ECON201 Final Learning Objectives

Discuss how game theory relates to oligopoly.

"Game theory is the study of how people behave in strategic situations. By 'strategic' we mean a situation in which each person, when deciding what actions to take, must consider how others might respond to that action." "Oligopoly is a market structure in which only a few sellers offer similar or identical products."

Relate how the ability of monopolistic competition to deliver product differentiation helps to compensate for its failure to deliver economic efficiency.

- Consumers have a wider array of products to choose from. - Better quality products

List and explain the barriers to entry that shield pure monopolies from competition.

- Economies of Scale - Legal barriers (Patents / Licenses) - Ownership or control of essential resources - pricing or other strategic barriers such as selective price-cutting and advertising.

Give business examples of short-run costs, economies of scale, and minimum efficient scale (MES).

- Examples of variable costs include employee wages and costs of raw materials. The short run costs increase or decrease based on variable cost as well as the rate of production. - Many specialist suppliers close by, Access to research and development facilities, Pool of skilled labour to choose from - minimum efficient scale is. the level of output at which the long-run average cost of production no longer decreases with output. a firm that does not reach its minimum efficient scale. will lose money if it remains in business.

Explain the differences between constant-cost, increasing-cost, and decreasing-cost industries.

In a constant-cost industry, exit will not affect the input prices of remaining firms. In an increasing-cost industry, exit will reduce the input prices of remaining firms. And, in a decreasing-cost industry, input prices may rise with the exit of existing firms.

Describe how information failures may justify government intervention in some markets.

- Information failure occurs when there are information gaps that can often lead to a misallocation of resources. Misunderstanding the true benefits/costs of a product... Complex information (such as when to buy house)... Inaccurate or misleading information (e.g. persuasive advertising can lead to higher demand than what is optimal)... Addiction (drugs addicts may be unable to stop consumption) Asymmetric information (asymmetry of information). This occurs when either buyer or seller knows more information that the other party. It distorts people's incentives to buy and sell goods and services at the right prices and as a result can lead to inefficiencies and market failure. - Government intervention is used to correct market failures arising from an inefficient resource allocation or a lack of equity (fairness). Mis-timing (by the time they intervene the issue may have changed and thus the solution will be wrong), Political pressure, politicians short-termism views, difficult to quantify the problem, lack of information on the extent of the problem

Distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government-regulated monopoly.

- MP price is set above marginal cost and the firm earns a positive economic profit. Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient. - SOP Socially optimal is where P = MC and profit is maximised. This is the optimal distribution of resources in society, taking into account all external costs and benefits as well as internal costs and benefits - FRP The price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it.

Contrast the potential positive and negative effects of advertising.

- Much advertising is designed to manipulate rather than inform buyers. - When advertising either leads to increased monopoly power, or is self-canceling, economic inefficiency results. - Advertising reduces a buyer's search time and minimizes these costs. - By providing information about competing goods, advertising diminishes monopoly power, resulting in greater economic efficiency. - By facilitating the introduction of new products, advertising speeds up technological progress. - If advertising is successful in boosting demand, increased output may reduce long-run average total cost, enabling firms to enjoy economies of scale.

Discuss the economic effects of monopoly.

- Price (Pure monopoly will charge a higher price; monopolies operate where MR=MC, not where D=MC (MC is essentially the same as supply for our intents and purposes) - Quantity of product produced (Pure monopoly will produce less, in order to operate where MR=MC) - Allocation of resources (Does not allocate efficiently; will not represent consumer wishes; MB≠MC) - Distribution of income (Contributes to income inequality because the monopolists charge higher prices, and the profit goes to rich stockholders) - Technological progress (Monopoly discourages technological processes; competition encourages competing firms to improve production, but monopolies compete with no one)

Explain how purely competitive firms can use the marginal-revenue-marginal-cost approach to maximize profits or minimize losses in the short run.

- Provided price exceeds minimum average variable cost, a competitive firm maximizes profit or minimizes loss in the short run by producing the output at which price or marginal revenue equals marginal cost. - If price is less than minimum average variable cost, a competitive firm minimizes its loss by shutting down. If price is greater than average variable cost but is less than average total cost, a competitive firm minimizes its loss by producing the P = MC amount of output. If price also exceeds average total cost, the firm maximizes its economic profit at the P = MC amount of output.

Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.

- Public goods: Extreme form of demand side market failures Market fails to produce any goods, demand curve reflect no willingness from consumers Characteristics: Nonrivalry and Nonexcludability National Defense Goods have to be produced by government to exist Paid through taxes - Free riding: Everyone obtains benefits People do not voluntarily pay for something they get for free Reduced demand - Why can Private companies produce public goods: Low demand makes it impossible for prv firms to profitably supply good Cannot "tap market demand" for revenues

Explain how a pure monopoly sets its profit-maximizing output and price.

- The MR = MC rule will tell the monopolist where to find its profit-maximizing output level. This can be seen in Table 12.1 and Figure 12.4. The same result can be found by comparing total revenue and total costs incurred at each level of production. - The pure monopolist has no supply curve because there is no unique relationship between price and quantity supplied. The price and quantity supplied will always depend on the location of the demand curve

Explain how the long run differs from the short run in pure competition.

- The entry and exit of firms in our market models can only take place in the long run. In the short run, the industry is composed of a specific number of firms, each with a plant size that is fixed and unalterable in the short run. Firms may shut down in the sense that they can produce zero units of output in the short run, but they do not have sufficient time to liquidate their assets and go out of business. - In the long run, by contrast, the firms already in an industry have sufficient time to either expand or contract their capacities. More important, the number of firms in the industry may either increase or decrease as new firms enter or existing firms leave.

Describe how profits and losses drive the long-run adjustment process of pure competition.

- The entry or exit of firms will change industry supply. Entry or exit will continue until the market price determined by industry supply interacting with market demand generates a normal profit for firms in the industry. With firms earning a normal profit, there will be no incentive to either enter or exit the industry. This situation constitutes long-run equilibrium in a purely competitive industry. - Entry and exit help to improve resource allocation. Firms that exit an industry due to low profits release their resources to be used in more profitably in other industries. Firms that enter an industry chasing higher profits bring with them resources that were less profitably used in other industries. Both processes increase allocative efficiency. - In the long-run, the market price of a product will equal the minimum average total cost of production. At a higher price, economic profits will cause firms to enter the industry until those profits have been competed away. At a lower price, losses will force the exit of firms from the industry until the product price rises to equal average total cost.

List the conditions required for purely competitive markets.

- large number of firms supplying the product - standardized or homogeneous products - low entry and exit costs for firms entering or leaving the industry, and - for any market for which the above qualities are true, then suppliers are price takers in that no individual supplier has any influence on the market price

Explain why monopolistic competition delivers neither productive nor allocative efficiency.

- long run equilibrium position monopolistically competitive producer is less efficient than pure competitor - price will exceed marginal cost due to under allocation - price exceeds minimum average total cost indicating that consumers do not get the product at the lowest price cost conditions may allow

Explain why monopolistic competitors earn only a normal profit in the long run.

- monopolistically competitive firms may earn economic profits or incur losses in the short run - easy entry and exit of firms results in only normal profits in the long run

Relate the law of diminishing returns to a firm's short-run production costs.

- the law states that continuous increases of one input factor while holding the other input factors fixed will lead to a decrease in the per unit output of the variable input factor - In a short-run perspective, a firm's total costs can be divided into fixed costs, which a firm must incur before producing any output, and variable costs, which the firm incurs in the act of producing. ... Average variable cost is calculated by taking variable cost and dividing by the total output at each level of output.

Utilize additional game-theory terminology and demonstrate how to find Nash equilibriums in both simultaneous and sequential games.

A Nash equilibrium is an outcome of a game from which neither rival wants to deviate. That is, neither of the firms have an incentive to change their behavior. - A sequential game is one where one of the firms moves first and commits to a strategy. The other firm can then base its decision on the choice made by the first-mover. - A simultaneous game is one where firms choose their strategies at the same time.

Relate how the indifference curve model of consumer behavior derived demand curves from budget lines, indifference curves, and utility maximization.

A budget line shows combinations of two goods a consumer is able to consume, given a budget constraint. An indifference curve shows combinations of two goods that yield equal satisfaction. To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.

Explain how a demand curve can be derived by observing the outcomes of price changes in the utility-maximization model.

A consumer's utility is maximized when income is allocated so that the last dollar spent on each product purchased yields the same amount of extra satisfaction. Algebraically, the utility-maximizing rule is fulfilled when

Explain how positive and negative externalities cause under- and over allocations of resources.

A negative externality means an overproduction of related product occur causing Overallocation of resources, A positive externality causes an underallocation of resources making a third party not willing to pay who receive external benefits

Explain the origin of both consumer surplus and producer surplus, and explain how properly functioning markets maximize their sum, total surplus, while optimally allocating resources.

Consumer surplus is the difference between the price of a product and the price consumers are willing to pay. - Producer surplus is the difference between the minimum viable product price for the supplier to function and the price consumers are willing to pay. - Nominal markets have marginal benefits (demand curve) equaling marginal costs (supply curves), and maximum willingness to pay equaling minimum viable price

Discuss creative destruction and the profit incentives for innovation.

Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones. ... Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones.

Use economies of scale to link a firm's size and its average costs in the long run.

Economies of scale means large organisations can often produce items at a lower unit cost than their smaller rivals - a source of competitive advantage. It is important not to confuse total cost with average cost. As a firm grows in size its total costs rise because it is necessary to use more resources.

Give the names and summarize the main characteristics of the four basic market models.

Economists group industries into four models based on their market structures: (a) pure competition, (b) pure monopoly, (c) monopolistic competition, and (d) oligopoly

Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs.

Explicit cost are for items a firm must purchase to produce something; ie labor or raw materials and implicit cost are for items a firm already owns; ie knowledge and/or machinery, forest, etc.

Explain how demand is seen by a purely competitive seller.

In a competitive industry, no single firm can influence the market price. This means that the firm's demand curve is perfectly elastic and price equals marginal revenue.

Identify and explain the objectives of GATT, WTO, EU, eurozone, and NAFTA, and discuss offshoring and trade adjustment assistance.

Inefficiencies of protectionism have led nations to seek ways to promote free trade. General Agreement on Tariffs and Trade (GATT) GATT is based on three principles: Equal, nondiscriminatory trade treatment for all member nations Decrease tariffs through multilateral negotiation Eliminate import quotas In 1947, GATT was signed by 23 nations, including the United States. The last round of negotiations was the Uruguay round where 123 nations reached a new agreement for liberalizing trade to be implemented between 1995 and 2005. World Trade Organization (WTO) In 2015, there were 161 nations who belonged to the WTO. The ninth and latest round of negotiations (the Doha round) started in Doha, Qatar, in late 2001. This round has targeted further tariff and quota reductions, as well as reductions in agricultural subsidies that distort the pattern of trade. The WTO has become a protest target of groups who are against various aspects of globalization. The European Union (EU) To promote free trade, countries have created free-trade zones. The European Union was first started as the Common Market in 1958. In 2003, the EU included 15 nations and has now grown to 27 nations today. Within the EU, tariffs and quotas have been removed on almost all traded goods among member nations and have the same trade barriers for imports into the EU. It led to increased regional specialization, greater productivity, greater output, and faster economic growth, creating large markets for producers contributing to lower costs. In 2000, the eurozone was established with 16 members of the EU using a common currency, further increasing trade. North American Free Trade Agreement (NAFTA) This created a free-trade zone between Mexico, the United States, and Canada in 1993, eliminating trade barriers on most goods. There was a concern that NAFTA would lead to large reductions in employment in the United States because firms would move to Mexico where there is less regulation. Since NAFTA, employment in the United States has increased by more than 25 million.

Explain the three main models of oligopoly pricing and output: kinked-demand theory, collusive pricing, and price leadership.

Kinked -There will be an asymmetrical reaction to a change in price by one firm -If a firm raises its price, other firms will not react and the firm which has raised its price will lose market share -If it lowers its price its competitors will lower price too in order to prevent an erosion of their market share -The firm will gain little extra demand as a result -The demand curve is therefore more elastic for a price rise than for a price fall Collusive - Criminal offense where numerous companies work together to keep the price of a product or service at an elevated level with the goal of receiving large profits or cornering the market. The companies involved essentially try to chase out competitors. Price Leadership - Price leadership is a situation in which one company, usually the dominant one in its industry, sets prices which are closely followed by its competitors

Describe the distinctions between fixed and variable costs and among total, average, and marginal costs.

Marginal costs are a function of the total cost of production, which includes fixed and variable costs. Fixed costs of production are constant, occur regularly, and do not change in the short-term with changes in production. ... By contrast, a variable cost is one that changes based on production output and costs.

Describe why a monopolist might prefer to charge different prices in different markets.

Monopoly chargers different prices to different buyers for the same exact product in order to increase product. Separates buyers into groups with different price elasticities of demand. Prevents resale of product from one group to another.

Explain how demand is seen by a pure monopoly.

Monopoly demand is the industry (market) demand and is therefore downward sloping.

Show why we normally won't want to pay what it would cost to eliminate every last bit of a negative externality such as air pollution.

Negative externalities is subject to the law of diminishing returns, which states that the marginal cost of removing negative externalities goes up as more is removed. - Once the marginal cost of removal is equal to the marginal benefit of removal, no more pollution will be removed.

Consumer Behavior

No two consumers spend their incomes in the same way. Examining why consumers buy a particular bundle of goods and services rather than other helps us understand consumer behavior and the law of demand.Exploration of behavioral economics and prospect theory will provide a better understanding of these kinds of decisions.

Differentiate between demand-side market failures and supply-side market failures.

Positive externalities cause demand-side market failures by failing to account for willingness to pay of consumers in the community who accrue communal benefits from a product. ... - Negative externalities cause supply-side market failures, by failing to account for production costs born by the community.

Discuss the efficiency of oligopoly from society's standpoint and whether it is more or less efficient than monopoly.

Productive and Allocative Efficiency of Oligopolies. Pure competition achieves productive efficiency by producing products at the minimum average total cost. They also achieve allocative efficiency because they produce until their marginal cost = price. ... Hence, oligopolies exhibit the same inefficiencies as a monopoly.

Analyze the economic effects of tariffs and quotas.

Tariffs and quotas are both ways for governments to protect domestic firms and industries. Both of these economic trade tactics ultimately lead to higher prices of goods and fewer choices or quantity of imported goods for the consumer. Because of higher prices, consumers ultimately can buy fewer goods and services.

List and discuss several key facts about international trade.

The United States has a trade deficit in goods (exports exceed imports); in 2015 the trade deficit in goods was $529 billion. - The United States has a trade surplus in services ($220 billion in 2015). - The principal exports of the United States include chemicals, semiconductors, consumer durables, aircraft, and agricultural products. Its main imports are petroleum, automobiles, computers, household appliances, and metals.

Define and explain the relationship between total utility, marginal utility, and the law of diminishing marginal utility.

The law of diminishing marginal utility states that beyond a certain quantity, additional units of a specific good will yield declining amounts of extra satisfaction to a consumer.

Show how long run equilibrium in pure competition produces an efficient allocation of resources.

The long-run equality of price and marginal cost implies that resources will be allocated in accordance with consumer tastes. Allocative efficiency will occur. In the market, the combined amount of consumer surplus and producer surplus will be at a maximum. The competitive price system will reallocate resources in response to a change in consumer tastes, in technology, or in resource supplies and will thereby maintain allocative efficiency over time.

Explain why a competitive firm's marginal cost curve is the same as its supply curve.

The marginal cost curve is a supply curve only because a perfectly competitive firm equates price with marginal cost. This happens only because the price is equal to marginal revenue for a perfectly competitive firm.

Give examples of several real-world phenomena that can be explained by applying the theory of consumer behavior.

The theory of consumer behavior can explain many real world phenomena, including the rapid adoption of popular consumer goods like the iPad that feature disruptive technologies, the over consumption of products like health care that have artificially low prices, and why people often prefer gifts of cash to receiving particular items or objects of the same monetary value as gifts.

Describe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase.

The utility-maximization model assumes that the typical consumer is rational and acts on the basis of well-defined preferences. Because income is limited and goods have prices, the consumer cannot purchase all the goods and services he or she might want. The consumer therefore selects the attainable combination of goods that maximizes his or her utility or satisfaction.

Discuss how the utility-maximization model helps highlight the income and substitution effects of a price change.

The utility-maximizing rule and the demand curve are logically consistent. Because marginal utility declines, a lower price is needed to induce the consumer to buy more of a particular product.

Describe how differences between world prices and domestic prices prompt exports and imports.

There are two components to international trade. The first is the relationship between the value of my country's currency to the value of my trading partner's currency. The second component is the value of the product, commodity or service to be sold. If I live in a country with a strong currency, I prefer to purchase products from a country with a weak currency because my strong currency is relatively more valuable. This makes the cost of products from that country cheaper. On the other hand, if I want to export products from my strong currency country to a weak currency country, then my products will be more expensive because my customer in the weak currency country has to spend more of his less valuable currency to compensate me for my more expensive currency. Therefore, strong currencies encourage imports and weak currencies encourage exports.

Describe the characteristics of oligopoly.

an industry dominated by a small number of large firms, (2) firms sell either identical or differentiated products, and (3) the industry has significant barriers to entry.

Convey how purely competitive firms can use the total-revenue-total-cost approach to maximize profits or minimize losses in the short run.

We can analyze short-run profit maximization by a competitive firm by comparing total revenue and total cost or by applying marginal analysis. A firm maximizes its short-run profit by producing the output at which total revenue exceeds total cost by the greatest amount.

Define comparative advantage, and demonstrate how specialization and trade add to a nation's output.

With trade, a country allocates more resources and produces a larger output in exporting industries with fewer resources and output in the importing industries. - The basic principle of comparative advantage rests on differing opportunity costs of producing various goods and services allows countries to specialize, increasing productivity of resources and increasing output. - The principle of comparative advantage says that total output will be greatest when each good is produced by the nation that has the lower opportunity cost. The United States has a comparative advantage in beef production and should specialize in beef, and Mexico should specialize in vegetables as one would expect.

List the characteristics of monopolistic competition.

large number of small firms, (2) similar but not identical products sold by the firms, (3) relative freedom of entry into and exit out of the industry, and (4) extensive knowledge of prices and technology.

List the characteristics of pure monopoly.

profit maximizer, price maker, high barriers to entry, single seller, and price discrimination