MICROECONOMICS

Equilibriumofthefirm
Assuming that firms aim at maximizing their profits, they will be in equilibrium when they earn
maximum profits.

THEORYOFDEMAND
Demand is a multivariate relationship. Some of the most important determinants of the market
demand for a particular product are: its own price, consumer income, prices of other
commodities, consumer tastes, income distribution, total population, consumer wealth, credit
availability, government policy, past levels of demand, and past levels of income.
Total demand includes final demand and intermediate demand. Final demand is subdivided into
consumer demand and demand for investment goods.

TheDemandCurve

TheDEMANDCURVEisdefinedastherelationshipbetweenthepriceofthegoodandtheamountor
quantitytheconsumeriswillingandabletopurchaseinaspecifiedtimeperiod,givenconstantlevels
of the other determinantstastes, income, prices of related goods, expectations, and number of
buyers.Inthediagram,thelinelabeled"D"showsaplotofthatdemandcurve,sayforbluejeanprices
andnumberofpairsdemanded.PricesareP(in$)andquantityisQ(innumberofproductunits)onthis
diagram.Atapriceof$75(verticalaxis),twopairsaredemanded(Qonhorizontalaxis).AsthepriceP
on vertical axis is lowered from $75 to $50, the quantity demanded Q is increased from two pairs to
threepairsofbluejeans.AlthoughthispricequantitydemandedrelationshipisobvioustoBobandany
otherstrugglingconsumer,severalformalreasonscanbegiven.Twoimportantexplanationsarethe(1)
income effectas the price per pair is smaller, Bob can buy more pairs with his fixed income without
givingupbuyingothergoods,and(2)thesubstitutioneffectthatthereareothergoodsthatheregards
as substitutes for L501s and when L501s become more expensive he might switch to wearing other
clothes,suchasbaggyshorts

DemandAReview
v

Demand is determined by non-price demand-determining variables, such as, income, price

of related goods, and tastes.

Changes in demand are shown by shifting the entire demand curve.

Changes in quantity demanded are shown by movements along the demand curve.

THEORYOFSUPPLY
The Supply Curve: The supply curve shows how much of a good, producers are willing to sell at a
given price, holding constant other factors that might affect quantity supplied. This price-quantity
relationship can be shown by the equation

NonpriceDeterminingVariablesofSupply
v

Costs of Production
o
Labor
o
Capital
o
Raw Materials

SupplyAReview
v

v
v

Supply is determined by non-price supply-determining variables as such as the cost of

labor, capital, and raw materials.
Changes in supply are shown by shifting the entire supply curve.
Changes in quantity supplied are shown by movements along the supply curve and are
caused by a change in the price of the product.

THEMARKETMECHANISM
Characteristics of the equilibrium or market clearing price:
v

QD = QS

No shortage

No excess supply

No pressure on the price to change

MARGINALUTILITYANALYSIS
Marginal utility measures the additional satisfaction obtained from consuming one additional unit
of a good.
The principle of diminishing marginal utility states that as more and more of a good is consumed,
consuming additional amounts will yield smaller and smaller additions to utility.
Marginal Utility and the Indifference Curve - If consumption moves along an indifference curve,
the additional utility derived from an increase in the consumption one good, food (F), must
balance the loss of utility from the decrease in the consumption in the other good, clothing (C).

When consumers maximize satisfaction:

Marginal rate of Substitution (MRS) =PF / PC
The equation for utility maximization:
Total utility is maximized when the budget is allocated so that the marginal utility per dollar of
expenditure is the same for each good. This is referred to as the equal marginal principle.

CONSUMERSBEHAVIOUR
Cardinal Approach: Utility can be measured in subjective units called "utils".
Ordinal Approach: Utility cannot be measured, but the consumer can rank the basket of goods
according to the satisfaction yield in his order of preference.

CARDINALUTILITYTHEORY:
ASSUMPTIONS:
(1)
(2)

(3)

Consumer is assumed to be rational.

Axiom of utility maximization, i.e. he plans the spending of his income so as to attain
the highest possible satisfaction or utility.
The utility of each commodity is measurable.

(4)

The utility gained from successive units of a commodity diminishes as the consumer
acquires larger quantities of it.

(5)

The total utility of a basket of goods depends upon the quantities of the individual
commodities.

Equilibrium:
The consumer is under equilibrium when the marginal utility of commodity x is equal to its market
price P(x). Symbolically
MU (x)=P(x)
For two or more commodities, the condition for equilibrium is the equality of the ratios of the
marginal utilities of the individual commodities to their prices:
MU(x) = MU(y) = MU(n)
P(x) P(y) P(n)

Criticisms:
The satisfaction derived from various commodities cannot be measured objectively (utils).
The assumption of constant utility of money is unrealistic as the marginal utility of money changes
with the increase in income.
The axiom of diminishing marginal utility has been established from introspection. It is a
psychological law which must be taken for granted.

ORDINALAPPROACH
Assumptions:
v

Consumer is rational and aims at the maximization of his utility given his income and
market prices.

Utility is ordinal; a consumer can rank his preference of one basket of goods as
compared to another.

Diminishing marginal rate of substitution. As a consumer acquires more of a particular

good, he is ready to give up less and less of other commodities to acquire it.

The consumer is consistent in his choice and there is transitivity.

INDIFFERENCECURVESANALYSIS
Indifference curves represent all combinations of market baskets that provide the same level of
satisfaction to a person. Hence, he is indifferent to the particular combination he chooses.

PROPERTIES:
v

Indifference curves slope downward to the right (-ve slope), i.e. they are convex to the
origin.

Any market basket lying above and to the right of an indifference curve is preferred to
any market basket that lies on the indifference curve.

The further away from the origin an indifference curve lies, the higher the level of utility it
denotes.

An indifference map is a set of indifference curves that describes a persons preferences

for all combinations of two commodities. Each indifference curve in the map shows the
market baskets among which the person is indifferent.

Finally, indifference curves cannot cross. This would violate the assumption that more is
preferred to less.

EQUILIBRIUM:
Two conditions necessary:
v

The marginal rate of substitution(MRS) be equal to the ratio of commodity prices:

MRS(x,y)= MU(x) = P(x)
MU(y) P(y)

The indifference curves have to be convex to the origin.

APPLICATIONS:
v

The leisure income trade-off and the need for overtime rates higher than the normal
wage rate.

Evaluation of alternative government policies.

Application in the Theory of Exchange

Assists in cost of living computation.

CRITICISMS:
v

The theory does not establish either the existence or the shape of the indifference
curves.

The consumer may not be able to order his preferences as precisely and rationally as
the theory implies.

The assumption of rationality and the concept of marginal utility implicit in the definition
of the MRS is an inherent weakness.

ELASTICITYOFDEMAND&SUPPLY
Generally, elasticity is a measure of the sensitivity of one variable to another.
It tells us the percentage change in one variable in response to a one percent change in another
variable.
Measures the sensitivity of quantity demanded to price changes.
It measures the percentage change in the quantity demanded for a good or service that results
from a one percent change in the price.
The price elasticity of demand is

Income elasticity of demand measures the percentage change in quantity demanded resulting
from a one percent change in income. It is generally positive.
Cross elasticity of demand measures the percentage change in the quantity demanded of one
good that results from a one percent change in the price of another good. The cross elasticity for
substitutes is positive, while that for complements is negative.
Price elasticity of supply measures the percentage change in quantity supplied resulting from a 1
percent change in price.
The elasticity is usually positive because price and quantity supplied are directly related.

ShortRunversusLongRunElasticities
Price elasticity of demand varies with the amount of time consumers have, to respond to a price.
Most goods and services: Short-run elasticity is less than long-run elasticity. (e.g. gasoline, Drs.)
Other Goods (durables): Short-run elasticity is greater than long-run elasticity (e.g. automobiles)

PriceElasticityofdemand
The term elasticity is used by economists to measure the responsiveness of one variable to
changes in another variable. Price elasticity of demand measures the responsiveness of demand
to changes in price. It involves comparing the proportional changes in the price with the
proportional changes in the quantity demanded.
Economists express the relationship between the proportional changes in price and demand in
the form of a ratio or coefficient. This is called the price elasticity of demand coefficient and is
given below:

Coefficient of price elasticity of

demand (PED)

Proportionate change in quantity demanded.

proportional change in the price

If a change in price causes the quantity demanded to change by a greater proportion then the
value of the coefficient will be greater than one. In this case demand is described as price elastic.
An elastic demand curve is shown below.

If the quantity demanded changes by a smaller proportion than price then the value of the
coefficient will be less than one. In this case demand is described as price inelastic. An inelastic
demand curve is shown below.

If the quantity demanded changes by an equal proportion to price then the value of the coefficient
will be equal to one. In this case demand is said to have unitary elasticity. A unit elastic demand
curve is shown below.

The table below summarizes the different possible values of the price elasticity.

PED

Definition

Price elastic

PED
1

> % change in quantity demanded is greater than the % change in

Price

Price inelastic

PED
1

< % change in Price is greater than the % change in quantity

demanded

Unitary
elasticity

PED
1

= % change in Price is equal to the % change in quantity demanded

Any time the price of a good or service changes then the impact on the quantity demanded will
depend upon the price elasticity of demand.

Marginalrevenueandmarginalcostapproach:
Marginal revenue means the addition made to the total revenue by producing and selling an
additional unit of output. Marginal cost means the addition made to total cost by producing an
additional unit of output. Its level of output so long as an extra unit of output adds more to
revenue than to cost .additional units of output will be produced so long as Marginal revenue
exceeds marginal cost. The firm will earn maximum profits at the point of equality of Marginal
revenue and marginal cost. This is the First order condition.
The second order condition: The Marginal cost curve must cut the marginal revenue curve
from below at the point of equilibrium.
Thus,
Necessary condition: MR =MC
Sufficient Condition: MC cuts MR curve from below.

IMPORTANTQUESTIONS??
Why do firms continue to produce in the short run if they continue to make losses? If they
cannot leave the industry, why do they not close down?
This is because they cannot alter the fixed capital equipment in the short run and therefore, have
to incur the fixed costs even if they choose to shut down and stop producing the product. In the
short run if a firm shuts down , it can avoid only its variable costs , the fixed costs have to be
borne by it whether it is producing it or not. If the firm can earn revenue which covers variable
costs as well as a part of the fixed costs, it will be quite rational for the firm to keep operating. If
the firm stops production in the short run, it will incur losses equal to the fixed costs.
But if the price falls below average variable costs it will lose its fixed cost as well as some
of its variable costs. It shuts down at this point.
Firm in the short run may:
(1)

Earn normal profits or

(2)

Earn super normal profits or

(3)

Make losses.

Longrunequilibriumofthefirmunderperfectcompetition(identicalCosts)
Long run equilibrium refers to the situation when free and full adjustment in the capital equipment
as well as the number of firms has been allowed to take place. In the long run, it is average total
cost which is of determining importance, since all costs are variable and none fixed. For long run
equilibrium of the firm, besides marginal cost being equal to price, price must also be equal to
average cost. The firms will continue entering or leaving the industry until the price is equal to the
average cost so that the firms remaining in the field make only Normal profit. Therefore,
(1) Price = Marginal Cost
(2) Price = Average Cost
But Marginal Cost is equal to Average cost only at the minimum point of the Average Cost...
Therefore, equilibrium condition is:
Price = Marginal cost = Minimum average cost.
The horizontal demand curve is tangent to the average cost curve, so that price equals average
cost and firm makes only normal profits.

Equilibrium of the firm under perfect competition (Differential cost

conditions)
Differences in the quality of raw materials used by various firms , differences in production
techniques, differences in the efficiency of managers , differences in the size of plants built by
them and differences in the ability of entrepreneurs themselves account for the differences in
the cost of various firms. Depending on different cost conditions, firms in the industry may be
earning supernormal profits, normal profits or making losses.

EquilibriumoftheIndustry:
Conditions for equilibrium of the Industry:
v

The long run supply and demand for the product of the industry should be equal.

All firms in the industry should be in equilibrium

There should be no tendency for new firms to enter the industry or for the existing firms
to leave it. The number of firms should be in equilibrium.

ConsumerandProducerSurplus:Measuresofwelfare
Consumer surplus is a measure of consumer welfare gained by consumers being able to
purchase a good or service in the market at a price lower that the maximum that they would be
prepared to pay for it rather than going with out it. In the diagram below it is shown by the area of
the triangle above the equilibrium price.

Producer surplus is the difference between the revenue that the firms would earn from offering a
good or service for sale rather than not selling it and the revenue that they are able to achieve by
selling it at the market price. The producer surplus arises because the producer can now sell
more than before and/ or at a higher price. The producer surplus is shown in the diagram below
by the triangle below the equilibrium price and above the supply curve.

The total welfare gained can be found by adding the consumer and producer surpluses together.

CONSUMERSSURPLUS:
A concept introduced by Marshall, who maintained that it can be measured in monetary terms. It
is equal to the difference between the amount of money that a consumer actually pays to buy a
certain quantity of a commodity x, and the amount that he would be willing to pay for this quantity
rather than do without it.

SUMMARY:
v

People behave rationally in an attempt to maximize satisfaction from a particular

combination of goods and services.

Consumer choice has two related parts: the consumers preferences and the budget
line.

Consumers make choices by comparing market baskets or bundles of commodities.

Indifference curves are downward sloping and cannot intersect one another.

Consumer preferences can be completely described by an indifference map.

The marginal rate of substitution of F for C is the maximum amount of C that a person is
willing to give up to obtain one additional unit of F.

Budget lines represent all combinations of goods for which consumers expend all their
income.

v
v

Consumers maximize satisfaction subject to budget constraints.

The theory of revealed preference shows how the choices that individuals make when
prices and income vary can be used to determine their preferences.

THEORYOFFIRMS
MonopolisticCompetition
Characteristics
1)

Many firms

2)

Free entry and exit

3)

Differentiated product

The amount of monopoly power depends on the degree of differentiation.

Examplesofthisverycommonmarketstructureinclude:
v

Toothpaste

Soap

Cold remedies

TheMakingsofMonopolisticCompetition
Two important characteristics

Differentiated but highly substitutable products

Free entry and exit

Observations(shortrun)
v

Downward sloping demand--differentiated product

Demand is relatively elastic--good substitutes

MR < P

Profits are maximized when MR = MC

This firm is making economic profits

Observations(longrun)
v

Profits will attract new firms to the industry (no barriers to entry)

The old firms demand will decrease to DLR

Firms output and price will fall

Industry output will rise

No economic profit (P = AC)

P > MC -- some monopoly power

Oligopoly
Characteristics
v

Small number of firms

Product differentiation may or may not exist

Barriers to entry

Examples:
Automobiles, Steel, Aluminum, Petrochemicals, Electrical equipment, Computers

Thebarrierstoentryare:
v

Natural: Scale economies, Patents, Technology, Name recognition

Strategic action: Flooding the market, Controlling an essential input

Management Challenges: Strategic actions, Rival behavior

EquilibriuminanOligopolisticMarket
v

In perfect competition, monopoly, and monopolistic competition the producers did not
have to consider a rivals response when choosing output and price.

In oligopoly the producers must consider the response of competitors when choosing
output and price.
Defining Equilibrium
o

Firms doing the best they can and have no incentive to change their output or
price
All firms assume competitors are taking rival decisions into account.

Nash Equilibrium: Each firm is doing the best it can, given what its competitors
are doing.

The Cournot Model: Duopoly: Two firms competing with each other,
Homogenous good, the output of the other firm is assumed to be fixed.

TheReactionCurve:
A firms profit-maximizing output is a decreasing schedule of the expected output of Firm 2.

Cartels
Characteristics
1)

Explicit agreements to set output and price

2)

May not include all firms

3)

Most often international. E.g. OPEC

4)

Conditions for success

v

Competitive alternative sufficiently deters cheating

Potential of monopoly power--inelastic demand

Observationstobesuccessful:
v

Total demand must not be very price elastic

Either the cartel must control nearly all of the worlds supply or the supply of non-cartel
producers must not be price elastic.

Summary
v

In a monopolistically competitive market, firms compete by selling differentiated

products, which are highly substitutable.

In an oligopolistic market, only a few firms account for most or all of production.

In the Cournot model of oligopoly, firms make their output decisions at the same time,
each taking the others output as fixed.

In the Stackelberg model, one firm sets its output first.

The Nash equilibrium concept can also be applied to markets in which firms produce
substitute goods and compete by setting price.

Firms would earn higher profits by collusively agreeing to raise prices, but the antitrust
laws usually prohibit this.

v
v

The Prisoners Dilemma creates price rigidity in oligopolistic markets.

Price leadership is a form of implicit collusion that sometimes gets around the Prisoners
Dilemma.
In a cartel, producers explicitly collude in setting prices and output levels.

PerfectCompetition
Review of Perfect Competition
v

P = LMC = LRAC

Normal profits or zero economic profits in the long run

Large number of buyers and sellers

Homogenous product

Perfect information

Firm is a price taker

Monopoly
Features:
v

One seller - many buyers

One product (no close substitutes)

Barriers to entry

The monopolist is the supply-side of the market and has complete control over the
amount offered for sale.

Profits will be maximized at the level of output where marginal revenue equals marginal
cost.

TheMonopolistsOutputDecision
AtoutputlevelsbelowMR= MCthe decreaseinrevenueisgreaterthan thedecreasein cost
(MR>MC).
At output levels above MR = MC the increase in cost is greater than the decrease in revenue
(MR<MC)
Monopolypricingcomparedtoperfectcompetitionpricing:
vMonopoly=>P>MC
vPerfectCompetition=>P=MC
vThemoreelasticthedemandthecloserpriceistomarginalcost.
vIfEdisalargenegativenumber,priceisclosetomarginalcostandviceversa.

Monopsony
vAmonopsonyisamarketinwhichthereisasinglebuyer.
vAnoligopsonyisamarketwithonlyafewbuyers.
vMonopsonypoweristheabilityofthebuyertoaffectthepriceofthegoodandpayless
thanthepricethatwouldexistinacompetitivemarket.

MonopolyandMonopsony
Monopoly
vMR<P
vP>MC
vQm<QC
vPm>PC
Afewbuyerscaninfluenceprice(e.g.automobileindustry).
Monopsonypowergivesthemtheabilitytopayapricethatislessthanmarginalvalue.

Summary
vMarketpoweristheabilityofsellersorbuyerstoaffectthepriceofagood.
vMarketpowercanbeintwoforms:monopolypowerandmonopsonypower.
v Monopoly power is determined in part by the number of firms competing in the
market.
vMonopsonypowerisdeterminedinpartbythenumberofbuyersinthemarket.
vMarketpowercanimposecostsonsociety.
vSometimes,scaleeconomiesmakepuremonopolydesirable.
vWerelyontheantitrustlawstopreventfirmsfromobtainingexcessivemarketpower

GAMETHEORY
Whatisgametheory?
Economists use game theory to study situations where a few individuals make decisions
strategically. A decisionmaker (an individual or a firm) has a payoff which will depend on
chance, his own actions, and the actions chosen by his opponents, just as in a game like
basketball or poker. We call such situations games, and we call the decision makers players.
Whenaplayerchooseshisstrategy,hewouldliketoknowwhatstrategytheotherplayersare
using,butotherplayersareusuallynotforthcomingaboutwhatstrategiestheyareusing.Thusa
playermustusesomereasoningtoanticipatethestrategiesofhisopponents.Gametheoryisa
sciencethatmakespredictionsofwhatstrategiestheplayerswilluse.

FundamentalPrinciplesofGameTheory
Whenanalyzinganygame,wemakethefollowingassumptionsaboutbothplayers:
1.Eachplayermakesthebestpossiblemove.
2.Eachplayerknowsthathisorheropponentisalsomakingthebestpossiblemove

Whatisagame?
vSetofPlayers:Whichplayersgettomakemoves?
vTheRules:Whomovesandwhen?Whatdoesaplayerknowwhenhemakeshis
move?
v Outcomes: An outcome is defined by the moves made by the players. What
happensoncetheplayersmaketheirmoves?

vPayoffs:Howdoesaplayerrankoneoutcomecomparedtoanother?

NashEquilibrium
ANashequilibrium,namedafterJohnNash,isasetofstrategies,oneforeachplayer,suchthat
noplayerhasincentivetounilaterallychangeheraction.Playersareinequilibriumifachangein
strategiesbyanyoneofthemwouldleadthatplayertoearnlessthanifsheremainedwithher
current strategy. For games in which players randomize (mixed strategies), the expected or
averagepayoffmustbeatleastaslargeasthatobtainablebyanyotherstrategy.

DominantStrategy
Astrategyisdominantif,regardlessofwhatanyotherplayersdo,thestrategyearnsaplayera
largerpayoffthananyother.Hence,astrategyisdominantifitisalwaysbetterthananyother
strategy,foranyprofileofotherplayers'actions.Dependingonwhether"better"isdefinedwith
weakorstrictinequalities,thestrategyistermedstrictlydominantorweaklydominant.Ifone
strategy is dominant, than all others are dominated. For example, in the prisoner's dilemma,
eachplayerhasadominantstrategy.

DominatedStrategy
Astrategyisdominatedif,regardlessofwhatanyotherplayersdo,thestrategyearnsaplayera
smallerpayoffthansomeotherstrategy.Hence,astrategyisdominatedifitisalwaysbetterto
play some other strategy, regardless of what opponents may do. If a player has a dominant
strategythanallothersaredominated,buttheconverseisnotalwaystrue.Astrictlydominant
strategy is always played in equilibrium, and thus strictly dominated strategies never are. For
example,intheprisoner'sdilemma,eachplayerhasadominatedstrategy.Equilibriaexistwith
weaklydominatedstrategies,however.

PureStrategy
A pure strategy defines a specific move or action that a player will follow in every possible
attainablesituationinagame.Suchmovesmaynotberandom,ordrawnfromadistribution,as
inthecaseofmixedstrategies.

MixedStrategy
Itsaastrategyconsistingofpossiblemovesandaprobabilitydistribution(collectionofweights)
which corresponds to how frequently each move is to be played. A player would only use a
mixedstrategywhensheisindifferentbetweenseveralpurestrategies,andwhenkeepingthe
opponentguessingisdesirablethatis,whentheopponentcanbenefitfromknowingthenext
move

SequentialGame
A sequential game is one in which players make decisions (or select a strategy) following a
certainpredefinedorder,andinwhichatleastsomeplayerscanobservethemovesofplayers

who preceded them. If no players observe the moves of previous players, then the game is
simultaneous. If every player observes the moves of every other player who has gone before
her,thegameisoneofperfectinformation.Ifsome(butnotall)playersobservepriormoves,
whileothersmovesimultaneously,thegameisoneofimperfectinformation.Sequentialgames
arerepresentedbygametrees(theextensiveform)andsolvedusingtheconceptofrollback,or
subgameperfectequilibrium.

GameofIncompleteInformation
A sequential game is one of imperfect information if a player does not know exactly what
actionsotherplayerstookuptothatpoint.Technically,thereexistsatleastoneinformationset
withmorethanonenode.Ifeveryinformationsetcontainsexactlyonenode,thegameisoneof
perfectinformation.Intuitively,ifitismyturntomove,Imaynotknowwhateveryotherplayer
has done up to now. Therefore, I have to infer from their likely actions and from Bayes rule
whichactionslikelyledtomycurrentdecision

GameofCompleteInformation
Asequentialgameisoneofperfectinformationifonlyoneplayermovesatatimeandifeach
player knows every action of the players that moved before him at every point. Technically,
every information set contains exactly one node. Intuitively, if it is my turn to move, I always
know what every other player has done up to now. All other games are games of imperfect
information.

RepeatedGame
When players interact by playing a similar stage game (such as the prisoner's dilemma)
numerous times, the game is called a repeated game. Unlike a game played once, a repeated
gameallowsforastrategytobecontingentonpastmoves,thusallowingforreputationeffects
andretribution.Ininfinitelyrepeatedgames,triggerstrategiessuchastitfortatcanencourage
cooperation.

PrisonersDilemma
Scenario
Twoconspiratorsarearrestedandinterrogatedseparately.Ifoneimplicatestheother,hemay
go free while the other receives a life sentence. Yet, if both confess, bad fate befalls them. If
both stay silent, insufficient evidence will lead them being charged with and convicted of a
lessercrime.
Description
Each player has a dominant strategy. The resulting equilibrium is Pareto dominated by an
alternateoutcomeinwhicheachplayerplaysthedominatedstrategy.
Example
Prisoner2

denyconfess

deny 2,2 0,3

Prisoner1
confess3,0 1,1
GeneralForm
Player2

L R

Ua,wb,x
Player1
Dc,y d,z

Where
c>a>d>b
x>w>z>y

the

following

relations

hold:

WhyStudyGameTheory?
A.Gametheoryisusedtostudy:
1.Oligopolies
2.AuctionsandBargaining
3.InternationalTrade
B.Withgametheory,westartwithawelldefinedgameandfindtheequilibriumoutcomes.
C.Howdoesthestructureofagameaffectoutcomes?Forexample:
1.InaCournotoligopolyeachfirmsimultaneouslyselectsaquantityofoutputtosell
2.onthemarket.
3. In a Bertrand oligopoly each firm simultaneously selects what price to sell its
output.
4. Although the idea of a limited number of firms competing with each other is
commontoboththeCournotandBertrandoligopolies,theresultingoutcomesare
fardifferent.Wecanseehowfurtherrulechangesaltertheoutcome:
1. What happens if one of the firms chooses its output prior to the other firms
choosingtheiroutput?

2.Whathappensiffirmsinthefirststagechooseproductivecapacity,andinthe
secondstage,chooseoutput?
D.Givesusalanguageandtechniquetodiscussverydifferenteconomicproblems.
1.Weusetheprisonersdilemmatodescribebehaviorofoligopolies,pollutioncontrol,
andprovisionofapublicgood.
2. The same idea of an equilibrium is used in oligopoly problems, law and economics,
andprocurementandsales.

PageupdatedbyAnkurGuptaonFebruary5,2009