Utility maximization and the demand curve

JohnKwan Utility theory provides a methodological framework for the evaluation of alternative choices made by individuals, firms and organizations.

Utility maximization and the demand curve

Utility maximization and the demand curve

In this hypothetical case, the 3-firm concentration ratio is Further examples Banking The Herfindahl — Hirschman Index H-H Index This is an alternative method of measuring concentration and for tracking changes in the level of concentration following mergers.

If the index is belowthe market is not considered concentrated, while an index above indicates a highly concentrated market or industry — the higher the figure the greater the concentration. Key characteristics The main characteristics of firms operating in a market with few close rivals include: Interdependence Firms that are interdependent cannot act independently of each other.

A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions.

For example, if a petrol retailer like Texaco wishes to increase its market share by reducing price, it must take into account the possibility that close rivals, such as Shell and BP, may reduce their price in retaliation.

Strategy Strategy is extremely important to firms that are interdependent. Because firms cannot act independently, they must anticipate the likely response of a rival to any given change in their price, or their non-price activity.

Maximum Utility

In other words, they need to plan, and work out a range of possible options based on how they think rivals might react. Oligopolists have to make critical strategic decisions, such as: Whether to compete with rivals, or collude with them.

Whether to raise or lower price, or keep price constant. Whether to be the first firm to implement a new strategy, or whether to wait and see what rivals do. Sometimes it pays to go first because a firm can generate head-start profits.

Barriers to entry Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market.

These hurdles are called barriers to entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist. Natural entry barriers include: Economies of large scale production.

If a market has significant economies of scale that have already been exploited by the incumbents, new entrants are deterred. Ownership or control of a key scarce resource Owning scarce resources that other firms would like to use creates a considerable barrier to entry, such as an airline controlling access to an airport.

High set-up costs High set-up costs deter initial market entry, because they increase break-even output, and delay the possibility of making profits.

Utility maximization and the demand curve

Many of these costs are sunk costswhich are costs that cannot be recovered when a firm leaves a market, and include marketing and advertising costs and other fixed costs. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future.

Predatory pricing Predatory pricing occurs when a firm deliberately tries to push prices low enough to force rivals out of the market.

Limit pricing Limit pricing means the incumbent firm sets a low price, and a high output, so that entrants cannot make a profit at that price.Economics exam questions and economics exam answers to help students study for microeconomics exams and be prepared for classes.

In our previous videos, we covered the basics of the demand alphabetnyc.com we get to dive into what happens when the demand curve shifts due to increases or decreases in market demand. Understand that the key characteristic of oligopoly is interdependence, apply game theory to examples, and accurately draw the kinked demand curve.

Rule of utility maximization and demand curve

How do you decide what to produce or trade? How can you maximize happiness in a world of scarcity. What are you giving up when you .

Econ -­‐ Fall Page 1 of 7 Utility Maximization and the Demand Curve This write-up is intended to make clear what utility maximization is and how utility maximization under the assumption of diminishing marginal utility results in, all else equal, a negative relationship between the price of a good and the quantity demanded of that good.

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