Microeconomics Lecturer Dr. Nguyen Thi Tuong Anh

LECTURER
Dr Nguyn Th Tng Anh

Head of Microeconomics section
Teaching:
+ Microeconomics for bachelor courses (FTU)
+ International Economics and Trade for master course in
International Business (La Trobe University Australia)
+ Economics for manager for VCCI
+ Microeconomics and Marketing for FPT University
Email: tuonganh@ftu.edu.vn
Cell phone: 0904 221816

Textbook
1. Principles of economics, Gregory
Mankiw, Worth Publishers, 2007

2. Exercise books
Lecture
3 credits

Twice per week, 7.5 weeks

Timetable: every Monday and Thursday

10 minutes break

Assessment
Class participation: 10%
- by random check
2 midterm tests: 30% (15% each):
- 3 Short-answer questions and 1 exercise (30 min)
- to be announced in advance
Final test: 60%:
- multiple choice questions (50 min)
- covers ALL contents discussed in the class
- according to universitys schedule
Assessment (cont.)
Presentation or essay is encouraged
- Group or individual
- works on one Vietnamese current economics and
trade issue
- good quality will get bonus mark added to the final
result
- Chosen topic must be announced to lecturers in
advance and be approved by lecturer
- Submit 1 week before the last lecture

Regulation
No chatting
No sleeping
No ringing
No late coming
CHAPTER 1
INTRODUCTION TO MICROECONOMICS
Content

Microeconomics
Basic questions
Economic choice
Chapter 1: Introduction
I. Microeconomics
1. The economy

Household
Government
Firm
Output market Input market
I. Microeconomics
1. The economy
- There are at least 3 members in any economy, which interacting
with each other in a certain economic mechanism.
Economic mechanism:
- market economy (1)
- planning economy (2)
- mixed economy (3)

2 3 1
Cuba
US, UK,
Japan...
Hong
Kong
Map of Cuba

Hong Kong notes

Hong Kong notes

Hong Kong notes

I. Microeconomics
2. Some definitions
Scarcity: When the need is greater than the
supplying ability
Commodities: Tools to satisfy needs
Resources: Inputs used to produce commodities to
satisfy needs, including:
+ Labour (L)
+ Materials (M)
+ Capital (K)
I. Microeconomics
3. Microeconomics and macroeconomics
Economics: study how society allocates scarce
resources for competitive goals
Microeconomics:study the behavior of each
member in an economy
Macroeconomics: study the economy as a whole

Microeconomics Macroeconomics Econometric
ECONOMICS
II. Basic questions
3 questions
WHAT?
HOW?
FOR WHOM?
TO PRODUCE
WHERE?
III. Economic choice
1. Choices principles
- Need to choose because of scarce resources. If resource is
already spent on A it can not be spent on B
- Many ways to spend resources easy to choose

2. Choices target
- Household: Optimize benefit
- Firm: Optimize profit
- Government: Optimize social welfare

III. Economic choice
3. Choosing tool
- Opportunity cost (OC): The value of the best missed opportunity
when making a choice
- Marginal thinking
+ Marginal cost (MC): The change in total cost resulting
from a change from quantity

+ Marginal benefit (MB): The change in total benefit
resulting from a change from quantity

) (
'
Q
TC
Q
TC
MC
) (
'
Q
TB
Q
TB
MB
Alfred Marshall
(1842 - 1924)
British economist
One of the greatest
microeconomist
Chapter 2
DEMAND AND SUPPLY
Content

+ Demand
+ Supply
+ Market equilibrium

I. Demand

1. Definitions
2. The law of demand
3. Demonstrating demand
4. Determinants in demand function
5. Movement and shift of demand curve

I. Demand
1. Some definitions
- Demand (D): The quantity of goods and services that consumer is
willing to buy and afford to buy at various price level in a certain time,
ceteris paribus.

- Quantity demanded (Q
D
): The quantity of goods and services
that consumer is willing to buy and afford to buy at a price level in a
certain time, ceteris paribus.

- Individual demand

- Market demand

I. Demand
2. The law of demand

P
Q
D
P
Q
D
I. Demand
3. Demonstrating demand
- Demand schedule
- Demand curve
- Demand function
P = - aQ
D
+ b
Q
D
= - aP + b
Q
D
= f (P
x,
P
y,
I, T, E, N)

P
Q
P
1

P
2

Q
1
Q
2

A
B
I. Demand
4.1. Price of related goods (P
Y
)
- Substitutes goods: A and B are substitutes if the
usage of A can be replaced by the usage of B,
provided that the initial consumption target is
unchanged

P
S

Q
S

Q
R

P
S

Q
S

Q
R

I. Demand
4.1. Price of related goods (P
Y
)
- Complementary goods: A and B are complementary if the usage
of A must go together with the usage of B to ensure the initial
utility of both goods

P
C
Q
C
Q
R
P
C
Q
C
Q
R

King Camp Gillett (1855 - 1932)
I. Demand
4.2. Income of consumer (I)

I Q
D

I
Q
D

I Q
D

I Q
D

Normal goods
Inferior goods
I. Demand
4.2. Income of consumer (I)
- Engel curve: Attitude
toward any goods
depends on buyers
income, not on goods
quality

I
Q
I
1

I
2

I
3

Q
1
Q
3
Q
2

Inferior
Normal
I*
I. Demand

4.3. Taste of consumer (T)

4.4. Expectation of consumer (E)

4.5. Number of consumer (N)

I. Demand

4.3. Taste of consumer (T)

Gender
Age
Culture
Religion
.

I. Demand
5. Movement and shift of the demand curve
- Movement: P
X
- endogenous variable

- Shift: The rest determinants exogenous
variables
P
P
Q
Q
P
1

P
2

Q
1
Q
2

P
Q
1
Q
2

A
B
Questions
1. Chicken and fish are substitutes goods.

a. The decrease in chickens price causes a
movement in fishs demand curve

b. The increase in chickens price causes a left shift in
fishs demand curve

II. Supply

1. Some definitions
2. The law of supply
3. Tools to demonstrate supply
4. Determinants in supply function
5. Movement and shift of supply curve

II. Supply

1. Some definitions
- Supply (S): The quantity of goods and services that
supplier is willing to supply and able to supply at various price
level in a certain time, ceteris paribus.

- Quantity supplied (Q
S
): The quantity of goods and
services that supplier is willing to supply and able to supply at
a price level in a certain time, ceteris paribus.

- Individuals supply (firms supply)

- Market supply

II. Supply
2. The law of supply

P Q
S
P Q
S
II. Supply
3. Tools to demonstrate supply
- Supply schedule
- Supply curve
- Supply function
P = aQ
S
+ b
Q
S
=aP + b
Q
S
= f (P
x
, P
i,
G, Te, E, N)

P
Q
P
1

P
2

Q
1
Q
2

II. Supply
4. Determinants in supply function
4.1. Price of inputs (P
i
)

4.2. Governments policies
4.3. Technology
4.4. Expectation
4.5. Number of supplier

P
i
C
Profit Q
S

P
i

C Profit
Q
S

II. Supply
5. Movement and shift of the supply curve
- Movement: P
X:
endogenous variable
- Shift: The rest factors exogenous variables

-
P
P
2

P
1

Q
1
Q
2

P
P
1

Q
1
Q
2

Q Q
S
S
1

S
2

A
B
III. Market equilibrium

1. Equilibrium status
2. Surplus and shortage
3. Price controlling

1. Equilibrium status
- Status in which quantity
demanded equals to
quantity supplied
- - Merger demand schedule
and supply schedule
P = -aQ
D
+ b
P = cQ
S
+ d
E (P
E,
Q
E
)
- Intersection of (S) and (D)
-
D
S
E P
E

Q
E

P
Q
- Shortage
+ P
2
< P
E

+ Q
S
< Q
D
=> shortage
+ Appear markets
pressure to make P
2

return to the equilibrium
price

Shortage
Shortage
P
E

P
2

Q
S
Q
D

Q
E


- Surplus:
+ P
1
> P
E

+ Q
S
> Q
D
=> surplus
+ Appear markets
pressure to make P
2

return to the equilibrium
price

Surplus
Surplus
P
E

P
1

Q
D

Q
S

Q
E

- Controlled by the Government
- Ceiling price (P
C
)
+ The highest price allowed
in the market
+ For the sake of buyer
+ Appear shortage
+ Governments responsibility
E
P
E

Q
E
Q
S

Q
D

(G)
P
C

- Floor price (P
F
)
+ The lowest price allowed
in the market
+ For the sake of supplier
+ Appear surplus
+ Governments responsibility
P
E

Q
E

P
F

Q
D
Q
S

(G)
Quantity
Price
10%
?%
A
B
How to
calculate the
change?
ELASTICITY
Contents

Elasticity of demand

Elasticity of supply


*Price elasticity of demand (E
D
P
)
*Income elasticity of demand (E
D
I
)
*Cross elasticity of demand (E
D
Py
)


Price elasticity of demand (E
P
D
)
- The percentage changed in quantity
demanded resulting from 1% change in price
-

P
Q
E
D
P
%
%
P
D
)
Point elasticity

E.g: Demand curve: P = 18 2Q and point A (P=6,
Q=6)
What is price elasticity of demand at point A

P
P
Q
Q
:
Q
P
Q
Q
P
P
Q
P
. ' .
) (
P
Q
E
D
P
%
%

E
D
P
= -1/2 . 6/6= -1/2
Conclusion:
-
-
P
D
)

Arc elasticity

Eg: At price P=7.000VND, consumer buys 10kilos of
pork/ month. At price P= 6.000 VND, consumer buys
15kilos/ month. What is price elasticity of demand?
2
2
2 1
2 1
2 1
2 1
P P
P P
Q Q
Q Q
E
D
P
AB

Conclusion: Price elasticity of demand
always:

- Unit free and negative value
- Usually use absolute value

Price elasticity of demand
(E
P
D
)
/E/ < 1: Inelastic demand
- steep demand curve
- large change in price, small
change in quantity demanded
- Consumers are not very sensitive
to the change in price
- the goods is hard to replace
or necessity
P
Q
P
1

P
2

Q
2
Q
1

P
D
)
/E/ > 1: Elastic demand,
- flat demand curve
- small change in price, large
- Consumers are very sensitive
- the goods is easy to replace
P
Q
P
1

P
2

Q
2

Q
1

P
D
)

/E/ = 1: Unitary-elastic demand
- slope down demand curve
- %change in price equal to %

P
D
)
/E/ = 0: Perfectly Inelastic demand
- Demand curve is parallel to the
vertical axis
- Change in price doesnt affect
quantity demanded
- Consumers are not sensitive
- The good is irreplaceable

P
Q

Price elasticity of demand
(E
P
D
)
/E/ = : Perfectly elastic
demand
- Demand curve is parallel to
the horizontal axis
- Change in price affects totally
on quantity demanded
- Consumers are perfectly
sensitive to the change in price
- The good is in the perfect
competition market
P
D
)
Factors effecting on E
P
D

- The availability of substitutes goods
- More substitute: E>1, less substitute: E<1
- The characteristic of the goods
- Necessities: E<1, Innecessities: E>1
- The time needed to find out the substitutes goods
- Long time: E>1, Short time: E<1
- The ratio of the spending in total income
- Big ratio: E>1, Small ratio: E<1

* The relationship
between E
P
D
,
P and
TR
E<1 E=1 E>1
P
P
P
D
)

The relationship between
E
P
D
,
P and TR

/E/<1: P TR
P
1

P
2

Q
1
Q
2

Minus
Plus
A
B
O

* The relationship
between E
P
D
,
P and
TR
E<1 E=1 E>1
P
P
TR
TR

P
D
)
* The relationship between E
P
D
,
P and TR
/E/>1: TR when P

Minus
Plus

The relationship
between E
P
D
,
P and
TR

E<1 E=1 E>1
P
P
TR
TR
TR =
const
TR =
const
TR
TR

Income elasticity of demand (E
I
D
)
- The percentage changed in quantity
demanded resulting from 1% change in
income
-
- E
I
D
<0: Inferior goods
- E
I
D
>0: Normal goods
- E
I
D
>1: Luxury goods

Q
I
Q
I
Q
E
I
D
I
. '
%
%
) (
Cross-elasticity of demand (E
Py
D
)
- The percentage changed in quantity demanded
resulting from 1% change in price of related goods

E
Py
D

> 0 : Substitutes goods
E
Py
D

< 0 : Complements goods
E
Py
D

= 0 : Independent goods

-
Q
P
Q
P
Q
E
Y
P
Y
D
P
Y Y
. '
%
%

Price elasticity of supply (E
P
S
)
- The percentage changed in quantity supplied
resulting from 1% change in price
-

P
Q
E
S
S
P
%
%

E=0: Perfectly inelastic supply
E<1: Inelastic supply
E>1: Elastic supply
E=1: Unitary elastic supply
E=: Perfectly elastic supply

Factors affecting on elasticity of supply:

- Time needed to find substitutes resources for
inputs
- Availability of inputs
Questions:
1. If 10% increase in As price leads to 2% increase in total
revenue, A is elastic demand

2. Decrease in gasolines price makes the demand curve of
motorbikes (D1) shift to the right to (D2) and this (D2) is more
elastic than (D1) at any quantity level (in absolute value)

3. All points in a demand curve has the same value of
slope and price elasticity of demand (point elasticity)

4. Food is less elastic demand than Kinh Do soft cake

5. Per-unit tax imposed on producer of good, which
demand is more elastic than supply will makes that
producer bear the smaller part in total tax amount in
comparison with consumers part.

CHAPTER 4
THEORY ON CONSUMERS BEHAVIOR
Content
Theory on consumers utility
The principle of diminishing marginal utility
Consumers surplus
Consumers preferences
Budget constraint
Maximizing utility (Optimal decision with budget
constraint)
I. Theory on consumers utility
1. Some definitions
1.1. Utility (U)
- The benefit or satisfaction a person gets
from consuming goods or services
- An abstract concept
- Unit free
- Depends on consumers perception
(subjectivity)

1. Some definitions
1.2. Total utility (TU)
- The total benefit or satisfaction a person gets from
the consumption of goods and services
- Depends on the persons level of consumption
more consumption generally gives more total utility

1. Some definitions
1.3. Marginal utility (MU)
- The change in total utility resulting from the change in the
quantity of consumed goods and/ or services

) (
'
Q
TU
Q
TU
MU

2. The principle of diminishing marginal
utility
- In a certain time period, continuous consumption will
lead to the increase in total utility but a decrease in
marginal utility

* Application
3. Consumers surplus (CS)
- The difference between
the market price and the
price buyer willing to pay
- The area below demand
curve and above the
market price line
P
Q
P*
CS
II. Theory on consumers choice
1. Consumers preferences
- Some assumptions:
+ Preferences do not depend on goods price or income
+ People can sort all the possible combinations of goods that might
be consumed into 3 groups: preferred, not preferred and
indifferent
+ Consumers prefer more to less
+ Consumers preference is transitivity


A
B
C
D
A (preferred
area)
C (less
preferred
area)
1. Consumers
preferences
Indifference curve:
shows the various
combinations of consumption
quantities that lead to the
same level of well-being or
happiness
I
1

I
2

Better
A
B
C
Movie
Food
Indifference curves characteristics
- Downward sloping, the closer to the right hand-
side, the higher utility consumer can gain
- Never intersect
X.MUx + Y . MUy = 0
- -MUx / MUy = Y / X
- -MUx / MUy : the slope of Indifference curve =
The marginal rate of substitution (MRS)

MRS: reduce gradually as
the quantity consumed
increases
A
B
C
D
Y
X
MRS reveals consumers preference toward
good and service
A
B
A
B
Y
X
Y
X
*Special indifference curve
Perfect substitute goods

vs

Mc Donalds vs Burger King

vs
MRS = const
*Special indifference curve
Perfect Complement goods

2. Budget constraint
- Budget line (BL): shows the various
combinations of consumption that consumer
can get from the available income
I=P
X
.Q
X
+P
Y
.Q
Y
Q
Y
= I/P
Y
(P
X
/P
Y
).Q
X
- P
X
/P
Y
: the slope of budget
constraint or price line
Area C: can not afford
Area D: Inefficient
A
B
Movie
(Y)
Food
(X)
C
D
- I, P
X
= const, P
Y
changes

P
Y
decreases: BL
1
BL
2
P
Y
increases: BL
1
BL
3

BL
1

BL
2
BL
3
Y
X
- I, P
Y
= const, P
X
changes

P
X
decreases: BL
1
BL
2
P
X
increases: BL
1
BL
3

BL
1

BL
2
BL
3
Y
X
- P
X
, P
Y
= const, I changes

I

increases: BL
1
BL
2
I

decreases: BL
1
BL
3

BL
1

BL
2
BL
3
Y
X
3. Optimal consumption combination
I
1

I
2

I
3

A
B
C
D
Y
X
3. Utility maximizing choice
- At point C, the indifference curve slope is equal to the
budget lines slope

- In case of many goods and services:

Y
Y
X
X
Y
X
Y
X
P
MU
P
MU
P
P
MU
MU

Z
Z
Y
Y
X
X
P
MU
P
MU
P
MU
.....
Chapter 3: Review
A consumer decides to spend his income of 200$
on X and Y.

a. P
X
= 4$, P
Y
= 2$. Draw this consumers budget line

b. Due to the decrease in quantity supplied, Ys price goes up to 4$.
Draw new budget line

c. There is a promotion from the seller. Buying 20 units of Y at price
of 2$, consumer will get 10 units more free of charge. This is
applied on the first 20 units of Y only. The following units are
still applied the price of 2$ (except the bonus). Draw new
budget line

CHAPTER 5

THEORY ON
FIRMS BEHAVIOR
Content
*Theory on production
- Production and Production function
- Short run &Long run

*Theory on cost
- Total, average and marginal cost
- Economic, Accounting and Sunk cost

*Theory on profit
- Total and marginal revenue
- Profit maximization
I. Theory on production
1. Some definitions
- Production
INPUTS OUTPUTS
PRODUCTION
M
(Material)
L
(Labour)
K
(Capital)
Goods
(Tangible)
Services
(Intangible)
1. Some definitions
- Short run and long run
+ Short run: is a period of time in which the quantity of at least
one input is fixed (fixed input) and the quantities of the other
inputs can be varied (variable inputs)
+ Long run: is a period of time in which the quantity of all inputs
can be varied
* No specific time that can be marked on the calendar
to separate the short run from the long run
Photocopy shop
2. Production function

- The maximum quantity of outputs gained from
certain quantity of inputs at current technology
constraint in a certain time period

Q = f (X
i
)
Charles W. Cobb
Paul H. Douglas, 1892-1976.

2. Production function
- Cobb-Douglas production function
For production, the function is
Q = AL
,
where:
Q = output
L = labour input
K = capital input
and = labour and capital's share of output.


According to Cobb& Douglas:

US economys production function
from 1899 - 1912:

Q = L
0.25
K
0.75

conclusion:

3. Production in short-run
- Average Product of an input (AP) : is equal to total
product divided by the quantity of the input
employed

- Average Product of labour (AP
L
)

- Average Product of capital (AP
K
)
i
X
Q
AP
L
Q
AP
L

K
Q
AP
K

- Marginal Product of a input (MP) is the increase in total
product divided by the increase in the quantity of the input
employed, holding the quantity of all other inputs constant

- Marginal Product of labour (MP
L
)

- Marginal Product of capital (MP
K
)
) (
'
Xi
i
Q
X
Q
MP
) (
'
L L
Q
L
Q
MP
) (
'
K K
Q
K
Q
MP
What is the
relationship
between MP
and AP?
Capital
(K)
Labour
(L)
Output
(Q)
AP
L
MP
L

4 0 0
4 1 70
4 2 150
4 3 75
4 4 288
4 5
4 6
4 7 52
}
}
52
10
Capital
(K)
Labour
(L)
Output
(Q)
AP
L
MP
L

4 0 0 0 -
4 1 70 70
4 2 150 75
4 3 225 75
4 4 288 72
4 5 340 68
4 6 354 59
4 7 364 52
70
}
}
}
}
}
}
}
80
75
63
52
14
10
- The law of diminishing marginal returns: occurs
when the marginal product of an additional input
(e.g. worker) is less than the marginal product of
previous input (i.e. previous worker)

II. Theory on cost
1. Cost in short-run
1.1. Fixed cost, variable cost, total cost
- Fixed cost (FC): the cost of a fixed input, independent with
the output level
- Examples:

C
Q
FC
FC
II. Theory on cost
1.1. Fixed cost, variable cost, total cost
- Variable cost (VC): the cost of a variable input, varies with
the output level
- Examples:

C
Q
VC
II. Theory on cost
1.1. Fixed cost, variable
cost, total cost
- Total cost (TC): is the sum of
total fixed cost and total
variable cost

TC = VC + FC

C
Q
FC
FC
VC
TC
II. Theory on cost
1.2. Average cost
- Average fixed cost (AFC):
is total fixed cost per unit of
output

AFC
C
Q
Q
FC
AFC
II. Theory on cost
1.2. Average cost
- Average variable cost (AVC):
is total variable cost per unit
of output

- Note: Average curves (except
AFC) are U-shaped

AVC
Q
VC
AVC
C
Q
II. Theory on cost
1.2. Average cost
- Average total cost (ATC): is
total cost per unit of output

C
Q
AFC
AVC AFC
Q
TC
ATC
AVC
ATC
II. Theory on cost
1.3. Marginal cost (MC): is
the change in total cost
results from a unit
increase in output

MC intersects AVC and ATC at
their minimum points

C
Q
AVC
ATC
MC
AVC
min

ATC
min

) ( ) (
' '
Q Q
VC TC
Q
TC
MC
Fill in the blank

Q FC VC TC AVC ATC

MC
1 15 -
2 36 15.5
3 5 52
4 83
Q FC VC TC AVC ATC

MC
1 5 15 20 15 20 -
2 5 31 36 15.5 18 16
3 5 52 57 17.3 19 21
4 5 83 88 20.75 22 31
II. Theory on cost
2. Economic cost, Accounting cost and Sunk cost

- Economic cost: Total amount paid for inputs used in
production, includes:

- Explicit cost: Amount paid for inputs that do not belong to the firms
owner

- Implicit cost: Amount paid for inputs that belong to the firms owner

Economic Cost = Explicit Cost + Implicit cost
II. Theory on cost
2. Economic cost, Accounting cost and Sunk cost

- Accounting cost: Amount paid for inputs used in
production and reported in accounting notes

- Sunk cost: Amount paid for inputs used in
production which neither be refundable nor
changeable by future decisions/ actions
Economic Cost = Accounting Cost + Opportunity cost
III. Theory on profit
1. Definition
- Profit (): is the difference between total revenue and
total cost

- Factors affect on profit:
- + P, Q, ATC
- +

TC TR
) ( . . ATC P Q ATC Q P Q
II. Theory on profit
1. Definition
- Average revenue: is total revenue per unit of output

- Marginal revenue: is the change in total revenue
results from a unit increase in output

Q
TR
AR
) (
'
Q
TR
Q
TR
MR

2. Profit maximization

0 )' (
) (

Q
TC TR
0 MC MR
MAX
0 '
) (

Q MAX
0 ' '
) ( ) (

Q Q
TC TR
MC MR
MAX

3. Revenue maximization

0 '
) (

Q MAX
TR TR
0 MR
0 MR TR
MAX
Review
Answer true or false with short explanation and
use diagram if necessary
1. When quantity increases, average product never
increases
2. When marginal cost increases, average costs also
increase
3. If marginal cost is decreasing, total cost will go down
as well.
4. Maximizing total revenue happens only when
demands price elastic is unitary
Exercise
Firm As demand curve are:
P = 40 Q
and average total cost is 10$ at any level of quantity

a. What is firm As fixed cost?
b. State out the optimal quantity and price for firm A
Exercise
Firm As demand and total cost functions are as
follows:

a. State out optimal Q,P, and TR to prove that profit
maximization and revenue maximization are quite
different
b. Firm As strategy is to earn as much revenue as
possible provided that profit always equal to 10$.
State out optimal Q,P and TR

Q P 4 . 0 12
5 4 6 . 0
2
Q Q TC
CHAPTER 6
MARKET STRUCTURE
Content

Perfect competition
Monopoly
Monopolistic competition
Oligopoly

1. Market
- Where suppliers and consumers meet
- Where demand and supply exist
??????

- Where all activities in economy are price-led
MARKET STRUCTURE
MARKET STRUCTURE
MARKET
STRUCTURE
PERFECT
COMPETITION
IMPERFECT
COMPETITION
MONOPOLY
MONOPOLISTIC
COMPETITION
OLIGPOLY
MARKET STRUCTURE

Types of market
Perfect
competition
Monopolistic
competition

Oligopoly

Monopoly
Number of suppliers

Products
Entry barrier
Market power
Non-price
competition

Unlimited Several Few One
Identical Different
Identical/
Different
Unique
Very
high
High
Low
None
Very
strong
Strong Weak None
None Little
None
Much
I. PERFECT COMPETITION
1. Definition
- A type of market where there are unlimited
suppliers and their products are identical

- Examples: Agricultural products ....
PERFECT COMPETITION
2. Characteristics
- Suppliers are price-taker
- No entry barrier
- No market power
- Symmetric information
- No non-price competition (no advertisement)
- Not necessary to choose supplier
OPEC: Organization of Petroleum Exporting
countries:

OPEC
OPEC
OPEC
- 1950s: Petroleum was exploiting by some big
firms, using dumping price to compete
very low price, just 1,5 2USD/ barrel
- OPEC found on 14 Sep 1960 with 11
members in order to keep petroleums price
not very low
- Sep 1973: increase price by 70%,
- Dec 1973: increase price by 130%
- Using price as a weapon to against Western
countries who supporting Israel

OPEC
PERFECT COMPETITION
3. Demand and marginal
revenue curves
- Demand curve: parallel
with horizontal axis
- Marginal curve: coinciding
with demand curve

- MR = P

P =MR
P
Q
P*
PERFECT COMPETITION
4. Maximizing profit
MAX
: MR=MC

In perfect competition: MR = P

MAX in perfect competition
:

P=MC

MC
P=MR
P*
Q* Q
P
5. Break-even, shut down point

= TR TC = Q (P - ATC)

P> ATC
min
> 0 profit
P= ATC
min
= 0 break-even point
P< ATC
min
< 0 loss
AVC
min
< P < ATC
min
continue producing
P < AVC
min
shut down

PERFECT COMPETITION
PERFECT COMPETITION
5. Break-even, shut
down point
P> ATC
min

TR = P*AQ*O
TC = OCBQ*
= P*ABC

MC
P=MR
P*
Q* Q
P
A
O
ATC
B
C
max

PERFECT COMPETITION
5. Break-even, shut
down point
P= ATC
min

TR = P*AQ*O
TC = P*AQ*O
= 0
Q*: break-even point

MC
P=MR
P*
Q* Q
P
A
O
ATC
PERFECT COMPETITION

MC
P=MR
P*
Q* Q
P
5. Break-even, shut
down point
P< ATC
min

TR = P*AQ*O
TC = OCBQ*
- = P*ABC
C
B
O
A
-
ATC
PERFECT COMPETITION

MC
P=MR
P*
Q* Q
P
5. Break-even, shut
down point
AVC
min
< P < ATC
min

TR = P*AQ*O
TC = OCBQ*
* Continue: Lose - = P*ABC
* Stop: Lose FC = BCEF
FC > -
Continue producing
B
C
A
E
F
AVC
ATC
PERFECT COMPETITION
5. Break-even, shut down
point
P < AVCmin

TR = P*AQ*O
TC = OCBQ*
* Continue: Lose - = P*ABC
* Stop: Lose FC = BCEF
FC < -
Stop producing
(shut down point)
MC
P=MR
P*
Q* Q
P
AVC
ATC
F
A
O
E
C
B
6. Supply curve

- Coinciding with MC,
but from AVC
min

MC
P=MR
P*
Q* Q
P
PERFECT COMPETITION
AVC
PERFECT COMPETITION
7. Producers surplus
(PS)
- The area below price
line and above marginal
cost curve

PS = TR VC
= + FC

PS
P
Q
Q*
P*
P=MR
MC
EXERCISE
Total cost function of a perfect competition firm is:

TC = Q
2
+ Q + 100
a. At P = 27$, state out Q* and
MAX

b. State out the break-even point of this firm

c. At P = 9$, should this firm close its business?

d. Show this firms supply curve
MONOPOLY
1. Definition
- A type of market where there is only one supplier
and the product is unique
- Examples:

2. Reasons of monopoly
- Economy of scales
- Stipulated by government
- Owning patterns, license.
- Monopoly in inputs
- Monopoly in location

MONOPOLY
MONOPOLY
CULLIAN

3.106 carat
Found in 1905
Largest in the world
MONOPOLY
MONOPOLY
3. Demand and marginal
revenue curves

- Demand curve: downward
sloping and relatively steep

- Marginal revenue curve:
downward sloping, is twice
as steep as the slope of the
demand curve (and the
same intercept)
P = -aQ + b
MR = -2aQ + b

P
Q
D
MR
MONOPOLY
4. Maximizing
profit

MAX
: MR=MC

P
Q
D MR
MC
Q*
m
P*
m

max
: MR=MC
ATC
MAX
MONOPOLY

P
Q
D MR
MC
Q*
m
P*
m

P*
c

Q*
c

P*
m
>>P*
c
Q*
m
<<Q*
c

max
: MR=MC
MONOPOLY
5. Supply curve of a monopolist
P changes, Q is constant P is constant, Q changes
P
Q
D
1

MR
1

MC
P
D
1

MR
1

MC
MR
2

D
2

Q*
P*
1

P*
2

P*
MR
2

D
2

Q*
1
Q*
2

- No 1:1 relationship between price and
quantity
- No functional relationship between price
and quantity
- No supply curve in monopoly

MONOPOLY
5. Supply curve of a monopolist
MONOPOLY
6. Market power
- Found in 1934 by Abba Lerner

(0 L 1)
- In perfect competition: P = MC L = 0
- The higher value of L is, the stronger market power a firm
can gain

P
MC P
L

EXERCISE
A monopolist is facing with a demand curve:
P = 18 2Q

and total cost function: TC = Q
2

a. State out P*, Q* and *
MAX

b. Government imposes 3$/ unit tax on producer. What is
new P**, Q** and **
MAX

c. Government imposes a fixed tax amount of 10$ on
producer. Compare P***, Q*** and ***
MAX
with P*, Q*
and *
MAX
in question a

Definition
- A type of market where there are a lot of suppliers
but their products are relatively different
- Example:
Demand and marginal revenue curves
- Demand curve: Downward sloping (each firm is a
mini-monopolist) but more elastic than
monopolists demand curve
- Marginal revenue curve: downward sloping, has
twice the slope of the demand curve

Imperfect competition

Maximizing profit

MAX
: MR=MC

P
Q
D MR
MC
Q*

P*
max
: MR=MC
ATC
MAX
Oligopoly
Definition:
- A type of market where there are some suppliers
but holding total or at least a very large part of
market share
- Example:
Characteristics:
- Firms depends closely on each other join in a
game and competitors act as players
- Firms are relatively powerful in market
- Entry barrier is relatively high
- Firm can either be cartelized or leading-price
Oligopoly
Cartelized (public collusion):
- Firms may merger and act as a monopolist help
reduce competing cost
- Cartel will agree about price and quantity, then
allocate quota for each member
- Harmony among members is in top priority
- Transparency in information is importance to avoid
members fraudulent

OREC???
Oligopoly
Price leadership (Non-public collusion)

- Occurs when cartelization is illegal
- One firm will act as leader and sets up price, the
others are followers
- The leader must be strong enough to punish the
others, which do not follow his price, by pushing to
the lowest level so that that firm will go bankruptcy

Oligopoly

A kinked demand curve

Oligopolies never compete
each other by price

Q
P
D
1

D
2

MR
1

MR
2

MC
1

MC
2

Q*
P*
Oligopoly Game theory Prisoners dilemma

A

Acknowledge
Does not
acknowledge

B

Acknowledge

A: -5, B: - 5

A: - 10, B: 0
Does not
acknowledge

A: 0, B: - 10

A: -2, B: -2

Microeconomics Lecturer Dr. Nguyen Thi Tuong Anh

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Microeconomics Lecturer Dr. Nguyen Thi Tuong Anh

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LECTURER

Dr Nguyn Th Tng Anh

I. Theory on consumers utility

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II. Theory on profit

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