General and partial equilibium

Nta UGC-NET dec-2018

UGC-NET PAPER-2 (ECO)

Marshall and walras equilibium.

Lerner, HHI index

Online batch ,Lecture-12

Marhsall partial equilibrium analysis.

assuming that the various commodities are not interdependent.

In partial equilibrium approach to the pricing, we seek to

explain the price determination of commodity, keeping the

prices of other commodities constant

This theory applicable in perfect competition.

This analysis is based on the assumption of cetris

paribus.(other things remain constant)

Similarly, supply curve of commodity is constructed by assuming that

prices of other commodities, prices of resources or factors and

production function remain the same.

Demand function for a commodity is drawn with the assumption that

prices of other commodities, tastes and incomes of the consumers remain

constant.

Then Marshall’s partial equilibrium analysis seeks to explain the price

determination of a single commodity through the intersection of demand

and supply curves

With prices of other goods, resource prices etc., remaining the same.

Prices of other goods, resource prices, incomes, etc.,

Thus, in partial equilibrium analysis, if the price of a good changes, it

will not affect the demand for other goods.

It should be noted that partial equilibrium analysis is based on the

assumption that the changes in a single sector do not significantly affect

the rest of the sectors.

Marshall quantity adjustment

Acc. To Marshall equilibrium situation adjustment is possible through

change in quantity.

The price at which quantity demanded equal to quantity supplied called

equilibrium price.

The quantity of goods purchased and sold at eqm price is called eqm

amount/quantity.

According to Marshall it is quantity that bring equilibrium.

Marshall’s theory of value.

(time period analysis)

Marshall gave the importance to the time elements in the determination

of prices in his ‘theory of value’.

Marshall divide the time into different period from supply but not

demand side view.

acc to him time is short or long according to the extent to which supply

can adjust to the changes in demand.

Marshall divide the time into following three periods.

1.Market period. 2.Short run 3.Long run

1.Market period.

This is very short market period in which the supply is fixed.

There is no adjustment can take place in supply conditions.

2.Short period.

In this period supply can be adjusted to a limited extent.

Only variable factors are employed.

3.Long period.

In long run all the factors are variable.

New firm can enter and existing firm can leave the market.

Plant size and capacity can be changed.

Walras general equilibrium analysis.

general equilibrium model was developed by the French economist

Leon Walras (1834-1910).

In his Elements of Pure Economics Walras argued that all prices and

quantities in all markets are determined simultaneously through their

interaction with one another.

Walras used a system of simultaneous equations to describe the

interaction of individual sellers and buyers in all markets,

In the Walrasian model the behaviour of each individual decision-maker

is presented by a set of equations.

Thus for each consumer we have a set of equations consisting of two

subsets: one describing his demands of the different commodities, and

the other his supplies of factor inputs.

For example, each consumer has a double role: he buys commodities and

sells services of factors to firms.

The important characteristic of these equations is their

simultaneity or interdependence.

Similarly, the behaviour of each firm is presented by a set of equations

with two subsets

one for the quantities of commodities that it produces, and the other for

the demand for factor inputs for each commodity produced.

Existence, Uniqueness and Stability of an Equilibrium:

3. If an equilibrium solution exists, is it stable? (Stability

problem.)

1. Does a general equilibrium solution exist? (Existence

problem.)

2. If an equilibrium solution exists, is it unique?

(Uniqueness problem.)

At such a price there is neither excess demand nor excess

supply.

Stable equilibrium

The equilibrium is stable if the demand function cuts the supply

function from above.

In this case an excess demand drives price up, while an excess

supply (excess negative demand) drives the price down

Unstable equilibrium

The equilibrium is unstable if the demand function cuts the

supply function from below.

In this case an excess demand drives the price down, and an

excess supply drives the price up

Multiple equilibrium

It is obvious that at Pe1 there is a

stable equilibrium,

while at Pe2the equilibrium is

unstable.

No equilibrium

equilibrium (at a positive price)

does not exist.

The equilibrium is stable if the slope of the excess demand curve is

negative at the point of its intersection with the price-axis.

Stable equilibrium

UnStable equilibrium

The equilibrium is unstable if the slope of the excess demand curve is

positive at the point of its intersection with the price-axis.

There are as many equilibria as

the number of times that the

excess demand curve

E(P) intersects the vertical price-

axis.

Multiple equilibrium

If the excess demand function does

not intersect the vertical axis at any

one price, an equilibrium does not

exist .

Walrasian price adjustment.

Acc. To him it is the price that bring adjustment in the equilibrium

between demand and supply.

Lerner degree of monopoly power.

That is, the degree of monopoly power depends upon the

numerical coefficient (e) of the price-elasticity of demand for

the monopolist’s product.

a smaller value of e higher degree of monopoly power

would be obtained

a larger value of e lower degree of monopoly power

This idea and formula given by Prof. A. P. Lerner (1903-82)

for measuring the degree of monopoly power.

According to Prof. Lerner, degree of monopoly power in perfect

competition is zero.

At the equilibrium point of a competitive firm, we have p = AR = MR

= MC, or p = MC, or p – MC = 0.

Lerner’s Index of monopoly power = p – MC/p

less elastic is the demand for the product, the more would be the

degree of monopoly power, and vice versa.

In the situation of imperfect market seller eqm position MC equal to

MR. But price will stand higher than the MC or MR.

P>MC or MR

When P= 4. then MC = 4 therefore 4-4/4= 0

When marginal cost of production is zero then monopoly

power is One.

P-0/P= 1

Thus the learner power of monopoly vary from 0 to 1.

The greater the value of index the greater the degree of

monopoly power by seller.

Lerner condition is inverse of price elasticity of demand.

The greater the difference bw price and MC greater will be

the degree of monopoly power.

Sources of Monopoly Power:

(i) Elasticity of market demand,

(ii) The number of firms in the market, and

(iii) The nature of interaction among the firms.

The Herfindahl –Hirschman Index for Measuring Monopoly Power:

It was developed by Orris C. Herfindahl and Albert O. Hirschman,

It is defined as the sum of the squares of the market shares of the

firms within the industry (sometimes limited to the 50 largest firms).

As such, it can range from 0 to 1.0, moving from a huge number of

very small firms to a single monopolistic producer.

Increases in the Herfindahl index generally indicate a decrease in

competition and an increase of market power,

whereas decreases indicate the opposite.

Alternatively, if whole percentages are used, the index ranges from 0

to 10,000 "points". For example, an index of .25 is the same as

2,500 points.

HHI = s1^2 + s2^2 + s3^2 + ... + sn^2

where si is the market share of firm i in the market, and n is the

number of firms

Consider the following hypothetical industry with four total firms:

Firm one market share = 40%

Firm two market share = 30%

Firm three market share = 15%

Firm four market share = 15%

The HHI is calculated as:

HHI = 40^2 + 30^2 + 15^2 + 15^2 = 1,600 + 900 + 225 + 225 =

2,950

An HHI below 0.01 (or 100) indicates a highly competitive industry.

An HHI below 0.15 (or 1,500) indicates an unconcentrated industry.

An HHI between 0.15 to 0.25 (or 1,500 to 2,500) indicates moderate

concentration/ moderate control.

An HHI above 0.25 (above 2,500) indicates high concentration/ higher

monopoly power.

In a monopoly, HHI approaches 10,000. If the one largest firm

has 100% of the market share, HHI = 1002 = 10,000.

In a perfectly competitive market, HHI approaches zero.

Let's say there are thousands of restaurants in your city, but the

top 50, each have 0.1% of the market share.

The HHI is 0.12 x 50 = 0.5.

Concentration Ratios as Measures of Monopoly Power:

Concentration ration indicate that the size of firms in relation

to their industry as a whole.

The concentration ratio is calculated as the sum of the market

share held by the largest specified number of firms in the

industry.

High concentration ratio in an industry means less competition

among the firms.

Low concentration ratio in an industry means greater

competition among the firms.

The concentration ratio can be move from 0% to 100%.

0 to 50%f indicate- industry is perfectly competitive.

Top firms share more than 60% - oligopoly.

100% indicates- monopoly.

Mcq’s

Q1. marshall general equilibrium based on

A. Simultaneous equilibrium.

B. Cetris peribus.

C. Existence of monopoly.

D. All of the above.

Q2.according to marshall market period of time related with.

A. Very short period.

B. Short period.

C. Long period.

D. All of the above.

Q3.walras general equilibrium is based on .

A. Simultaneous equilibrium.

B. Cetris peribus.

C. Existence of monopoly.

D. All of the above.

Q4. according to Walras a stable equilibrium is abstain where.

A. Supply curve cuts demand curve from above.

B. Demand curve cut supply curve from below.

C. Demand curve cut supply curve from above.

D. All of the above.

Q5.under monopoly the learner index value will be.

A. Zero.

B. 0.50.

C. 0.75.

D. 1

Q6.Under perfect competition the learner index value will be.

A. Zero.

B. 0.50.

C. 0.75.

D. 1

Q7. the value of HHI in case of monopoly.

Q8.in perfect competition when price of a firm is 80 then,

value of learner index will be.

A. 800

B. 80

C. 8

D. 0

A. Zero.

B. 0.50.

C. 0.75.

D. 1

1. - b

2. -a

3. -a

4. -c

5. -d

6. -a

7. -d

8. d

Answer keys.

Managerial theories

Nta UGC-NET dec-2018

UGC-NET PAPER-2 (ECO)

Boumal, marris, williamson, and bains theory.

Online batch ,Lecture-13