Relax. Take a deep breath. And another.
For many of you, this will be your first midterm; for some of you, this will set the stage for future academic greatness. For others, this is one of your last classes, the rumors have scared you enough that you’ve been putting this off until the last possible moment… and that’s ok.
Here is some advice for the midterm.
1) Take your time to understand each problem
Always understand what the problem is asking for; ManEc is unlike most of the other classes because there isn’t a set way to approach every problem. Indeed, if you’ve been coming to the Saturday sessions, I’ve been trying to push the fact that there are usually multiple correct ways to find the right answer. So whatever you do…
2) Show your work
Especially in this course, partial credit may make a significant impact on your grade. If your line of thinking is correct, logical, and can be followed, you will get some credit.
3) Don’t take this too seriously
This is for the FTers… given that it’s your first midterm, you may be anxious. Don’t be. After this is done, remember that there are 19 more classes to take including this one; even those gunning for McKinsey jobs will have at least 2 full terms of grades on the transcript (3 without an exchange) before interviews roll around in around a year. If you ace this midterm, there are plenty of grades to be had; if you fail, there is plenty of time to recover. That is the way of things.
Good luck! I’ll be pulling for you.
^_^
Friday, March 13, 2009
Week 5 -- Market Clearing Price
This week was mostly a procedural review of the other concepts. However, one gem was introduced. A market clearing price is a price where the number of buyers = the number of sellers. That’s it. If a price is set too high, so that a person wants to sell but can’t find a buyer, or if it’s too low, so that a person wants to buy but can’t find a seller, then the price is NOT a market clearing price.
Notice that MCPs are probably the quickest and easiest way to find out which prices create competitive distributions. If a price is market-clearing, then we know the distribution will be competitive. We’ll be going over this on Saturday.
Notice that MCPs are probably the quickest and easiest way to find out which prices create competitive distributions. If a price is market-clearing, then we know the distribution will be competitive. We’ll be going over this on Saturday.
Week 4 -- Multilateral negotiation
These words might sound frightening… Multi-lateral. Negotiation. They’re not English, or at least, they’re not really used that much on this continent or any others.
The meaning is straightforward, though. A multi-lateral negotiation (condensed hereafter to ‘multilateral’) is a negotiation with multiple buyers AND/OR multiple sellers AND the people are selling are all buying and selling the same thing. In other words, whenever you have more than 2 people buying / selling something, we call that multilateral. There are many more rules than bilateral (bilateral means 2 people), enough to make your head spin. This is because symmetry does not necessarily apply anymore (see below) because we have to add something called competition that affects the price ranges we can agree on.
If there is a greater number of buyers than sellers (or vice versa), then the potential exists for competition to play a role in the price that’s agreed upon. In other words, if there are three buyers and only two sellers, the three buyers might bid the price up of the single good that is being bought and sold in this multilateral negotiation. Think of an auction, or a reverse auction. If more people want the item being purchased and are willing to pay for it, the price will rise; if there are three basketballs being sold and only one potential buyer, the price will fall. That’s what the graph is talking about in the class notes; that’s what Sven was trying to prove with his Red card / Black card example in class. Only one catch…
The meaning is straightforward, though. A multi-lateral negotiation (condensed hereafter to ‘multilateral’) is a negotiation with multiple buyers AND/OR multiple sellers AND the people are selling are all buying and selling the same thing. In other words, whenever you have more than 2 people buying / selling something, we call that multilateral. There are many more rules than bilateral (bilateral means 2 people), enough to make your head spin. This is because symmetry does not necessarily apply anymore (see below) because we have to add something called competition that affects the price ranges we can agree on.
If there is a greater number of buyers than sellers (or vice versa), then the potential exists for competition to play a role in the price that’s agreed upon. In other words, if there are three buyers and only two sellers, the three buyers might bid the price up of the single good that is being bought and sold in this multilateral negotiation. Think of an auction, or a reverse auction. If more people want the item being purchased and are willing to pay for it, the price will rise; if there are three basketballs being sold and only one potential buyer, the price will fall. That’s what the graph is talking about in the class notes; that’s what Sven was trying to prove with his Red card / Black card example in class. Only one catch…
Week 4 -- Law of one price
If there are multiple sellers AND multiple buyers AND all the goods bought / sold are identical THEN the price of the good will be the same for every transaction. Notice this does NOT necessarily hold for monopolies with multiple buyers or sellers (though it might). Notice this is not exactly real life either… but it’s close enough that it’s one of the easier leaps of faith to make in this class.
Week 4 -- Pure Bargaining
Bargaining is the only thing that affects the agreed upon price. In other words, competition has no role in the price you agree on.
Week 4 -- Pure Competition
Competition is the only thing that affects the agreed upon price. In other words, bargaining has no role in the price you agree on.
This one’s a little harder to think about, but consider this; you need to buy a washing machine and are willing to pay $200 for it, but you have two friends who are moving out of country; each one wants to sell his washing machine and has a WTS of only $50. Your BATNA is 0; the price of a washing machine in the store is $200. Even though your WTP is $200, you’ll get one of the machines for $50, because you only want one machine, and your friends will bid each other down until the price reaches $50. Congratulations! You get all of the surplus, and your bargaining skills had nothing to do with it.
This one’s a little harder to think about, but consider this; you need to buy a washing machine and are willing to pay $200 for it, but you have two friends who are moving out of country; each one wants to sell his washing machine and has a WTS of only $50. Your BATNA is 0; the price of a washing machine in the store is $200. Even though your WTP is $200, you’ll get one of the machines for $50, because you only want one machine, and your friends will bid each other down until the price reaches $50. Congratulations! You get all of the surplus, and your bargaining skills had nothing to do with it.
Week 4 -- Competitive Advantage
This concept is not English, at least, not the English most people speak.
In this class, Competitive Advantage means that, if a person transacts, competition ensures that he or she is going to get some utility above and beyond his or her BATNA. In the washing machine example, you would have a competitive advantage, because the competition between the two sellers ensures that you’ll get $150 of utility. If you don’t transact? You’ll get your BATNA, which is less than that. But we say you have competitive advantage because, just by transacting, you're guaranteed some surplus. Simple, right?
In this class, Competitive Advantage means that, if a person transacts, competition ensures that he or she is going to get some utility above and beyond his or her BATNA. In the washing machine example, you would have a competitive advantage, because the competition between the two sellers ensures that you’ll get $150 of utility. If you don’t transact? You’ll get your BATNA, which is less than that. But we say you have competitive advantage because, just by transacting, you're guaranteed some surplus. Simple, right?
Week 4 -- Monopolist and capacity restriction
If a monopolist seller decides to restrict capacity, it’s possible that the competition generated by the overabundance of buyers might actually give the monopolist more profits than otherwise, even though the overall surplus may decrease. The same argument holds true for a monopsonist buyer. I am saying ‘may’ and not ‘will’ because it would depend on the various WTP and WTS of the various parties. Take a look at the monopolist example at the end of week 4’s lecture notes if you have any doubt.
Week 4 -- Competitive Distribution
A distribution is competitive when everybody decides to do business together; nobody (or no group) could do better by going off on their own. Notice this is NOT real life; in real life, people go off on their own all the time. In this class, they do also (think BATNA)… but if they do, then we say the distribution is not competitive.
Week 4 -- Competitive Allocation
The allocation of surplus. In a test question, if this comes up, Sven’s asking for the utility values of the various players. The terminology is rather vague, though; the notes use competitive distribution / allocation almost interchangeably so it’s always best to write out the entire allocation (or, distribution of value) every time he asks for one or the other.
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