Lecture 1 Foundations
- Market Demand (Market demand of a good is the quantity that consumers purchase for
that good at various prices)
o Depends
on: price,
income,
preferences, expectations…
Lineair demand
Q = a – bP (altijd deze notatie gebruiken)
Industry that focuses on quantity rather than price: Oil industry
P = A – BQ (gebruik deze om surplus te berekenen)
o Demand also depends on
Income (Engel Law) normal goods vs inferior goods
Price (decreasing except for giffen goods)
o If only 1 firm, firm’s demand coincides with market demand, if not, it also depends
on the other firms
How many competitors, their products, their prices, their marketing…
o Demand function trough regression analysis
- Price elasticity cross price elasticity of demand
- Profit maximization = difference between revenues and costs
dπ
o First order conditions for profit maximization:
dq = 0
o MR = MC
- Perfect competition
o Firms and consumers are price-takers & a firm
can sell as much as it likes at the ruling market
price
o Price = marginal cost p = MC
, - Monopoly
o Only firm in the market
o Market demand = firm demand
Demand: P = A – BQ
TR = PQ = AQ – BQ²
dTR
MR = = A−2 BQ
dQ
o Monopolist maximizes profit by
equating marginal revenue with
marginal cost
Price is greater than
MC: loss of efficiency
Price is greater than AC:
positive economic
profit π
Key to growth (or to survive) is to operate activities at an optimal niveau related to profit
maximization
- Cost and output decisions
o Do not forget about sunk costs! Ex. Licence fee or marketing analysis prior to a
potential investment
o Firms maximize profit where MR = MC
Output should be greater than zero
Price is greater than average variable cost (must expect to cover sunk costs)
- Economies of scale
o Definition: average costs fall with an increase in output
o Sources
Product specialization and the division of labour, indivisibilities, capacity
related to volume while cost is related to surface area (ex. Container)…
- Economies of scope
o An economy of scope
means that the production of one good reduces the cost of producing another
related good. Economies of scope occur when producing a wider variety of goods or
- Market Demand (Market demand of a good is the quantity that consumers purchase for
that good at various prices)
o Depends
on: price,
income,
preferences, expectations…
Lineair demand
Q = a – bP (altijd deze notatie gebruiken)
Industry that focuses on quantity rather than price: Oil industry
P = A – BQ (gebruik deze om surplus te berekenen)
o Demand also depends on
Income (Engel Law) normal goods vs inferior goods
Price (decreasing except for giffen goods)
o If only 1 firm, firm’s demand coincides with market demand, if not, it also depends
on the other firms
How many competitors, their products, their prices, their marketing…
o Demand function trough regression analysis
- Price elasticity cross price elasticity of demand
- Profit maximization = difference between revenues and costs
dπ
o First order conditions for profit maximization:
dq = 0
o MR = MC
- Perfect competition
o Firms and consumers are price-takers & a firm
can sell as much as it likes at the ruling market
price
o Price = marginal cost p = MC
, - Monopoly
o Only firm in the market
o Market demand = firm demand
Demand: P = A – BQ
TR = PQ = AQ – BQ²
dTR
MR = = A−2 BQ
dQ
o Monopolist maximizes profit by
equating marginal revenue with
marginal cost
Price is greater than
MC: loss of efficiency
Price is greater than AC:
positive economic
profit π
Key to growth (or to survive) is to operate activities at an optimal niveau related to profit
maximization
- Cost and output decisions
o Do not forget about sunk costs! Ex. Licence fee or marketing analysis prior to a
potential investment
o Firms maximize profit where MR = MC
Output should be greater than zero
Price is greater than average variable cost (must expect to cover sunk costs)
- Economies of scale
o Definition: average costs fall with an increase in output
o Sources
Product specialization and the division of labour, indivisibilities, capacity
related to volume while cost is related to surface area (ex. Container)…
- Economies of scope
o An economy of scope
means that the production of one good reduces the cost of producing another
related good. Economies of scope occur when producing a wider variety of goods or
