Basic market structure analysis,详细版.docx

Managerial Economics, Lecture 2:Basic market structure and analysisThis lecture is organised as follows, the first Half of the lecture considers basic issues of demand and supply characteristics which apply to all industries – ie. irrespective of their structure.Let us start with a basic industry demand curve, shown in Figure 1,Which has the form Q = a-bP, where a is the intercept and b is the slope coefficient – which is constant for a linear demand curve. After Figure 1 (d), need to emphasise that this basic demand function can generate some powerful results, which you need to be aware of. But Note: in the exam, there will be essay type questions for those who are concerned about analytical questions. Characteristics of supply – again applicable to all industry structures (ie) irrespective of structure.Our starting point is a basic, short-run production function:Q = f (K, L), where capital is assumed fixed, and labour is assumed variable. However, this need not always be the case: certain types of specialised labour can be considered ‘fixed’, and there are legal and contractual relations which prevent labour being fired on the spot etc.This production function indicates what happens to output (Q), if we increase the fixed and variable factors: Law of diminishing returns: as we apply increasing quantities of the variable factor to the fixed factor, the marginal product of the variable factor rises and then falls. Now, without going into isoquant analysis (not required), there is an inverse relationship between average and marginal product, and marginal and average cost: Figure 2 (a):If marginal output is maximised, then marginal cost must be minimised; the same applies to average output and average cost: duality theory. Marginal product = dQ/dL; AP = Q/L; MC = dTC/dQ; AVC = TVC/Q; ATC = TC/QMuch of the preceding analysis focused on the short run, where at least one factor of production was fixed. But, in the long-run, all factors can be changed – including t