Shifts in Labor Supply and Demand

An increase in the demand for labor will shift the labor demand curve to the right, creating a shortage at the original wage. This will put upward pressure on the equilibrium wage causing the quantity of labor supplied to increase. The value of the marginal product rises because MRPL = P x MPL (and either P or MPL have risen to cause the demand for labor to rise). This implies that both the wage and the value of the marginal product are now higher.

A decrease in the demand for labor, will shift the labor demand curve to the left, creating a surplus at the original wage. This will put downward pressure on the equilibrium wage causing the quantity of labor supplied to decrease. The value of the marginal product falls because MRPL = P x MPL (and either P or MPL have risen to cause the demand for labor to rise MRPL = P x MPL (and either P or MPL have fallen to cause the demand for labor to decline). This implies that both the wage and the value of the marginal product are now lower.

An increase in the supply of labor would shift the supply curve to the right, creating a surplus of workers at the original wage. This will put downward pressure on the equilibrium wage causing the quantity of labor demanded to rise. As the number of workers employed rises, the marginal product of labor falls due to the diminishing marginal product of labor. Thus, both the wage and the value of the marginal product of labor are now lower.

An decrease in the supply of labor would shift the supply curve to the left, creating a shortage of workers at the original wage. This will put upward pressure on the equilibrium wage causing the quantity of labor demanded to fall. As the number of workers employed falls, the marginal product of labor rises due to the diminishing marginal product of labor. Thus, both the wage and the value of the marginal product of labor are now higher.

Unit Test D: Unit V (Firm Behavior)

Begins: Sunday, November 19th

Deadline: Monday, December 4th

More on Advertising

From: http://en.wikipedia.org/wiki/Advertising (check for more details)

Whereas marketing aims to identify markets that will purchase a product (business) or support an idea and then facilitate that purchase, advertising is the paid communication by which information about the product or idea is transmitted to potential consumers.

In general, advertising is used to convey availability of a "product" (which can be a physical product, a service, or an idea) and to provide information regarding the product. This can stimulate demand for the product, one of the main objectives of advertising. More specifically, there are three generic objectives of advertisements : communicate information about a particular product, service, or brand (including announcing the existence of the product, where to purchase it, and how to use it), persuade people to buy the product, and keep the organization in the public eye (called institutional advertising). Most advertising blends elements of all three objectives. Typically new products are supported with informative and persuasive ads, while mature products use institutional and persuasive ads (sometimes called reminder ads).

Advertising frequently uses persuasive appeals, both logical and emotional (that is, it is a form of propaganda), sometimes even to the exclusion of any product information. More specific objectives include increases in short or long term sales, market share, awareness, product trial, mind share, brand name recall, product use information, positioning or repositioning, and organizational image improvement.

Examples of the ideas, informative or otherwise, that advertising tries to communicate are product details, benefits and brand information. Advertising usually seeks to find a unique selling proposition (USP) of any product and communicate that to the user. This may take the form of a unique product feature or a perceived benefit. In the face of increased competition within the market due to growing numbers of substitutes there is more branding occurring in advertising. This branding attributes a certain personality or reputation to a brand, termed brand equity, which is distinctive from its competition. Generally, brand equity is a measure of the volume and homogeneity of, as well as positive and negative characteristics of, individual and cultural ideas associated with the product.

Effective advertising will stimulate demand for a product and build brand equity and brand franchise. When enough brand equity is created that the brand has the ability to draw buyers (even without further advertising), it is said to have brand franchise. The ultimate brand franchise is when the brand is so prevalent in people's mind (called mind share), that it is used to describe the whole category of products. This phenomena is sometimes known as "hyperbranding." Kleenex, for example, can distinguish itself as a type of tissue or a label for a category of products. That is, it is frequently used as a generic term. One of the most successful firms to have achieved a dominant brand franchise is Hoover, whose name was for a very long time synonymous with vacuum cleaner (and Dyson has subsequently managed to achieve similar status, having moved into the Hoover market with a more sophisticated model of vacuum cleaner). The strength of a brand franchise can be established to a greater or lesser degrees in various markets. In Texas, for example, it is common to hear people refer to any soft drink as a Coke, regardless of whether it is actually produced by Coca-Cola or not (more accurate terms would be 'cola' or 'soda').

A legal risk of the dominant brand franchise is that the name can become so widely accepted that it becomes a generic term, and loses trademark protection. Examples include "escalator", "aspirin" and "mimeograph".

LR Equilibrium in Monopolistic Competition

The picture above represents the long run equilibirum of a monopolistically competitive firm. The short run profits induce entry into the industy. The increased entry has two effects. The first is the business stealing effect. New companies, with new differentiated products, capture some of the market of the existing firms. At the same time, the existence of more substitutes due to entry, causes the demand curve for the individual firm to be more elastic (D to D' and MR to MR'). In the long run, the industry settles at a point where there are zero economic profits for all the firms (at q lower than the min of ATC).

Demand Elasticity and Total Revenue

Note: Please ignore the minus sign in front of the elasticity numbers. This post refers to the the link between Total Revenue (TR) and the elastic part of the demand curve.

As shown in the figure, the elasticity in the upper part of the demand curve, between the horizontal intercept and the midpoint of the demand line is the area where the elasticity is less than -1 (or greater than +1). At the midpoint the elasticity is = 1, and this is where TR is maximized (i.e. where MR=0).

To the right of the midpoint, on the lower part of the demand curve, elasticity is greater than -1 (or less than +1). In this area TR is falling as the price falls.Firms should never willingly operate in the inelastic part of their demand curves. By producing less they can increase revenues so, by definition, profits would be higher. Firms will not operate where we have unit elasticity unless there are no costs of production.

Comments on PS 4

Hey guys, here are a couple of comments on PS4

a. With regards to extra credit, the range of credit is 1 to 3, one being given for legitimate effort and 3 given for a correct answer.

b. For question 1, please note that machinery is NOT a cost. Read the solutions carefully and let me know if you have further questions on this one.

c. Your graphs need to be more precise! Do not forget to label the axis and/or the curves! This is important! There is no reason to lose points on the hourlies for such things!

Also, a request from the grader: Please staple your problem sets before handing then in and your writing needs to be legible!

Battle of the Sexes, Where do they go?

The Battle of the Sexes is a two player game used in game theory. Imagine a couple, Kelly and Chris. Kelly would most of all like to go to the football game. Chris would like to go to the opera. Both would prefer to go to the same place rather than different ones. If they cannot communicate where should they go?

The the payoff matrix labeled "Battle of the sexes (1)" is an example of Battle of the Sexes, where Chris chooses a row and Kelly chooses a column.

This representation does not account for the additional harm that might come from going to different locations and going to the wrong one. In order to account for this, the game is sometimes represented as in "Battle of the sexes (2)".

How do we find the Nash Equilibrium in this case? Is there more than one?

Classic Prisoner's Dilemma and Pop Culture

Game Theory and Pop Culture: http://gametheory.net/popular/

The classical prisoner's dilemma (PD)* is as follows:

Two suspects A, B are arrested by the police. The police have insufficient evidence for a conviction, and having separated both prisoners, visit each of them and offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the silent accomplice receives the full 10-year sentence and the betrayer goes free. If both stay silent, the police can only give both prisoners 6 months for a minor charge. If both betray each other, they receive a 2-year sentence each.

It can be summarized thus:

	Prisoner A Stays Silent	Prisoner A Betrays
Prisoner B Stays Silent	Both serve six months	Prisoner B serves ten years; Prisoner A goes free
Prisoner B Betrays	Prisoner A serves ten years; Prisoner B goes free	Both serve two years

The dilemma arises when one assumes both prisoners are selfish enough to want to minimize their own jail term. Each prisoner has two options: to cooperate with his accomplice and stay quiet, or to betray his accomplice and give evidence. The outcome of each choice depends on the choice of the accomplice. However, neither prisoner knows the choice of his accomplice. Even if they were able to talk to each other, neither could be sure that they could trust the other.

Let's assume the protagonist prisoner is rationally working out his best move. If his partner stays quiet, his best move is to betray as he then walks free instead of receiving the minor sentence. If his partner betrays, his best move is still to betray, as by doing it he receives a relatively lesser sentence than staying silent. At the same time, the other prisoner thinking rationally would also have arrived at the same conclusion and therefore will betray.

It would be rational then for a prisoner to decide to cooperate if only he could be sure that the other player would not betray, and thus achieve a better result than in mutual betrayal. However, such a cooperation is then rationally vulnerable to the treachery of selfish individuals, which we assumed our prisoners to be. Therein lies the paradox of the game.

If reasoned from the perspective of the optimal interest of the group (of two prisoners), the correct outcome would be for both prisoners to cooperate with each other, as this would reduce the total jail time served by the group to one year total. Any other decision would be worse for the two prisoners considered together. However by each following their individual interests, the two prisoners each receive a lengthy sentence, which in fact hurts both the interest of the group and that of the individuals.

*Source: Wikipedia, www.wikipedia.com

Monopoly Profits w/ Perfect Price Discrimination

Oligopoly Watch

A great blog on Oligopolies: http://www.oligopolywatch.com/

(Note: we will be covering oligopolies in class, on Monday of next week)

What is a Natrual Monopoly?

A comprehensive review in Wikipedia: http://en.wikipedia.org/wiki/Natural_monopoly

PS4 Solutions and PS5

Hey everybody,

The solutions to PS4 have been posted on the Ec10 Website.

Also PS5 has been posted as well. It is due on Friday, Nov 17th in Section.

Please note, I will hold my regular office hours on Wednesday, 7-8:30pom in Room 112, Littauer.