdependent
C) are large in number
D) cannot earn economic profits

9) The products of oligopolies are

A) Homogeneous
B) Differentiated
C) Homogeneous or Differentiated
D) Unique

10) P = MC is what type of efficiency

A) Technical
B) Productive
C) Allocative

Free Response

1) Due to a new technological advancement, MATAM Inc. is realizing monopolistic power

A) Why does the demand curve lie above the MR curve?

B) MATAM Inc. is currently enjoying short term economic profits. Draw a graph that includes the following

i. Profit maximizing output
ii. profit maximizing price
iii. shaded economic profit

C) State what happens to MATAM Inc.'s demand curve as other firms acquire the same technology.

Answers: 1) + - - 2) C 3) D 4) D 5) B 6) D 7) C 8) B 9) C 10) C
Free Response
A) MATAM must lower the price on all units as quantity increases, therefore the marginal revenue from each good sold is the price minus the change in price of all goods before


C) The demand curve will shift to the left because as new firms acquire the technology, the amount of substitute goods increases

News Article
http://www.nytimes.com/2009/08/27/business/27views.html?_r=1&scp=3&sq=oligopoly&st=Search-SABMIller and Molson Coors are colluding and demonstrating monopoly power by raising prices, and with 80% of the market between them, the government is beginning to ask questions.
VI. Efficiency