ECON 2106 TEST 2

Temporary Assistance to Needy Families (TANF)

- State administered program financed in part by federal grants - The program provides aid to families in need.

Discrimination:

- Different pay for equal MRP - Equal pay for different MRP

Social regulation

- The aim is better quality of life - Improved products - Less pollution - Better working conditions

Supplemental Security Income (SSI)

Minimum income for the - Aged - Blind - Disabled

Earned Income Tax Credit Program (EITC)

- Designed to provide rebates to low-income workers - Each year federal government grants more than $46 billion in these credits - Over one-fifth of all tax returns claim an EITC No apparent reduction in poverty rates - 1973: 11% - 1983: 15% - 1997: 12% - Since then >14%

Rationing can be done by:

- Using the seniority system - Lengthening the apprenticeship period - Instituting other rationing methods

Externalities:

- A situation in which a private cost or benefit diverges from a social cost or benefit, - A situation in which the costs or benefits of an action are not fully borne or gained by the two parties engaged in exchanges or by an individual engaging in a scarce resource- using activity.

Exemptions from Antitrust Laws:

- All Labor unions - Public utilities—electric, gas, and telephone companies - Professional baseball - Cooperative activities among U.S. exporters - Hospitals - Public transit and water systems - Suppliers of military equipment - Joint publishing arrangements in a single city by two or more newspapers

The Robinson-Patman Act of 1936

- Amended Section 2 of the Clayton Act - Designed to protect independent retailers and wholesalers from "unfair discrimination" by chain stores

Antitrust Policy:

- An expressed aim of the U.S. government is to foster competition - This is the general idea behind antitrust legislation - Congress has enacted four key antitrust laws, seen in Table 27-2 - The most important of these laws is the Sherman Act

Correcting for Externalities:

- An externality arises when there is a divergence between private cost and social cost - The remedy is to change the signal for decision making - In the case of industrial pollution, the firm must be forced to internalize the cost of the environmental damage The Polluters' Choice: - install pollution-abatement equipment or otherwise change production techniques - Reduce pollution-causing activity - Pay the price to pollute

Inheritance:

- An inheritance can consist of cash, jewelry, stocks, bonds, houses, and other real estate. - Only about 10 percent of inequality of income can be traced to differences in inherited wealth.

The Short-Run Break-Even Price and the Short-Run Shutdown Price:

- As long as total revenues from continuing to produce output exceed the associated variable costs, the firm will continue to produce. - A firm goes out of business when the owners sell its assets; a firm temporarily shuts down when it stops producing, but is still in business - As long as the price per unit sold exceeds the average variable cost per unit produced, the earnings of the firm's owners will be higher if it continues to produce in the short run than if it shuts down. - In the short run, the firm will not shut down as long as the loss from staying in business is less than the loss from shutting down. - The firm must compare the cost of producing (while incurring losses) with the cost of closing down. - The cost of continuing to produce in the short run is given by the total variable cost curve. - As long as price is greater than average variable cost (AVC), the firm is better off continuing to produce in the short run because it covers all variable costs and some fixed costs.

International Discord in Antitrust Policy:

- As more U.S. firms seek to merge with companies in other countries, the international dimensions of antitrust policy become more important - In the European Union, there are restrictions against any business combination that would enhance the market dominance of one firm

Four types of two-sided markets:

- Audience-making markets: Media platforms link advertisers to audiences. - Matchmaking markets: Platform firms, such as real estate agents and online dating firms, bring end users together. - Transaction-based markets: Banks, credit- and debit-card companies are platforms that finalize transactions between retailers and card holders. - Shared-input markets: Groups of end users utilize a key input obtained from a platform

Economic effects of the national health care program include higher health care spending and a worsened moral hazard problem

- Because the price people actually pay out-of-pocket will decline, the quantity of health care services demanded will increase - Because health insurers will be required to cover an expanded quantity of services, total expenditures on health care will increase - Because people will pay a smaller portion of the actual cost of treating health problems, more individuals will have reduced incentives to make decisions that promote better health Impacts on the rest of the U.S. economy - Labor market: The effective wage rate will increase as firms are required to provide health insurance - Market for goods and services: The increase in labor costs that firms incur will raise their marginal costs and thus their output prices - Government budgets: The federal government ultimately will have to search for ways to reduce its health care expenditures and to raise more tax revenues to fund the program

Calculating the Short-Run Break-Even Price:

- The prices at which a firm's total revenues equal its total costs. - At the break-even price, price equals ATC. - The firm is making a normal rate of return on its capital investment, i.e., it is just covering its explicit and implicit costs.

Sales Promotion and Advertising:

- Can increase demand for a firm - Can differentiate a firm's product - Can result in increased profits How much advertising should be undertaken? - It should be carried to the point at which the additional revenue from one more dollar of advertising just equals that one dollar of additional cost Ease of Entry: - For any current monopolistic competitor, potential competition is always lurking in the background. - The easier and less costly entry is, the more a current monopolistic competitor must worry about losing business.

Emerging Arguments Against Free Trade:

- Environmental concerns - Genetic Engineering - New diseases National Defense -Exports of new technology.

The total social cost of regulation

- Explicit costs of compliance in the United States is estimated to be between $500 billion and $600 billion per year - Economists estimate the opportunity cost of complying with federal regulations may be as high as $270 billion - Add state and municipal regulations, and consider all implicit and explicit costs, and we are over $1 trillion in total

Economic Effects of Labor Unions:

- Have unions raised wages and affected productivity? - Unions have been able to raise wages if they can successfully limit the supply of labor in a particular industry - Economists estimate that the average union wage premium is $2.25 an hour - Yet annual earnings for union workers are not necessarily higher, because they may work somewhat fewer hours Featherbedding - Any practice that forces employers to use more labor than they would otherwise or to use existing labor in an inefficient manner Economic benefits and costs of labor unions—two opposing views - Unions are monopolies whose main effect is to raise the wage rate of high seniority members - Unions increase labor productivity by promoting generally better work environments

Comparing Perfect Competition with Monopolistic Competition:

- In perfect competition, the long-run equilibrium occurs where average total cost is minimized (this does not occur in monopolistic competition) - Some have argued that this is not necessarily a waste of resources—as the added cost arises from product differentiation - Chamberlin argued it is rational for consumers to have a taste for differentiation; consumers willingly accept the resultant increased production costs in return for more choice and variety of output

The Distribution of Wealth:

- Income—a flow—can be viewed as a return on wealth—a stock - The distribution of income is not the same as the distribution of wealth - Wealth includes tangible objects and human wealth

Demand for union labor can be increased by

- Increasing Worker Productivity - Increasing Demand for Union-Made Goods - Decreasing the Demand for Non-Union-Made Goods

Information Products and Monopolistic Competition

- Information products, such as computer operating systems, software, and digital music and videos, have a unique cost structure - Product development entails high fixed costs, but the marginal cost of producing a copy for one more customer is low Information Products: - An item that is produced using information-intensive inputs at a relatively high fixed cost but distributed for sale at a relatively low marginal cost Short-Run Economies of Operation: - A distinguishing characteristic of an information product arising from declining short- run average total cost as more units of the product are sold Consider how computer game manufacturers operate in a monopolistically competitive market. - In monopolistic competition, marginal cost pricing results in losses for the firm, even though it creates efficiencies for the economy as a whole. - Providing an information product entails incurring relatively high fixed costs, but a relatively low per-unit cost for additional units of output - The ATC for a firm that sells an information product slopes downward, meaning the firm experiences short-run economies of operation - In a long-run monopolistically competitive equilibrium, price adjusts to equal ATC; the firm earns sufficient revenues to cover total costs, including the opportunity cost of capital - Consumers thereby pay the lowest price necessary to induce sellers to provide the item

Is a Uniform Tax Appropriate?:

- It may be appropriate to levy a uniform tax, as external costs might vary from location to location - We must establish the amount of economic damages; we have to come up with a measure of economic costs

The Congress of Industrial Organizations (CIO) was formed in 1938

- It was composed mainly of industrial unions - Prior to the formation of the CIO, most labor organizations were craft unions

Industrial Unions

- Labor unions that consist of workers from a particular industry, such as automobile manufacturing or steel manufacturing

Employing All Members in the Union

- Maximizing Member Income - Maximizing Wage Rates for Certain Workers

Access to Education:

- Minorities have faced discrimination in the acquisition of human capital. - The unexplained income differential between whites and blacks is often attributed to discrimination in the labor market. Because no better explanation is offered, we will infer that discrimination in the labor market does indeed still exist

Trade Deflection

- Moving partially assembled products into a member nation of a regional trade bloc, completing assembly, and then exporting them to other nations within the bloc, so as to benefit from preferences granted by the trade bloc - The primary issue associated with regional trade blocs

Network effects arise in Two-Sided markets:

- Network effects are a common feature of two-sided markets. Groups of end users benefit from the network effects in different types of two-sided markets.

Observations on Specialization and trade:

- Not everyone gains from trade - Cannot "run out of exports" - Every country will always have a comparative advantage in something Other Benefits from International Trade: - New goods, services spread - New processes transmitted - Intellectual property introduced.

Wild Species, Common Property, and Trade-Offs:

- One of the most distressing common property problems involves endangered species - Virtually all species not endangered are private property (dogs, cats, cattle, sheep and horses) - Endangered species (spotted owls, bighorn sheep and condors) are typically common property - In 1973, the federal government passed the Endangered Species Act in an attempt to keep species from dying out - As more and more species were put on the endangered list, a trade-off became apparent

The Clayton Act of 1914:

- Passed to remove the vagueness of The Sherman Act - Federal Trade Commission Act of 1914: * Established the Federal Trade Commission to investigate unfair trade practices and enumerated certain business practices that involved overly aggressive competition. * An amendment in 1938 expressly prohibited "unfair or deceptive acts or practices in commerce"

The Capture Hypothesis

- Predicts that the regulators will eventually be captured by the special interests of the industry being regulated

The benefits and costs of regulation

- Regulation offers many potential benefits - Actual benefits are more difficult to measure Direct costs to taxpayers

Rules of Origin:

- Regulations that nations in regional trade blocs establish to delineate product categories eligible for trading preferences - Used in regional trade agreements in order to reduce incentives for trade deflation

Economic Regulation of Non- monopolistic industries

- Securities (SEC) - Banking (Fed, FDIC, Comptroller) - Transportation (FAA) - Communications (FCC)

Characteristics of Monopolistic Competition

- Significant numbers of sellers in a highly competitive market - Differentiated products - Sales promotion and advertising - Easy entry of new firms in the long run

Specialization Is the Key:

- Specializing in producing goods for which a nation has a comparative advantage allows for greater efficiency - Production capabilities increase, making possible greater worldwide consumption through international trade

The Share- the- Gains, Share -the-Pains Theory

- States that regulators must take account of the demands of three groups: legislators, members of the regulated industry, and consumers of the regulated industry's product or service

Why Cartel Agreements Usually Break Down:

- Studies have shown that most cartel agreements do not last for more than 10 years. In many cases, cartel agreements break down more quickly than that - One reason that cartels tend to break down is that the economic profits that existing firms obtain from holding prices above competitive levels provide an incentive for new firms to enter the market - Variations in overall economic activity also tend to make cartels unsustainable

Consumption with Specialization and Trade:

- The United States is willing to buy 1 digital app as long as they provide in exchange no more than 2.5 tablet devices -This is the United States' opportunity cost of producing 1 digital app at home - India buys a tablet device from the United States in exchange for no more than 2 digital apps - This is India's opportunity cost of producing a tablet device at home

Gains from Trade: The gains from trade are shown for each country.

- The United States' gain from specialization and trade is 45 digital apps - India can consume 37.5 more tablet devices - These are net gains

The Meaning of Zero Economic Profits:

- The average total cost curve includes the full opportunity cost of capital as well as the opportunity cost of all other factors of production used in the production process. - Economic profits are that part of accounting profits over and above what are required to stay in business in the long run. - At the short-run break-even price, economic profits are, by definition, zero. - Accounting profits at that price are not, however, equal to zero. They are positive.

Product Differentiation:

- The distinguishing of products by brand name, color, minor attributes, and the like. - The firm has some control over the price it charges - Unlike a perfect competitor, it faces a downward sloping demand curve Consider the abundance of brand names for many products - The more successful the firm is at differentiation, the more control it has over price

Monopsony: A buyer's Monopoly

- The firm is perfect competitor in the product market: it cannot alter the price of the product it sells, and it faces a perfectly elastic demand curve for its product - One factory not only hires the workers but also owns all the businesses in the town. This buyer of labor is called a monopsonist, the only buyer in market - The monopsonist faces an upward-sloping supply curve of labor - We call the additional cost to the monopsonist of hiring one more worker the marginal factor cost (MFC) - The marginal factor cost of increasing the labor input by one unit is greater than the wage rate; thus the marginal factor cost curve always lies above the supply curve Employment and wages under monopsony - To determine the number of workers that a monopsonist desires to hire, compare the marginal benefit to the marginal cost of each hiring decision - The marginal cost is the marginal factor cost (MFC) curve, and the marginal benefit is the marginal revenue product (MRP) curve Monopsonistic Exploitation - Paying a price for the variable input that is less than the marginal revenue product - The difference between marginal revenue product and the wage rate Bilateral Monopoly - A market structure consisting of a monopolist and a monopsonist

Two-Sided Oligopolistic Pricing

- The presence of network effects in two-sided markets means that it is often the case that a few firms capture most of the payoffs associated with market feedback - Thus, oligopoly is the most common industry structure in these markets

Calculating the Short-Run Shutdown Price:

- The price that just covers average variable costs. - It occurs just below the intersection of the marginal cost curve and the average variable cost curve.

Why a Perfect Competitor is a price taker

- There are a large number of buyers and sellers. - The product sold by the firms in the industry is homogeneous. - Both buyers and sellers have equal access to all relevant information. - (No Barriers) Any firm can enter or leave the industry without serious impediments.

Income Distribution in the United States:

- There have been only slight changes in the distribution of money income over time. - The definition of money income used by the U.S. Census Bureau includes only wage and salary income, income from self-employment, interest and dividends, and government transfer payments such as Social Security and unemployment compensation.

Short-Run Profits:

- To find out what our competitive individual magneto optical disk producer is making in terms of profits in the short run, we have to determine the excess of price above average total cost - From Figure 23-2 previously, if we have production and sales of seven Titanium batteries, TR = $35, TC = $30, and profit = $5 per hour. Graphical Depiction of Maximum Profits and graphical depiction of minimum losses - The height of the rectangular box in the previous figure represents profits per unit - The length represents the amount of units produced - When we multiply these two quantities, we get total economic profits Short-run average profits are determined by comparing ATC with P = MR = AR at the profit- maximizing Q In the short run, the perfectly competitive firm can make either economic profits or economic losses

Oligopoly, Efficiency, and Resource Allocation:

- To the extent oligopolists have market power—the ability to individually affect the market price for the industry's output—they lead to resource misallocations, just as monopolies do - But if oligopolies occur because of economies of scale, consumers might actually end up paying lower prices - All in all, there is no definite evidence of serious resource misallocation in the United States because of oligopolies - Some oligopolists charge prices that are greater than marginal cost. - There is no definite evidence of serious resource allocation in the United States. - The more U.S. firms face competition from the rest of the world, the less any oligopoly will be able to exercise market power.

The Old and New of Two-Sided Markets:

- Two-sided markets are not new as newspapers have existed for more than 2,000 years. Today, two-sided markets can be found everywhere.

The Worldwide Importance of International Trade:

- World trade has increased to more than 28 times what it was in 1950. - World GDP today is nearly nine times greater than it was at the end of World War II - The United States has figured prominently in this expansion of world trade.

To understand the current status of labor unions, we consider

- Worldwide trends in unionization - U.S. unionization trends Explaining the fall in union membership - Deregulation - Immigration - Shift from manufacturing to services

The Relationship Between Imports and Exports:

- in the long run, imports are paid for by exports. - Any restriction of imports ultimately reduces exports - When a country engages in trade, it is not competing against the other countries. - All nations stand to benefit from trade

Cutting Back on Production:

A fledgling cartel faces two fundamental problems - A monopoly producer maximizes economic profits by restraining its production to a rate below the competitive output rate - As soon as all producers in the cartel begin restraining production and charging a higher price, each individual member could theoretically increase its revenues and profits by charging a slightly lower price, raising production, and selling more units

Regional Trade Bloc

A group of nations that grants members special privileges - Examples include the European Union, NAFTA, and the Association of Southeast Asian Nations Some economists worry that regional blocs could lead to a reduction in members' trade with nations outside their blocs

Long-Run Industry Supply Curves:

A market supply curve that shows the relationship between prices and quantities after firms have been allowed the time to enter into or exit from an industry, depending on whether there have been positive or negative economic profits. - Constant-Cost Industries: * Industries whose total output can be increased without an increase in long-run per-unit costs; an industry whose long-run supply curve is horizontal. - Increasing-Cost Industries: * Industries in which an increase in output is accompanied by an increase in long-run per-unit costs, such that the long-run industry supply curve slopes upward. - Decreasing-Cost Industries: * Industries in which an increase in output leads to a reduction in long- run per-unit costs, such that the long-run industry supply curve slopes downward.

Income:

A payment for labor services, or a payment for ownership of one of the other factors of production. Income provides us a means of consuming and saving - Can be payment for labor - Can be payment for other factor - Can be from gifts and government transfers Distribution of Income - The way income is allocated among the population based on groupings of residents The Lorenz Curve: - A geometric representation of the distribution of income. - A Lorenz curve that is perfectly straight represents perfect income equality. - The more bowed a Lorenz curve, the more unequally income is distributed.

Definition of a Monopolist:

A single supplier that comprises its entire industry for a good or service for which there is no close substitute

Network Effects:

A situation in which a consumer's willingness to purchase a good or service is influenced by how many others also buy or have bought the item. Positive Market Feedback: - Potential for a network effect to arise when an industry's product catches on Negative Market Feedback - The tendency for industry sales to spiral downward rapidly when the product falls out of favor In some industries, a few firms can potentially reap most of the benefits of positive market feedback - Is a network effect present in the online auction industry, in which eBay, Amazon and Yahoo account for more than 80% of sales - When a small number of firms secure the bulk of payoffs resulting from positive market feedback, oligopoly is likely to emerge as the prevailing market structure

Incentives and Costs of Regulation

Abiding by government regulations can be costly - Consequently, businesses engage in activities intended to avoid intent or to change regulations agencies establish Creative response and feedback effects: Results of regulation - Creative Response * Behavior on the part of a firm that allows it to comply with the letter of the law but violates the spirit, significantly lessening the law's effects

General Agreement on Tariffs and Trade (GAAT)

All of these trade agreement obligations were carried out under the General Agreement on Tariffs and Trade (GATT) - Replaced by the World Trade Organization in 1995 - An international agreement established in 1947 to further world trade by reducing barriers and tariffs. - GATT was replaced by the World Trade Organization in 1995 - In 2002, the U.S. government proposed eliminating all tariffs on manufactured goods by 2015

Oligopoly:

An important market structure that we have yet to discuss involves a situation in which a few large firms comprise an entire industry - They are not perfectly competitive, nor even monopolistically competitive, and because there are several of them a pure monopoly doesn't exist - A market situation in which there are very few sellers - Each seller knows that the other sellers will react to its changes in prices and quantities

Brand Names and Advertising:

Because "differentness" has value for consumers, monopolistically competitive firms regard their brand names as valuable private (intellectual) property - Firms use trademarks, words, symbols, and logos to distinguish their product brands from goods or services sold by other firms * A successful brand image contributes to a firm's profitability Brand Names and Trademarks: - A firm's value in the marketplace depends largely on its current profitability and perceptions of its future profitability. - We can see it in the market value of the world's most valuable product brands - Valuation depends on the market prices of shares of stock of a company times the number of shares traded

The Cooperative Game: A Collusive Cartel:

Cartel: - An association of producers in an industry that agree to set common prices and output quotas to prevent competition. The Rationale for a Cartel and the Seeds of Its Undoing: - If all the firms in an industry can find a way to cooperatively determine how much to produce to maximize their combined profits, then they can form a cartel and jointly act as a single producer - This means that they must collude - They must act together to attain the same outcome that a monopoly firm would aim to achieve

Changing Property Rights:

Closing the gap between private costs and social costs - Taxation - Subsidization - Regulation

The Social Cost of Monopolies

Comparing Monopoly with Perfect Competition: - Let's assume a monopolist comes in and buys up every single perfect competitor - Notice the monopolist produces a smaller quantity and sells at a higher price - Monopolists raise the price and restrict production compared to a perfectly competitive situation - Consumers pay a price that exceeds the marginal cost of production and resources are misallocated in such a situation

Measuring Industry Concentration

Concentration Ratio: - The percentage of all sales contributed by the leading four or leading eight firms in an industry: - sometimes called the industry concentration ratio. U.S. Concentration Ratios: - The concept of an industry is necessarily arbitrary. As a consequence, concentration ratios rise as we narrow the definition of an industry and fall as we broaden it. The Herfindahl-Hirschman Index: - The sum of the squared percentage sales shares of all firms in an industry.

Methods of rate regulation:

Cost-of-Service Regulation - Regulation based on allowing prices to reflect only the actual cost of production and no monopoly profits Rate-of-Return Regulation - Regulation that seeks to keep the rate of return in the industry at a competitive level by not allowing excessive prices to be charged

Industrialization and Labor Unions:

Craft Unions: - Labor unions composed of workers who engage in a particular trade or skill Collective Bargaining - Negotiation between the management of a company or of a group of companies and the management of a union or group of unions for the purpose of reaching a mutually agreeable contract that sets wages, fringe benefits, and working conditions for all employees in all unions Unions in the United States: - Knights of Labor - American Federation of Labor (Samuel Gompers) Early Labor Issues: - 8 hour workday - Equal pay for men and women

Special Cost Characteristics of Information Products:

Creating the first unit of an information product such as a computer program entails a high initial up-front cost. Additional units are very inexpensive to produce. - Costs of Producing Information Products: * High up-front costs of producing the first unit are fixed costs. All subsequent costs of producing additional units are very low. - Cost Curves for an Information Product: * The larger the number of units of an information product that is sold, the lower the average fixed cost. * Thus the average fixed cost curve slopes downward over the entire range of possible outputs. * Average variable cost is likely to be constant and thus marginal cost is likely to be constant. * The average total cost curve will slope downward, so producers of information products experience short-run economies of operation. * This sets information products apart from most other goods and services.

How Society Loses from Monopoly

Deadweight Loss - The portion of consumer surplus that no one in society is able to obtain in a situation of monopoly - No one in society, not even the monopoly, can obtain this deadweight loss

Methods of Advertising:

Direct Marketing - Advertising targeted at specific consumers: e-mail, regular mail Mass Marketing - Advertising intended to reach as many customers as possible: radio, TV, newspaper Interactive Marketing - Permits consumer to follow up directly by searching for more informationq

Why Oligopoly Occurs

Economies of Scale: - The strongest reason that has been offered for the existence of oligopoly is economies of scale. - Economies of scale are defined as a production situation in which a doubling of output results in less than a doubling of total costs. - The firm's average total cost curve will slope downward as it produces more and more output. - Average total cost can be reduced by continuing to expand the scale of operation. Barriers to Entry: -These barriers include legal barriers, such as patents, and control and ownership over critical supplies. Oligopoly by Merger: - A merger is the joining of two of more firms under a single ownership or control. - There are two types of mergers. * A horizontal merger involves firms producing or selling a similar product. * A vertical merger occurs when one firm merges with another from which it purchases an input or to which it sells an output.

Strategic Behavior and Game Theory:

Explaining the pricing and output behavior of oligopoly markets - Reaction Function: The manner in which one oligopolist reacts to a change in price, output, or quality made by another oligopolist in the industry Game Theory: - A way of describing the various possible outcomes in any situation involving two or more interacting individuals when those individuals are aware of the interactive nature of their situation and plan accordingly - The plans made by these individuals are known as game strategies Cooperative Game: A game in which the players explicitly cooperate to make themselves better off - Firms collude for higher than competitive rates of return Non- Cooperative Game: A game in which the players neither negotiate nor cooperate in any way - Relatively few firms with some ability to change price Zero - Sum Game: A game in which any gains within the group are exactly offset by equal losses by the end of the game Negative-Sum Game: A game in which players as a group lose at the end of the game. Positive-Sum Game: A game in which players as a group are better off at the end of the game. Strategies in Non- cooperative Games: - Strategy: Any rule that is used to make a choice such as "always pick heads" - Dominant Strategies: Strategies that always yield the highest benefit Opportunistic Behavior: - Actions that, because long-run benefits of cooperation are perceived to be smaller, focus on short-run gains -An example might be writing a check that you know will bounce - Implies a non-cooperative game which is not realistic—we make repeat transactions Tit- for Tat Strategic Behavior: - In game theory, cooperation that continues so long as the other players continue to cooperate

Enforcing a Cartel Agreement:

Four conditions that make it more likely that firms will be able to successfully coordinate their efforts to restrain output and deter cheating. - A Small Number of Firms in the Industry: The smaller the number of firms in the industry, the easier it is to prevent cheating. - Relatively Undifferentiated Products: If the cartel members sell a homogeneous or nearly homogeneous product, it is easier for them to agree on how much each firm should reduce production. - Easily Observable Prices: If the terms of industry transactions are publically available, cartel members can more readily observe a firm's efforts to cheat. - Little Variations in Prices: Stable demand and cost conditions help a cartel form and continue to operate effectively.

Food Stamps

Government-issued coupons (or e-debit cards) that can be used to purchase food - The supplemental Nutrition Assistance Program (SNAP, commonly known as "food stamps") provides government-issued, electronic debit cards that can be used to purchase food. - In 2013, almost one in every seven citizens (including children) was receiving SNAP benefits.

Health Care:

Health care is intimately related to the distribution of income and poverty The U.S. health care situation - Portion of national income spent on health care has risen steadily since 1965 * 16% of U.S. real GDP is devoted to spending on health care * Per capita spending greater than anywhere else in the world Third Parties - Parties who are not directly involved in a given activity or transaction - Fees may be paid by third parties (insurance companies, government) Price, quantity demanded, and the question of moral hazard - Large percent of medical services payments made by third parties - Price to the consumer drops and the quantity demanded increases - An individual with a zero deductible may engage in a less healthful lifestyle Moral hazard as it affects physicians and hospitals - Due to third-party payments, patients do not have to worry about the cost of operations and medical procedures - Physicians and hospitals order more of them since they are reimbursed on the basis of medical procedures Medicare expenditures are one of the most serious problems facing the federal government today The number of beneficiaries has increased from 19.1 million in 1966 to more than 40 million in 2011 Federal spending on Medicare has increased about 10% a year, adjusted for inflation The nationalization of health care In March 2010, President Barack Obama signed a law that will govern the future operation of U.S. health care markets Health Insurance Exchanges - Government agencies to which the national health care program assigns the task of assisting individuals, families, and small businesses in identifying health insurance policies to purchase

Exit and Entry of Firms:

If firms in an industry are making economic profits, this will signal owners of capital elsewhere in the economy that they should enter this industry. If firms in an industry are suffering economic losses, the losses signal resource owners within the industry not to reinvest and, if possible, to leave it. Profits direct resources to their highest valued use. In the long run, capital and labor will flow to industries where profitability is highest and will flow out of industries where profitability is lowest. In a competitive long-run equilibrium situation, firms will be making zero economic profits. - Allocation of Capital and Market Signals: * Signals are compact ways of conveying to economic decision makers information needed to make decisions. * An effective decision, such as profits and losses, not only conveys information but also provides an incentive to react appropriately. * The price system allocates capital according to the relative expected rates of return on alternative investments. - Tendency Toward Equilibrium: * There is only a tendency for markets to move to competitive equilibrium because things change all the time in a dynamic world. * Firms, even in a very competitive situation, may for various reasons not be making zero economic profits. * These firms are, however, constantly adjusting to changes in their cost and individual demand curves.

Monopolistic Competition:

In the 1920s and 1930s, economists were aware of industries that did not fit under perfect competition or pure monopoly Theoretical and empirical research was instituted to develop some sort of middle ground Two separately developed models of monopolistic competition resulted A market situation in which a large number of firms produce similar but not identical products There is relatively easy entry into the industry.

Long-Run Equilibrium:

In the long run, the firm can change the scale of its plant, adjusting its plant size in such a way that it has no further incentive to change. The Firm's Long-Run Situation: - Given a price of P and a marginal cost curve MC, the firm produces output at which economic profits must be zero in the long run. - The firm's short-run average cost (SAC) is equal to P at that output, which is produced at minimum SAC. - In addition, since the firm is in long-run equilibrium, any economies of scale must be exhausted so that it is on the minimum point of the long-run average cost curve. - At that point, price equals MR equals MC equals average cost where both short-run and long-run average costs are at a minimum. Perfect Competition and Minimum Average Total Cost: - Under conditions of perfect competition, goods and services are produced using the least costly combination of resources, i.e., at minimum short-run and long-run average total costs.

Arguments Against Free Trade:

Infant Industry Argument: - The Contention that tariffs should be imposed to protect from import competition an industry that is trying to get started. -Presumably, after the industry becomes technologically efficient, the tariff can be lifted. Dumping: - selling of a good or service abroad at a price below the price charged in the home market or below its cost of production Protecting Domestic Jobs: - Do imports reduce jobs? * Gould/Woodbridge/Ruffin study - no casual link between the rate of imports and unemployment * In half of the cases studied, when imports rose, unemployment fell

Other Advertising

Informational Advertising - Advertising that emphasizes transmitting knowledge about the features of a product Persuasive Advertising - Advertising that is intended to induce a consumer to purchase a particular product and discover a previously unknown taste for an item Advertising as Signaling Behavior: - Individual companies can explicitly engage in signaling behavior - They do so by establishing brand names or trademarks and promoting them

Economic regulation of natural monopolies:

Initially, most economic regulation in the United States was aimed at controlling prices in industries considered natural monopolies. Over time, federal and state governments have sought to influence products and processes of firms in a variety of industries

Criticisms of the Lorenz Curve:

It does not include income in kind: - Income received in the form of goods and services, housing or medical care - to be contrasted with money income, which is simply income in dollars, or general purchasing power, that can be used to buy any goods and services - It does not account for the differences in size of households or the number of wage earners households contain - It does not account for age differences - It ordinarily reflects money income before taxes - It does not measure unreported income

Union Strategies to Raise Wages Indirectly

Limiting Entry Over Time: - This involves freezing the number of workers in the union. Altering the Demand for Union Labor

Attacks on poverty:

Major income maintenance programs - Social Security which has been called OASDI - 90% of all employed persons covered - In 2013, 55 million people received checks averaging $1,000 a month

Competitve Pricing

Marginal Cost Pricing: - Competitive pricing is a system of pricing in which the price charged for the last unit produced is equal to the opportunity cost to society of producing one more unit of the good as measured by marginal cost. - The competitive solution is economically efficient because it is impossible to increase the output of any good without lowering the value of the total output in the economy. - Situations that arise where perfectly competitive markets cannot efficiently allocate resources are called market failure. Marginal Cost Pricing: - A system of pricing in which the price charged is equal to the opportunity cost to society of producing one more unit of a good or service. - The opportunity cost is the marginal cost to society. Market Failure: - A situation in which an unrestrained market operation leads to either too few or too many resources going to a specific economic activity. - Examples are externalities and public goods.

Using Marginal Analysis to Determine the Profit-Maximizing Rate of Production:

Marginal Revenue: - The change in the total revenues divided by the change in output - MR = Change in TR/ Change in Q Marginal Cost - The change in total cost divided by the change in output - MR= Change in TC/ Change in Q Profit maximization occurs at the rate of output at which - marginal revenue equals marginal cost - MR = MC

Reducing Humanity's Carbon Footprint:

Mixing Government Controls and Market Processes: Cap and Trade: - In light of the costs arising from spillovers that polluting activities create, one solution might seem to be for governments to try to stop them from taking place Kyoto Protocol (1997) aims to reduce overall emissions of greenhouse gases by 2020 by as much as 20% below 1990 levels - The EU's Emissions Trading Scheme (2005) * Each EU nation is established an allowance of emissions that a company can release * If a firm exceeds its limit, it must purchase additional allowances (at the market clearing price) from companies who are emitting less than their quota

Antitrust Enforcement:

Monopolization - The possession of monopoly power in the relevant market and the willful acquisition or maintenance of that power - As distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident The relevant market - A group of products of firms that are closely substitutable and available to consumers within a geographical area Measuring concentration in the relevant market to assess mergers - The Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission use the Herfindahl-Hirschman Index to determine the degree of concentration within the relevant market - A proposed merger may be blocked if it is perceived to lead to lower output and higher prices Versioning - Selling a product in slightly altered forms to different groups of consumers - An example is selling software in "professional" and "standard" versions Bundling - Offering two or more products for sale as a set Tie- In Sales - Purchases of one product that are permitted by the seller only if the consumer buys another good or service from the same firm

Calculating Monopoly Profit

Monopoly profit is given by the shaded area in Figure 24-6, which is equal to total revenues (P xQ) minus total cost (ATC x Q). No Guarantee of Profits: - The term monopoly conjures up the notion of a greedy firm ripping off the public.

The formation of industrial unions

National Industrial Recovery Act of 1933 National Labor Relations Act 1935, otherwise known as the Wagner Act - Gave unions the right to organize workers and to engage in collective bargaining

Union Goals with Direct Wage Setting:

One of the major roles of a union that establishes a wage rate above the market- clearing price is to ration available jobs among excessive numbers of workers who wish to work in unionized industries.

Pollution:

Optimal Quantity of Pollution: - The level of pollution for which the marginal benefit of one additional unit of pollution abatement just equals the marginal cost of the additional unit.

Barriers to Entry:

Ownership of Resources without Close Substitutes: - The Aluminum Company of America (ALCOA) at one time owned most of the world's bauxite - If one firm owns the entire supply of raw material input that is essential to production of a particular commodity, then that ownership serves as a barrier to entry until an alternative source of raw material input is found or an alternative technology not requiring the raw material in question is developed. Economies of Scale: - Low unit costs and prices drive out rivals - The largest firm can produce at the lowest average total cost. Natural Monopoly - A monopoly that arises from the peculiar production characteristics in an industry - It usually arises when there are large economies of scale - One firm can produce at a lower average cost than can be achieved by multiple firms. Legal or Governmental Restrictions - Licenses, Franchises, and Certificates of Convenience: - Examples includes: * Electrical utilities * Radio and television broadcasting - Patents: Intellectual property - Tariffs: Taxes on imported goods - Regulation: Government enforcement of safety and quality

Characteristics of a Perfectly Competitive Market Structure:

Perfect competition - market structure in which the decisions of buyers and sellers as individuals have no effect on market price. Perfectly Competitive Firm: - A firm is such a small part of the total industry that it cannot affect the price of the product or service that it sells Price Taker: - A competitive firm that must take the price of its product as given because the firm cannot influence its price

How Much Should the Perfect Competitor Produce?

Perfect competitor accepts price as given - Firm raises price, it sells nothing - Firm lowers its price, it earns less revenues than it otherwise would Perfect competitor has to decide how much to produce - Firm uses profit-maximization model The model assumes that firms attempt to maximize their total profits. - The positive difference between total revenues and total costs The model also assumes firms seek to minimize losses - When total revenues may be less than total costs Total Revenues: - The price per unit times the total quantity sold. - The same as total receipts from the sale of output - The firm will maximize profits where the total revenue curve exceeds the total cost, the sum of total fixed and total variable costs, by the greatest amount. Profit pi = Total Revenue (TR) - Total cost (TC) - TR = P x Q P is determined by the market in perfect competition Q is determined by the producer to maximize profit - TC = TFC + TVC For the perfect competitor, price is also equal to average revenue are the same: - (AR) = TR/Q = (P ´ Q)/Q = P Profit-Maximizing Rate of Production - The rate of production that maximizes total profits, or the difference between total revenues and total costs - Also, the rate of production at which marginal revenue equals marginal cost The demand curve is the average revenue curve

On Making Higher Profits:

Price Discrimination: - Selling a given product at more than one price, with the price difference being unrelated to differences in marginal cost. Price Differentiation - Establishing different prices for similar products to reflect differences in the marginal cost in providing those commodities to different groups of buyers. Necessary Conditions for Price Discrimination - The firm must face a downward-sloping demand curve. - The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand. - The firm must be able to prevent resale of the product or service

Common Property:

Private Property Rights - Exclusive Rights of ownership that allow the use, transfer, and exchange of property Common Property: - Property that is owned by everyone and therefore by no one (air and water) Voluntary Agreements and Transaction Costs - Voluntary Agreements: Contracting: - Opportunity cost always exists, whoever has property rights Transaction Costs: - All costs associated with making, reaching, and enforcing agreements * Must be low relative to the expected benefits

Private versus Social Costs:

Private costs: - Also called internal costs - Costs borne solely by the individuals who incur them Social Costs: - The full costs borne by society whenever a resource use occurs - Measured by adding internal to external costs Environmental issues occur when social costs exceed private cost The cost of polluted air—consider both private and social cost

Regulation of Nonmonopolistic Industries:

Protecting consumer interests has been the main rationale for governmental regulatory functions The Latin phrase caveat emptor, "let the buyer beware," was once the operative principle, but no more Rationales for government oversight in nonmonopolistic industries -Market failure arising from externalities - The need for consumer protection arising from asymmetric information The Lemons Problem - The potential for asymmetric information to bring about a general decline in product quality in an industry * Credence goods such as pharmaceuticals, health care, and professional services are vulnerable to the lemons problem. Implementing consumer protection regulation - Liability laws and government licensing - Direct economic and social regulation

Ways to Restrict Foreign Trade

Quotas System: - A government-imposed restriction on the quantity of a specific good that another country is allowed to sell in the United States - In other words, quotas are restrictions on imports, usually applied to one or several specific countries

International Competitiveness:

Reasons for this ranking: - Widespread entrepreneurship - Economic restructuring - Investment in information-technology - Sophisticated financial system - Large investments in scientific research

The cost of protecting U.S. jobs

Restrictions on textiles and apparel goods cost U.S. consumers $9 billion a year - Cost $50,000 a year for each $20,000 job saved Restriction on imports of Japanese cars - Cost $160,000 per year for each job saved in the auto industry Glass industry restrictions - Cost $200,000 per year per job saved Steel industry restrictions - Cost $750,000 per year per job saved.

Creative response and feedback effects:

Results of regulation - Feedback effect * Changing behavior after the regulation that offset the regulation Example - HOV lanes added to combat air pollution have higher accident rates

Informational Versus Persuasive Advertising

Search Good: - A product with characteristics that enable an individual to evaluate the product's quality in advance of purchase. Experience Good: - A product that an individual must consume before the product's quality can be established. Credence Good: - A product with qualities that consumers lack the expertise to assess without assistance.

Characteristics of Oligopoly

Small Number of Firms: - An oligopoly exists when the few top firms account for an overwhelming percentage of total industry output. - Interdependence: This is also called strategic dependence * A situation in which one firm's actions with respect to price, quality, advertising, and related changes may be strategically countered by the reactions of one or more other firms in the industry * Such dependence can exist only when there are a limited number of firms in an industry

Implications of the large number of firms

Small Share of Market: - When many firms exist in an industry, each firm has a relatively small share of the total market. Lack of Collusion: - With many firms it is difficult for them to get together to collude; that is, to agree to cooperate to set a pure monopoly price and output. - Price rigging in a monopolistically competitive industry is virtually impossible. Independence: - Because there are so many firms, each one acts independently of the others; no firm attempts to take into account all of its rival firms.

Union Goals and Strategies:

Strike: The Ultimate Bargaining Tool: - The purpose of a strike is to impose costs on management to force management's acceptance of the union's proposed contract terms. - Workers draw no wages while on strike but may be partly compensated out of strike funds. - Strikebreakers can effectively destroy the bargaining power of the union. * Temporary or permanent workers hired by a company to replace union members who are striking

Congressional control over labor unions

Taft-Hartley Act of 1947 Allowed right-to-work laws 1. Laws that make it illegal to require union membership as a condition of continuing employment in a particular firm 2. Made closed shops illegal - A business enterprise in which employees must belong to the union before they can be hired and must remain in the union after they are hired 3. A union shop however, is legal - Non-union members join later 4. Prohibited jurisdictional disputes - Disputes involving two or more unions over which should have control of a particular jurisdiction 5. Prohibited sympathy strikes - A strike by a union in sympathy with another union's strike or cause 6. Prohibited secondary boycotts - A boycott of companies or products sold by companies that are dealing with a company being struck. 7. Established the 80-day cooling - off period 8. A court injunction can be used to delay a strike if it would imperil the nation's safety or health

Tariffs:

Tax on imported goods - Benefits import- competing industries - Harms consumers by raising prices. Tariffs in the United States: - Have varied widely on imported goods. - Highest rates in twentieth century occurred with the passage of the Smoot- Hawley Tariff in 1930. - The Trade Expansion Act of 1962 gave the president the authority to reduce tariffs by up to 50 % - The Trade Reform Act (1974) allowed further reductions - The Trade and Tariff Act of 1984 resulted in the lowest tariff rates ever.

Determinants of Income Differences

The Age-Earnings Cycle: - The regular earnings profile of an individual throughout his or her lifetime. - At age 18, earnings from wages are relatively low - Earnings gradually rise until they peak at about age 50 - Earnings then fall until they approach zero at retirement age. Marginal Productivity: - Talent: This is a factor that cannot be acquired if one does not have it. - Experience: Experience can be linked to the well-known learning curve that applies when the same task is done over and over. The worker repeating a task becomes more efficient and thus more productive. - Training: Much of a person's increased productivity is due to on-the-job training. - Investment in Human Capital: An important reason for forgoing income from working in order to get more education is the expectation of a higher income. The average the rate of return to investment in human capital of a college education is between 6 and 8 percent per year, which is on a par with the rate of return to investment in other areas.

Price and Output for the Monopolistic Competitor

The Individual Firm's Demand and Cost Curves: - Demand curve slopes downward. - Profit maximized where MC intersects MR from below. Short-Run Equilibrium: - In the short run, it is possible for a monopolistic competitor to make economic profits - profits over and above the normal rate of return, or beyond what is necessary to keep that firm in the industry. - Losses in the short run are clearly also possible The Long Run: Zero Economic Profits: - The rate of return will tend toward normal - Economic profits will tend toward zero * So many firms produce substitutes, any economic profits will disappear with competition * Reduced to zero either through entry of new firms seeking to earn a higher rate or return, or by changes in product quality and advertising outlays by existing firms

Price Determination under Perfect Competition

The Market Clearing Price: - This price is established by the interaction of all the suppliers (firms) and all the demanders (consumers) - The short-run industry supply curve is the horizontal summation of all the sections of the marginal cost curves of the individual firms above their respective minimum average variable cost points. - The intersection of the demand and supply curves determines the equilibrium or market price. Market Equilibrium and the Individual Firm: - The individual firm demand curve is set at the going market price. The competitive price is determined by the intersection of the market demand curve and the market supply curve. - The market supply curve is equal to the horizontal summation of the supply curves of the individual firms

Theories of Desired Income Distribution:

The Productivity standard: - "To each according to what he or she produces" is a contributive standard. Equality - the egalitarian principle: "To each exactly the same"

Forms of Industry Regulation:

The U.S. government began regulating social and economic activity early in the nation's history. The amount of government regulation began increasing in the twentieth century. There are two basic types of government regulation: - Economic Regulation of regulation of natural monopolies and non-monopolistic industries. - Social Regulation which covers all industries.

International Trade Organizations:

The World Trade Organizations: - The successor organization to GATT that handles trade disputes among its member nations - Most important international trade organization, with largest membership - Fostered most important and far- reaching global trade agreement covering * Financial institutions; including banks, insurers and investment companies

Elasticity and Monopoly:

The monopolist faces a downward-sloping demand curve (its average revenue curve) That means that it cannot charge just any price with no changes in quantity (a common misconception) because, depending on the price charged, a different quantity will be demanded A monopolist is a single seller of a well-defined good or service with no close substitute - Think of some imperfect substitutes. - The demand curve slopes downward because individuals compare marginal satisfaction to cost After all, consumers have limited incomes and unlimited wants The market demand curve, which the monopolist alone faces in this situation, slopes downward because individuals compare the marginal satisfaction they will receive to the cost of the commodity to be purchased

The Demand Curve a Monopolist Faces:

The monopolist faces the industry demand curve because the monopolist is the industry. Recall that under perfect competition - Firm faces perfectly elastic demand curve, it is a price taker - The forces of supply and demand establish the price per unit - Marginal revenue, average revenue, and price are all the same Marginal revenue equals the change in total revenue due to a one-unit change in the quantity produced and sold Perfect Competition versus Monopoly: - The perfectly competitor doesn't have to worry about lowering price to sell more. - In a purely competitive situation, the firm accounts for a small part of the market * It can sell its entire output, whatever that may be, at the same price. - The more the monopolist wants to sell, the lower the price it has to charge on the last unit sold - To sell the last unit, the monopolist has to lower the price because it is facing a downward sloping demand curve The Monopolist's Marginal Revenue: Less Than Price: - A monopolist's marginal revenue is always less than price. - To understand why, let sales increase by one unit due to a reduction in the price. - Price times the last unit sold is not the addition to total revenues received from selling that last unit because price had to be reduced on all previous units sold in order to sell the larger quantity.

The Demand Curve of the Perfect Competitor:

The perfectly competitive firm is a price taker, selling a homogeneous commodity that is indistinguishable across all firms in the industry - Will sell all units for $5 - Will not be able to sell at a higher price - Will face a perfectly elastic demand curve at the going market price The demand schedule for a perfectly competitive firm is thus perfectly elastic at the market supply and market demand determined price. The firm is a price taker, i.e., it must take price as given because the firm cannot influence market price.

The Supply Curve for a Perfectly Competitive Industry:

The relationship between a product's price and the quantity produced and sold is the perfectly competitive firm's supply curve. The Perfect Competitor's Short-Run Supply Curve: - The individual firm's supply curve is the portion of its marginal cost curve above its average variable cost curve. The Short-Run Industry Supply Curve: - The short-run industry supply curve is the locus of points showing the minimum prices at which given quantities will be forthcoming, also called the market supply curve. Factors That Influence the Industry Supply Curve (determinants of supply) - Firm's productivity - Factor costs (wages, prices of raw materials) - Taxes and subsidies - Number of sellers - Anything that affects the marginal cost curves of the firms will influence the industry supply curve.

Trade Diversion

The shifting of trade from countries outside a regional trade bloc to nations within a bloc - Most evidence, however, indicates that regional trade blocs have promoted trade instead of hindering it - Numerous studies have found that as countries from around the world have become more open to trade, they have tended to join regional trade blocs that promote even more openness

Regulation of Natural Monopolies:

The theory of natural monopoly regulation includes our understanding of: - Unregulated natural monopoly - Impracticality of marginal cost pricing - Average cost pricing - Natural monopoly is a monopoly arising from the peculiar production characteristics in an industry - It usually arises when there are large economies of scale relative to the industry's demand - One firm can produce at a lower average cost than can be achieved by multiple firms

The Sherman Antitrust Act of 1890:

This act was the first attempt by the federal government to control the growth of monopoly in the United States. The most important provisions of the act are as follows: - Section 1: * Every contract, combination in the form of trust or otherwise or conspiracy, in the restraint of trade or commerce among the several states, or with foreign nations. - Section 2: * Everyone person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of trade or commerce...shall be guilty of a misdemeanor.

Poverty and Attempts to Eliminate It:

Throughout history mass poverty has been accepted as inevitable Sustained economic growth has wiped out mass poverty in many countries How can there be so much poverty in a nation of such abundance? Defining Poverty: - Official poverty level in 2011 for an urban family of four around $22,000 * Adjusted based on CPI * Does not include cash and non-cash transfer payments Absolute Poverty is not the same as relative poverty - In a relative sense, poverty will always exist even if absolute poverty eliminated

Specialization among nations:

To demonstrate the concept of comparative advantage, consider a simple two- country, two-good world * United States will specialize - Produce 225 tablet devices, and no apps * India will specialize - Produce 100 apps, and no tablet devices Production and Consumption Capabilities in a two-country, two -good world - We show maximum feasible quantities of software and PCs - Using all resources - land, labor, capital, and entrepreneurship

Two-Sided Markets, Network Effects, and Oligopoly:

Two-sided market: - In a two-sided market, a platform and the groups of producers and consumers are end users - The platform establishes prices that are not necessarily the same for the two groups

Voluntary Quotas:

Voluntary Restraint Agreement (VRA) - An official agreement with another country that " voluntarily" restrict the quantity of its exports. Voluntary Import Expansion (VIE): - An official agreement with another country in which it agrees to import more from the United States.

Costs and Monopoly Profit Maximization:

We assume profit maximization is the goal of the pure monopolist, just as it is for the perfect competitor. Perfect competitor has only to decide on the profit-maximizing output rate because price is given - The perfect competitor is a price taker For the pure monopolist, we must seek a profit-maximizing price output combination - The monopolist is a price searcher Price Searcher - A firm that must determine the price-output combination that maximizes profit because it faces a downward-sloping demand curve We can determine the profit-maximizing price-output combination with either of two equivalent approaches: - By looking at total revenues and total costs - By looking at marginal revenues and marginal costs Total Revenues-Total Costs Approach: - Maximize the positive difference between total revenues and total costs. Marginal Revenue-Marginal Cost Approach: - Profit maximization will also occurs where marginal revenue equals marginal cost. Why Produce Where Marginal Revenue Equals Marginal Cost?: - This is where the greatest positive difference between total revenue and total cost occurs. Producing past where MR= MC - Result is that incremental cost will exceed incremental revenue Producing less than where MR= MC - The monopolist is not maximizing profits through this approach either. Real-World Informational Limitations - Price searching by a less-than perfect competitor is a process - A monopolist can only estimate the actual demand curve and make an educated guess when it sets its profit-maximizing profit - For the perfect competitor, price is given already by the intersection of market demand and supply

Why We Trade: Comparative Advantage and Mutual Gains from Exchange

We have learned about the concept of specialization and the mutual gains from trade We can understand gains from trade among nations by understanding output gains from specialization between individuals Comparative Advantage: - The ability to produce a good or service at a lower opportunity cost than can other producers. * The opportunity cost of producing a tablet is lower in the United States than in India * Cost of producing 1 tablet = 0.4 apps * Cost of producing 1 app = 2.5 tablets *The opportunity cost of producing an app is lower in India than the U. S. *Cost of producing 1 tablet = 2 apps * Cost of producing 1 app = 0.5 tablet