Microeconomics

To produce goods and services, a firm uses raw materials, labor, and capital. We will now look at the market for labor. The workers sell their labor, or alternatively the sell their leisure time, for a wage, and their supply depends on their valuations of leisure and wage, respectively.

Before we go on to the other market forms, oligopoly and monopolistic competition, we will introduce a tool called game theory. Game theory is a much younger tool than most of the others we have discussed so far and has become a large field of research. Here, we will just present two different games.

These will get to represent the two different groups of games: normal form games and extensive form games. We will later use these tools in the analysis of oligopolies.

Oligopoly

An oligopoly is a market in which there are only a few sellers. Most of the models in the literature only cover cases in which there are two sellers. Such markets are also called duopolies. As you will see, the analysis of oligopolies is quite complicated. Furthermore, there are several different models that yield different results. This can be quite confusing. Take some time to see what the differences are in the assumptions and why they give different results. Which model to use, depends on what the situation is in a particular case. Different structures can have dramatically different effects on the market.

A monopoly can be viewed as the opposite of perfect competition. Instead of many firms, there is only one: the monopolist. This has important consequences for both price setting and the quantity produced.

Barriers to Entry

Why do monopolies arise? There are many different reasons, but all of them have to do with barriers to entry in the market. The reasons for these barriers could be structural. There are properties of the market that automatically shut competitors out:

Economics is often defined as something along the lines of “the study of how society manages its scarce resources.” The starting point of most such studies is that individuals allocate their resources such that they themselves will get the highest possible level of utility.

An individual has an idea of what the consequences of different actions will be, and she chooses that action she believes will produce the best result for her. She is, in other words, selfish and rational.

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