EC 111 Final Exam

Monopolistic Competition Demand Curve

A firm's demand curve is more elastic the more substitutes there are and the less differentiated its product is

Explicit Costs

A firm's opportunity cost of resources employed by a firm that takes the form of cash payments Examples: wages, rent, interest, insurance, taxes

Can change a resource's marginal product

1. A change in the amount of other resources employed If two resources are substitutes, an increase in the price of one increases the demand for the other If two resources are complements, a decrease in the price of one leads to an increase in the demand for the other Any increase in the quantity and quality of a complementary resource, such as trucks, raises the marginal productivity of the resource in question, such as truck drivers, and so increases the demand for that resource 2. A change in technology Technological improvements can boost the productivity of some resources but make other resources obsolete

Ways Unions Can Increase Wages

1. By forming an inclusive, or industrial union 2. By forming an exclusive, or craft, union 3. By increasing the demand for union labor

Ways Unions Try to Raise Wages

1. By negotiating a wage floor above the equilibrium wage for the industry then somehow rationing the limited jobs among union members 2. By restricting the supply of labor 3. By increasing the demand for union labor

Price Maker

A firm with some power to set the price because the demand curve for its output slopes downward A firm with market power The monopolist can choose either the price or the quantity, but choosing one determines the other

Three uses of time

1. Market Work 2. Nonmarket Work 3. Leisure

Ways sellers can differentiate their products

1. Physical difference 2. Location 3. Services 4. Product Image

Ways to Increase Wages

1. Reduce labor supply through restrictions 2. Increase demand of labor (either by increasing demand of union product, increasing productivity, or decreasing supply of nonunion products)

Taxing Productive Activity

1. Resource owners may supply less of the taxed resource because the after-tax earnings decline 2.To evade taxes, some people shift from the formal, reported economy to an underground, "off the books" economy 3. Thus, when the government taxes market exchange and the income it generates, less market activity and less income get reported

Conditions for Price Discrimination

1. The demand curve for the firm's product must slope downward, indicating that the firm is a price maker—the producer has some market power, some ability to set the price 2. There must be at least two groups of consumers for the product, each with a different price elasticity of demand 3. The firm must be able, at little cost, to charge each group a different price for essentially the same product 4. The firm must be able to prevent those who pay the lower price from reselling the product to those facing the higher price

Game Theory

A approach that analyzes oligopolistic behavior as a series of strategic moves and countermoves by rival firms

Producer Surplus

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable cost

Can change the price of the resource

A change in demand for the product Because the demand for a resource is derived from the demand for the final output, any change in the demand for output affects resource demand

Constant Long Run Average Cost Curve

A condition that occurs if, over some range of output, long-run average cost neither increases nor decreases with changes in firm size

Long Run Average Cost Curve

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve Each of the short-run average cost curves is tangent to the long-run average cost curve, and these points of tangency represent the least-cost way of producing each particular rate of output, given resource prices and the technology Each point of tangency between a short-run average cost curve and the long-run average cost curve represents the least-cost way of producing that particular rate of output

Short Run Industry Supply Curve

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve

Short Run Firm Supply Curve

A curve that shows how much a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve

Long Run Industry Supply Curve

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust in the long run to any change in market demand

Price Taker

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm that decides to produce must accept, or "take," the market price

Price Leader

A firm whose price is matched by other firms in the market as a form of tacit collusion A dominant firm sets the market price and initiates any price changes, and other firms follow that lead, thereby avoiding price competition Example: steel industry as a price-leadership form of oligopoly Violates U.S. antitrust laws The greater the product differentiation among sellers, the less effective price leadership is as a means of collusion There is no guarantee that other firms will follow the leader. Firms that fail to follow a price increase take business away from firms that do Unless there are barriers to entry, a profitable price attracts new entrants, which could destabilize the price-leadership agreement Firms are tempted to cheat on the agreement to boost sales and profit

Implicit Costs

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment Examples: use of a company-owned building, use of company funds, and the time of the firm's owners Require no cash payment and no entry in the firm's accounting statement

Total Product

A firm's total output

Economic Profit

A firm's total revenue minus its explicit and implicit costs Takes into account the opportunity cost of all resources used in production Any accounting profit in excess of a normal profit is economic profit

Accounting Profit

A firm's total revenue minus its explicit costs

Prisoner's Dilemma

A game that shows why players have difficulty cooperating even though they would benefit from cooperation Two thieves are caught near the crime scene and brought to police headquarters, where they are interrogated in separate rooms → the police know the two guys did it but can't prove it, so they need a confession → each thief faces a choice of confessing, thereby "squealing" on the other, or "clamming up," thereby denying any knowledge of the crime → if one confesses, turning state's evidence, he is granted immunity from prosecution and goes free, while the other guy gets 10 years → if both clam up, each gets only a 1-year sentence on a technicality → if both confess, each gets 5 years Applies to a broad range of economic phenomena including pricing policy and advertising strategy The prisoner's dilemma outcome is an equilibrium because each player maximizes profit, given the price chosen by the other

Public Goods

A good that is nonrival and nonexclusive Examples: national defense, the national weather service, the Centers for Disease Control, or a local mosquito-control program One person's consumption does not diminish the amount available to others Once produced, public goods are available to all in equal amount A public good can be supplied to an additional consumer for zero marginal cost Once a public good is produced, suppliers cannot easily deny it to those who don't pay Public goods are nonexclusive, so for-profit firms can't profitably sell public goods In this case of market failure, the government comes to the rescue by providing public goods and paying for them through enforced taxation Public goods are more complicated than private goods in terms of what goods should be provided, in what quantities, and who should pay because once the public good is produced, only that quantity is available

Natural Monopoly Goods

A good that is nonrival but exclusive Additional people can benefit from the good without diminishing the benefit to other users Examples: rock concert, subway system, highway, golf course, public swimming pools People excluded by fees and prices When not congested, these goods are nonrival, yet once congestion sets in, these goods become rivals and the natural monopoly morph into private goods

Cartel

A group of firms that agree to coordinate their production and pricing decisions to reap monopoly profit More likely among sellers of a commodity For cartel profit to be maximized, output must be allocated so that the marginal cost for the final unit produced by each firm is identical If average costs differ across firms, the output allocation that maximizes cartel profit yields unequal profit across cartel members Firms earning less profit could drop out of the cartel, which in turn undermines the cartel Consensus becomes harder to achieve as the number of firms grows If a cartel can't prevent new entry or can't force new entrants to join the cartel, new firms could eventually expand industry output, force prices down, squeeze economic profit, and disrupt the cartel Cartels collapse once cheating on the agreed upon price becomes widespread

Labor Union

A group of workers who organize to improve their terms of employment

Substitution Effect of a Wage Increazse

A higher wage encourages more work because other activities now have a higher opportunity cost

Income Effect of a Wage Increase

A higher wage raises a worker's income, increasing the demand for all normal goods, including leisure, so the quantity of labor supplied to market work decreases As your wage increases, the substitution effect causes you to work more, but the income effect causes you to work less and demand more leisure

Patents

A legal barrier to entry that grants the holder the exclusive right to sell a product for 20 years from the date the patent application is filed Provides stimulus for innovation A small firm without the resources to market and legally defend a promising patent usually sells that patent to a larger firm, one better positioned to make the most of it

Oligopoly

A market structure characterized by so few firms that each behaves interdependently Example: steel, automobiles, oil, breakfast cereals, cigarettes, personal computers, and operating systems software industries Because an oligopoly has only a few firms, each one must consider the effect of its own actions on competitors' behavior in the market Oligopolists are interdependent The lower the barriers to entry into the oligopoly, the more oligopolists act like perfect competitors In an oligopoly, each firm knows that any changes in its product's quality, price, output, or advertising policy may prompt a reaction from its rivals, and each firm may react if another firm alters any of these features An oligopoly can often be traced to some form of barrier to entry, such as economies of scale, legal restrictions, brand names built up by years of advertising, or control over an essential resource At one extreme, oligopolists may try to coordinate their behavior so they act collectively as a single monopolist, forming a cartel, and at the other extreme, oligopolists may compete so fiercely that price wars erupt

Monopolistic Competition

A market structure with many firms selling products that are substitutes but different enough that each firm's demand curve slopes downward Firm entry and exit is relatively easy in the long run Because the products of different suppliers differ slightly the demand curve for each is not horizontal but slopes downward Firms that populate the market are price makers → each supplier has some power over the price it can charge, but there are so many buyers that no buyer can influence the price Because each monopolistic competitor offers a product that differs somewhat from what others supply, each has some control over the price charged → this market power means that each firm's demand curve slopes downward Because many firms offer close but not identical products, any firm that raises its price can expect to lose some customers to rivals There is no curve that uniquely relates prices and corresponding quantities supplied The monopolistic competitor is not guaranteed an economic profit or even a normal profit No economic profit in the long run (like perfect competition) Demand curve slopes downward (like monopoly)

Perfect Competition

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run In a perfectly competitive market, the consumer has no control over the price Examples of perfectly competitive markets include those for most agricultural products, such as wheat, corn, cotton, and livestock; markets for basic metals, such as gold, silver, and copper; markets for widely traded stock, such as Google, Bank of America, and General Electric; and markets for foreign exchange, such as yen, euros, and pesos Perfect competition is also an important benchmark for evaluating the efficiency of other types of markets

Duopoly

A market with only two suppliers A special type of oligopoly market structure

Perfectly Discriminating Monopolist

A monopolist who charges a different price for each unit sold; also called the monopolist's dream By charging a different price for each unit sold, the perfectly discriminating monopolist is able to convert every dollar of consumer surplus into economic profit → high allocative efficiency Perfect price discrimination enhances social welfare when compared with monopoly output in the absence of price discrimination

Profit Maximization for a Monopolistic Compeititor

A monopolistic competitor maximizes profit where marginal revenue equals marginal cost; the profit-maximizing price for that quantity is found up on the demand curve

Natural Monopoly

A monopoly sometimes occurs naturally if a firm experiences economies of scale A single firm can supply market demand at a lower average cost per unit than could two or more firms, each producing less Market demand is not great enough to allow more than one firm to achieve sufficient economies of scale → a single firm emerges from the competitive process as the only low-cost supplier in the market A new entrant cannot sell enough to experience the economies of scale achieved by an established natural monopolist, so market entry is naturally blocked

Differentiated Oligopoly

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal

Monopolist Demand Curve (Demand, Marginal Revenue, Marginal Cost, Average Total Cost, Average Variable Cost)

A perfectly competitive firm's supply curve is that portion of the marginal cost curve at or above the average variable cost curve The intersection of a monopolist's marginal revenue and marginal cost curves identifies the profit-maximizing (or loss-minimizing) quantity, but the price is found up on the demand curve Because the equilibrium quantity can be found along a monopolist's marginal cost curve, but the equilibrium price appears on the demand curve, no single curve traces points showing unique combinations of both the price and quantity supplied Because no curve reflects combinations of price and quantity supplied, there is no monopolist supply curve Loss if Average Total Cost curve is higher than demand curve → loss extends from intersection of marginal revenue and marginal cost curves on demand curve to y-axis

Long run

A period during which all resources under the firm's control are variable All resources can be varied

Short Run

A period during which at least one of a firm's resources is fixed Output can be changed in the short run by adjusting variable resources, but the size, or scale, of the firm is fixed in the short run

Resource Demand

A producer demands another unit of a resource as long as its marginal revenue exceeds its marginal cost As long as the additional revenue from employing another worker exceeds the additional cost, the firm should hire that worker The market demand for a particular resource is the sum of demands for that resource in all its different uses

Exhaustible Resource

A resource in fixed supply, such as crude oil or coal

Renewable Resource

A resource that regenerates itself and so can be used indefinitely if used conservatively, such as a well-managed forest Examples: the atmosphere and rivers are renewable resources to the extent that they can absorb and neutralize a certain level of pollutants and biological resources like fish, game, forests, rivers, grasslands, and agricultural soil are renewable if managed appropriately Some renewable resources are also open-access resources, which is rival in consumption, but exclusion is costly Because defining and enforcing property rights to open-access resources, such as the air, are quite costly if not impossible, these resources usually are not owned as private property

Nash Equilibrium

A situation in which a firm, or a player in game theory, chooses the best strategy given the strategies chosen by others; no participant can improve his or her outcome by changing strategies even after learning of the strategies selected by other participants All members in a cartel have an incentive to cheat, although all would earn more by sticking to the agreement that maximizes joint profit

Rational Ignorance

A stance adopted by voters when they realize that the cost of understanding and voting on a particular issue exceeds the benefit expected from doing so

Commodity

A standardized product (such as a bushel of wheat, a gallon of milk, a dozen eggs, an ounce of gold, or a share of Google stock) that does not differ across suppliers

Coordination Game

A type of game in which a Nash equilibrium occurs when each player chooses the same strategy; neither player can do better than matching the other player's strategy

Industrial Union

A union consisting of both skilled and unskilled workers from a particular industry, such as all autoworkers or all steelworkers Congress of Industrial Organizations (CIO) was formed in 1935 to serve as a national organization of unions in mass-production industries

Craft Union

A union whose members have a particular skill or work at a particular craft, such as plumbers or carpenters Each craft union kept its individual identity but combined forces with other craft unions to form a national organization in 1886, the American Federation of Labor(AFL) Clayton Act of 1914 exempted labor unions from antitrust laws, meaning that unions at competing companies could legally join forces

Strike

A union's attempt to withhold labor from a firm to halt production, thereby hoping to force the firm into accepting the union's position Risky for workers, who earn no company pay or benefits during the strike and could lose their jobs permanently Although neither party usually wants a strike, both sides, rather than concede on key points, usually act as if they could endure one Industries are more vulnerable to strikes are industries that deal in perishable goods, such as strawberries, and industries where picket lines can turn away lots of customers, such as Broadway theaters or hotels In other industries, advances in technology have reduced the effectiveness of strikes, as petroleum and chemical workers learned when strikers found that skeleton crews of supervisors could run computer-controlled refineries for a long time

Relationship between income and education is clear

Aat every age, those with more education earn more Earnings tend to increase as workers acquire job experience and get promoted Among more educated workers, experience pays more Differences in earnings reflect the normal workings of resource markets, whereby workers are rewarded according to their marginal productivity

Rent Seeking

Activities undertaken by individuals or firms to influence public policy in a way that increases their incomes and secure these special favors from government Rent - earnings that exceed opportunity costs Special-interest groups, such as dairy farmers, trial lawyers, government employees, and other producers, seek from government some special advantage or some outright transfer or subsidy Resources employed to persuade government to redistribute income and wealth to special interests are unproductive because they do nothing to increase total output and usually end up reducing it If the advantage conferred by government on some special-interest group requires higher income taxes, the earnings people expect from working and investing fall, so they may work less and invest less → if this happens, productive activity declines

Demand in a Monopoly

Along the demand curve, price equals average revenue, so the demand curve is also the monopolist's average revenue curve Where demand is elastic, marginal revenue is positive, and total revenue increases as the price falls Where demand is inelastic, marginal revenue is negative, and total revenue decreases as the price falls A profit-maximizing monopolist would never expand output to the inelastic range of demand because doing so would reduce total revenue

Collusion

An agreement among firms to increase economic profit by dividing the market and fixing the price Colluding firms, compared with competing firms, usually produce less, charge more, block new firms, and earn more profit → consumers pay higher prices, and potential entrants are denied the opportunity to compete

Economic Efficiency Approach

An approach that offers each polluter the flexibility to reduce emissions as cost-effectively as possible, given its unique cost conditions; the market for pollution rights is an example Firms with the lowest costs of emission control have an incentive to implement the largest reduction in emissions and then sell unused pollution permits to those with greater control costs

Underground Economy

An expression used to describe market activity that goes unreported either because it is illegal or because those involved want to evade taxes Unreported income becomes part of the underground economy The underground economy grows more when: 1. Government regulations increase 2. Tax rates increase 3. Government corruption is more widespread

Mediator

An impartial observer who helps resolve differences between union and management

Representative Democracy

An important feature is the incentive and political power it offers interest groups to increase their wealth, either from direct government transfers or from favorable public expenditures and regulations

Constant Cost Industry

An industry that can expand or contract without affecting the long-run per-unit cost of production; the long-run industry supply curve is horizontal The long-run supply curve for a constant-cost industry is horizontal A constant-cost industry uses such a small portion of the resources available that expanding industry output does not bid up resource prices

Increasing Cost Industry

An industry that faces higher per-unit production costs as industry output expands in the long run; the long-run industry supply curve slopes upward

Command and Control Legislation

An inflexible approach that required polluters to adopt particular technologies to reduce emissions by specific amounts Regulations based on engineering standards and did not recognize unique circumstances across generating plants, such as plant design, ability to introduce scrubbers, and the ease of switching to low-sulfur fuels

Undifferentiated Oligopoly

An oligopoly that sells a commodity, or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil

Barriers to Entry

Any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms Monopolized markets are characterized by this Types: legal restrictions, economies of scale, and control of an essential resource

Variable Costs

Any production cost that changes as the rate of output changes Pays for variable resources

Fixed Costs

Any production cost that is independent of the firm's rate of output Pays for fixed resources

Variable Resource

Any resource that can be varied in the short run to increase or decrease production Example: labor

Fixed Resource

Any resource that cannot be varied in the short run Example: size of the building

Coase Theorem

As long as bargaining costs are low, an efficient solution to the problem of externalities is achieved by assigning property rights to one party or the other, it doesn't matter which According to Coase, the efficient solution depends on which party can avoid the externality at the lower cost This efficient solution will be achieved regardless of which party gets the property right A particular assignment determines which side bears the externality costs but does not affect the efficient outcome Inefficient outcomes do occur, however, when the transaction costs of arriving at a solution are high When the number of parties involved in the transaction is large, Coase's solution of assigning property rights may not be enough According to the Coase theorem, the assignment of property rights is often sufficient to resolve the market failure typically associated with externalities → additional government intervention is not necessary If the right to pollute could be granted, monitored, and enforced, then what had been a negative externality problem could be solved through market allocation

Cost curves

As long as marginal cost is below average cost, marginal cost pulls down average cost as output expands Once marginal cost exceeds average cost, marginal cost pulls up average cost The fact that marginal cost first pulls average cost down and then pulls it up explains why the average cost curves have U shapes The shapes of the average variable cost curve and the average total cost curve are determined by the shape of the marginal cost curve, so each is shaped by increasing, then diminishing, marginal returns The rising marginal cost curve intersects both the average variable cost curve and the average total cost curve where these average curves reach their minimum → this occurs because the marginal pulls down the average where the marginal is below the average and pulls up the average where the marginal is above the average The distance between the average variable cost curve and the average total cost curve is average fixed cost, or AFC, which gets smaller as the rate of output increases The law of diminishing marginal returns determines the shapes of short-run cost curves The long run is best thought of as a planning horizon, where the choice of input combinations is flexible

Should a monopolistic competitor shut down?

As long as price exceeds average variable cost, the firm in the short run loses less by producing than by shutting down If no price covers average variable cost, the firm shuts down Firms that expect economic losses to persist may, in the long run, leave the industry

Law of Diminishing Marginal Returns

As more of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative The law of diminishing marginal returns is the most important feature of production in the short run As more and more labor is hired, marginal product could even turn negative, so total product would decline

Backward Bending Supply Curve of Labor

As the wage rises, the quantity of labor supplied may eventually decline; the income effect of a higher wage increases the demand for leisure, which reduces the quantity of labor supplied enough to more than offset the substitution effect of a higher wage

Time-allocation

Balance your time among market work, nonmarket work, and leisure to maximize utility → as a rational consumer, you attempt to maximize utility by allocating your time so that the expected marginal utility of the last unit of time spent in each activity is identical Allocate your scarce time trying to satisfy your unlimited wants, or trying to maximize utility Time-allocation process ensures that at the margin, the expected net utilities from the last unit of time spent in each activity are equal The theory of time allocation described has several implications for individual choice: 1. The higher your market wage, other things constant, the higher your opportunity cost of leisure and nonmarket work 2. The higher the expected earnings right out of high school, other things constant, the higher the opportunity cost of attending college

Effect of higher wages on use of time

Because each hour of work now buys more goods and services, a higher wage increases the opportunity cost of leisure and nonmarket work → as the wage increases, you substitute market work for other activities A higher wage means a higher income for a given number of hours, which increases your demand for all normal goods → because leisure is a normal good, a higher income increases your demand for leisure, thereby reducing your allocation of time to market work

Total and Marginal Cost Curve

Because fixed cost does not vary with output, the fixed cost curve is a horizontal line at the amount of the fixed cost Variable cost is zero when output is zero, so the variable cost curve starts from the origin The total cost curve sums the fixed cost curve and the variable cost curve Because a constant fixed cost is added to variable cost, the total cost curve is simply the variable cost curve shifted vertically by the fixed cost Because of increasing marginal returns from labor, marginal cost at first declines, so total cost initially increases by successively smaller amounts and the total cost curve becomes less steep Because of diminishing marginal returns from labor, marginal cost starts increasing after the ninth unit of output, so total cost increases by successively larger amounts and the total cost curve becomes steeper

Free Rider Problem

Because nobody can be easily excluded from consuming a public good, some people may try to reap the benefits of the good without paying for it

Restrictions on Resource Use

By imposing restrictions on resource use, government regulations may reduce the common-pool problem Output restrictions or taxes could force people to use the resource at a rate that is socially optimal, a rate that supports a sustainable yield When imposing and enforcing private property rights would be too costly, government regulations may improve allocative efficiency Not all regulations are equally efficient

Economic Profit in a Monopoly

Comes entirely from what was consumer surplus under perfect competition Monopolist earns economic profit equal to the square made by the point where the marginal revenue and marginal cost curves intersect and the point of the same quantity on the demand curve Because the profit rectangle reflects a transfer from consumer surplus to monopoly profit, this amount is not lost to society and so is not considered a welfare loss

Industry

Consists of all firms that supply output to a particular market, such as the auto market, the shoe market, or the wheat market

Derived Demand

Demand that arises from the demand for the product the resource produces Occurs because the value of any resource depends on the value of what it produces Examples: a carpenter's pay derives from the demand for the carpenter's output, such as a kitchen cabinet or a new deck, a professional baseball player's pay derives from the public's demand for ballgames, a truck driver's pay derives from the demand for transporting goods, a teacher's pay derives from the marginal value of student learning

Price Elasticity for a Monopolistic Competitor

Depends on: 1. The number of rival firms that produce similar products 2. The firm's ability to differentiate its product from those of its rivals

Services

Differentiate between accompanying services to the product Examples: delivery, online support, toll-free help lines, money-back guarantees

Location

Differentiate between number and variety of locations where a product is available Online vs. in-store Urban vs. local

Product Image

Differentiate by the image the producer tries to foster in the customer's mind Create and maintain brand loyalty through product promotion and advertising Some producers try to demonstrate high quality based Firms advertise to increase sales and profits

Physical Difference

Differentiate using physical appearance and qualities Size, weight, color, scent, taste, texture, packaging, etc.

Repeated Game Setting

Each player has a chance to establish a reputation for cooperation and thereby may be able to encourage other players to do the same. The cooperative solution makes both players better off than if both fail to cooperate

Short Run Economic Profit

Encourages new firms to enter the market in the long run and may prompt existing firms to get bigger → this expansion in the number and size of firms shifts the industry supply curve rightward in the long run, driving down the price Attracts new entrants in the long run and may cause existing firms to expand → market supply thereby increases, driving down the market price until economic profit disappears

Law of Demand

Even the most powerful monopolist must obey the law of demand Charging the highest possible price is not consistent with maximizing profit

Resource Market

Firms are demanders and households are suppliers Firms demand the resources that maximize profit, and households supply the resources that maximize utility Any differences between the profit-maximizing goals of firms and the utility-maximizing goals of households are sorted out through voluntary exchange in resource market Like the demand and supply for final goods and services, the demand and supply for resources depend on the willingness and ability of buyers and sellers to engage in market exchange Market converges to the equilibrium wage, or the market price, for this type of labor

Product Differentiation in Monopolistic Competition

Firms in monopolistic competition spend more to differentiate their products than do firms in perfect competition, where products are identical → this higher cost of product differentiation shifts up the average cost curve Some economists have argued that monopolistic competition results in too many suppliers and in artificial product differentiation Counterargument is that consumers are willing to pay a higher price for a wider selection

Diseconomies of Sale

Forces that may eventually increase a firm's average cost as the scale of operation increases in the long run More generally in a firm, as the amount and variety of resources employed increase, so does the task of coordinating all these inputs Diseconomies of scale result from a larger firm size, whereas diminishing marginal returns result from using more variable resources in a firm of a given size

Economies of Sale

Forces that reduce a firm's average cost as the scale of operation increases in the long run A larger size often allows for larger, more specialized machines and greater specialization of labor Because of the economics of sale, the long-run average cost for a firm may fall as size increases A larger scale of operation allows a firm to use larger, more efficient machines and to assign workers to more specialized tasks

Optimal Level of Production

Found where the marginal social benefit equals the marginal social cost

Relationship Between Earnings and Demand Curve

Given a resource demand curve that slopes downward: 1. When the resource supply curve is vertical (perfectly inelastic), all earnings are economic rent 2. When the resource supply curve is horizontal (perfectly elastic), all earnings are opportunity cost 3. When the resource supply curve slopes upward (an elasticity greater than zero but less than infinity), earnings divide between economic rent and opportunity cost

Bureaus

Government agencies charged with implementing legislation and financed by appropriations from legislative bodies Taxpayers are in a sense the "owners" of government bureaus Ownership in the bureau is surrendered only if the taxpayer dies or moves out of the jurisdiction, but ownership is not transferable—it cannot be bought or sold directly If the bureau earns a "profit," taxes may decline If the bureau operates at a "loss," as most do, this loss must be made up by taxes Each taxpayer has just one vote, regardless of the taxes he or she pays Usually financed by government appropriation, most of which comes from taxpayers Because public goods and services are not sold in markets, government bureaus receive less consumer feedback and have less incentive to act on any feedback they do receive There are usually no prices and no obvious shortages or surpluses Because the ownership of bureaus is not transferable, there is less incentive to eliminate waste and inefficiency Voters can leave a jurisdiction if they believe government is inefficient

Why the deadweight loss could be lower

If economies of scale are substantial enough, a monopolist might be able to produce output at a lower cost per unit than could competitive firms. → the price, or at least the cost of production, could be lower under monopoly than under competition Monopolists might, in response to public scrutiny and political pressure, keep prices below the profit-maximizing level A monopolist might keep the price below the profit-maximizing level to avoid attracting competitors to the market

Price In an Oligopoly

If oligopolists engaged in some sort of implicit or explicit collusion, industry output would be smaller and the price would be higher than under perfect competition If oligopolists did not collude but simply operated with excess capacity, the price would be higher and the quantity lower with oligopoly than with perfect competition The price could become lower under oligopoly compared with perfect competition if a price war broke out among oligopolists

Prices Discrimination

Increasing profit by charging different groups of consumers different prices for the same product Example: children, students, and senior citizens often pay lower admission prices to ball games, movies, amusement parks, and other events Example: airlines charge one price for business class and another for coach class

Why the deadweight cost could be higher

If resources must be devoted to securing and maintaining a monopoly position, monopolies may impose a greater welfare loss than simple models suggest The monopolist, insulated from the rigors of competition in the marketplace, might also grow fat and lazy—and become inefficient → because some monopolies could still earn an economic profit even if the firm is inefficient, corporate executives might waste resources by creating a more comfortable life for themselves Economists have also noted that a firm with monopoly power in the product market may be able to leverage that power in the resource market as well, driving down resource earnings, particularly for resources specialized to that industry → resource earnings would decline, but this would not necessarily translate into a lower price to consumers Monopolists have also been criticized for being slow to adopt the latest production techniques, being reluctant to develop new products, and generally lacking innovation

One-shot Game

If the game is to be played just once, the strategy of confessing makes you better off regardless of what the other player does Your choice won't influence the other player's behavior But if the same players repeat the prisoner's dilemma, other possibilities unfold

Should a monopolist produce or shut down

If the price covers average variable cost, the monopolist produces, at least in the short run If the price doesn't cover average variable cost, the monopolist shuts down, at least in the short run

Substitution in Production

If the price of a particular resource falls, it becomes cheaper compared with other resources that could produce the same output A lower price for a resource also increases a producer's ability to hire that resource → lower resource price means the firm is more able to employ the resource

Market Structure

Important features of a market, such as the number of firms, product uniformity across firms, firm's ease of entry and exit, and forms of competition Firm's decisions about how much to produce or what price to charge depend on the structure of the market

Ownership of Resources

In a market system, specific individuals usually own the rights to resources and therefore have a strong interest in using those resources efficiently Private property rights, allow individuals to use resources or to charge others for their use, and are defined and enforced by government, by informal social actions, and by ethical norms Pollution and other negative externalities arise because there are no practical, enforceable, private property rights to open-access resources, such as the air Market prices usually fail to include the costs that negative externalities impose on society

Tit-for-tat

In game theory, a strategy in repeated games when a player in one round of the game mimics the other player's behavior in the previous round An optimal strategy for getting the other player to cooperate

Payoff Matrix

In game theory, a table listing the payoffs that each player can expect from each move based on the actions of the other player

Strategy

In game theory, the operational plan pursued by a player

Dominant Strategy Equilibrium

In game theory, the outcome achieved when each player's choice does not depend on what the other player does

Traditional public-goods legislation

Legislation that involves widespread costs and widespread benefits—nearly everyone pays and nearly everyone benefits Usually has a positive impact on the economy because total benefits exceed total costs

Special-interest Legislation

Legislation with concentrated benefits but widespread costs Legislation that caters to special interests usually harms the economy, on net, because total costs often exceed total benefits

Competing Interest Legislation

Legislation with widespread benefits but concentrated costs The concentrated group who would get whacked by the taxes object strenuously

Populist Legislation

Legislation with widespread benefits but concentrated costs The concentrated group who would get whacked by the taxes object strenuously

Market Entry in Monopolistic Competition

Low barriers to entry in monopolistic competition mean that short-run economic profit attracts new entrants in the long run → because new entrants offer similar products, they draw customers away from other firms in the market, thereby reducing the demand facing other firms → entry continues in the long run until economic profit disappears Because market entry is easy, monopolistically competitive firms earn zero economic profit in the long run Economic losses drive some firms out of business in the long run → as firms leave the industry, their customers switch to the remaining firms, increasing the demand for those products → firms continue to leave in the long run until the remaining firms have enough customers to earn normal profit, but not economic profit

Characteristics of Perfect Competition

Many buyers and sellers—so many that each buys or sells only a tiny fraction of the total amount in the market Firms sell a commodity, which is a standardized product (such as a bushel of wheat, a gallon of milk, a dozen eggs, an ounce of gold, or a share of Google stock) that does not differ across suppliers Buyers and sellers are fully informed about the price and availability of all resources and products Firms and resources are freely mobile—that is, over time they can easily enter or leave the industry without facing obstacles like patents, licenses, and high capital costs

Marginal Revenue in a Monopoly

Marginal revenue is less than the price As the price declines, the gap between price and marginal revenue widens As the price declines, the loss from selling all diamonds for less increases (because quantity increases) and the gain from selling another diamond decreases (because the price falls) The marginal revenue curve is below the demand curve and that total revenue reaches a maximum where marginal revenue is zer

Binding Arbitrition

Negotiation in which union and management must accept an impartial observer's resolution of a dispute Occurs in critical sectors, such as police and fire protection, where a strike could harm the public interest

Deadweight Cost of a Monopoly

Net loss to society when a firm with market power restricts output and increases the price Results from the allocative inefficiency arising from the higher price and reduced output of a monopoly Society would be better off if output exceeded the monopolist's profit-maximizing quantity, because the marginal benefit of more output exceeds its marginal cost The actual cost of monopoly could differ from the deadweight loss

Variable Technology

Occurs when the amount of externality generated at a given rate of output can be reduced by altering the production process With variable technology, the idea is to find the most efficient level of pollution for a given quantity of electricity

Fixed Production Technology

Occurs when the relationship between the output rate and the generation of an externality is fixed; the only way to reduce the externality is to reduce the output

Resource Profit Maximization

Occurs where labor's marginal revenue product equals the market wage Whether a firm sells in competitive markets or with some market power, the profit-maximizing level of employment occurs where the marginal revenue product of labor equals its marginal resource cost Each unit of a resource must "pull its own weight," meaning that each unit must bring in additional revenue that at least covers its additional cost Maximum profit (or minimum loss) occurs where the marginal revenue from output equals its marginal cost Maximum profit (or minimum loss) occurs where the marginal revenue from an input equals its marginal resource cost As long as marginal revenue product exceeds marginal resource cost, a firm can increase any profit or reduce any loss by employing more of that resource

Work

Often not a pure source of utility and is often a source of disutility

Differentiation in Oligopolies

Oligopolists differentiate their products through: 1. Physical appearance 2. Sales locations 3. Services offered with the product 4. The image of the product established in the consumer's mind

Bureaucratic Objectives

One widely discussed theory of bureaucratic behavior claims that bureaus try to maximize their budget, for along with a bigger budget come size, prestige, amenities, staff, and pay—all features that are valued by bureaucrats According to this view, bureaus are monopoly suppliers of their output to elected officials → rather than charge a price per unit, bureaus offer the entire amount as a package deal in return for the requested appropriation Traditional view is that bureaucrats are "public servants," who try to serve the public as best they can Budget maximization by bureaus results in a larger budget than that desired by the median voter Bureaus are monopoly suppliers of public goods and elected officials have only limited ability to cut that budget If taxpayers have alternatives in the private sector or if elected officials can dig into the budget, the monopoly power of the bureau is diminished

Nonwage determinants of labor supply

Other sources of income - your willingness to supply labor depends on income from other sources, including from family, savings, student loans, and scholarships - Wealthy individuals have less incentive to work - A decrease in wealth would prompt some people to work more, thus increasing their supply of labor Nonmonetary factors - the difficulty of the job, the quality of the work environment, and the status of the position - Individuals must usually be physically present to supply labor The value of job experience - you are more inclined to take a position that provides valuable job experience - The more a job enhances future earning possibilities, the greater the supply of labor, other things constant Taste for work - taste for work also differs among labor suppliers - Your preferences are relatively stable and you supply more labor to jobs you like - Based on taste, workers seek jobs in a way that tends to minimize the disutility of work

Legal Restrictions

Patents, licenses, and other legal restrictions imposed by the government provide some producers with legal protection against competition Governments often confer monopoly status by awarding an individual firm the exclusive right to supply a particular good or service Sometimes the government itself may claim monopoly right by outlawing competitors For example, many state governments sell liquor and lottery tickets, and the U.S. Postal Service has the exclusive right to deliver first-class mail to your mailbox

Resource Supply

People supply their resources to the highest-paying alternative, other things constant Because other things are not always constant, people must be paid more for jobs less suited to their tastes

Perfectly Competitive Firm

Perfectly competitive firm is so small relative to the market that the firm's supply decision does not affect the market price Perfectly competitive firm supplies the short-run quantity that maximizes profit or minimizes loss → when confronting a loss, a firm either produces an output that minimizes that loss or shuts down temporarily → given the conditions for perfect competition, the market converges toward the equilibrium price and quantity

Economic Rent

Portion of a resource's total earnings that exceeds its opportunity cost; earnings greater than the amount required to keep the resource in its present use Specialized resources tend to earn a higher proportion of economic rent than do resources with alternative uses

Resource Price

Resources tend to flow to their highest-valued use → people have a strong interest in selling their resources to the highest bidder, other things constant Because resource owners seek the highest pay, other things constant, earnings should tend toward equality for different uses of the same type of resource As long as the nonmonetary aspects of supplying resources to alternative uses are identical and as long as resources are freely mobile, resources adjust across uses until they earn the same in different uses Resource prices might differ temporarily across markets because adjustment takes time, because a difference between the prices of similar resources prompts resource owners and firms to make adjustments that drive resource prices toward equality Some price differences are temporary because they spark shifts of resource supply away from lower-paid uses and toward higher-paid uses Permanent price differences are explained by a lack of resource mobility (urban land vs. rural land), differences in the inherent quality of the resource (fertile land vs. scrubland), differences in the time and money involved in developing the necessary skills (certified public accountant vs. file clerk), or differences in non-monetary aspects of the job (lifeguard at Malibu Beach vs. prison guard at San Quentin)

Complements (resources)

Resources that enhance one another's productivity A decrease in the price of one resource increases the demand for the other

Substitutes (resources)

Resources that substitute in production An increase in the price of one resource increases the demand for the other

Response of the Quantity of Labor Supplied

Responsive is the quantity of labor supplied to changes in the wage: an average of many studies suggests an elasticity of about 0.3, meaning that a 10 percent increase in the wage, other things constant, would increase the quantity of labor supplied by 3 percent

Government and Public Output

Simply because some goods and services are financed by the government does not mean that they must be produced by the government → elected officials may contract directly with private firms to produce public output Elected officials may also use a combination of bureaus and firms to produce the desired output The mix of firms and bureaus varies over time and across jurisdictions, but the trend is toward increased privatization, or production by the private sector, of public goods and services When governments produce public goods and services, they are using the internal organization of the government—the bureaucracy—to supply the product When governments contract with private firms to produce public goods and services, they are using the market to supply the product While private firms have more incentives to be efficient than bureaus do, public officials sometimes prefer dealing with bureaus Public officials may have more control over a bureau than over a private firm Bureaus may also offer public officials more opportunities to appoint friends and political supporters to government jobs In situations where it would be difficult to specify a contract for the public good in question, a bureau may be more responsive to public concerns than a for-profit firm would be

Positive Externality

Society is better off if the level of a positive externality exceeds the private equilibrium With positive externalities, decisions based on private marginal benefits result in less than the socially optimal quantity of the good Thus, like negative externalities, positive externalities typically point to market failure, which is why government often gets into the act When there are external benefits, public policy aims to increase quantity beyond the private optimum

Differences in Pay

Some jobs pay more because they require a long and expensive training period, which reduces market supply because few are willing to incur the time and expense required But such training increases labor productivity, thereby increasing demand for the skills Reduced supply and increased demand both raise the market wage 1. Differences in ability - because they are more talented, some people earn more than others with the same training and education Pay differences reflect differing abilities as expressed in different marginal productivities 2. Differences in risk: Research indicates that jobs with a higher probability of injury or death, such as coal mining, usually pay more, other things constant Workers also earn more, other things constant, in seasonal jobs such as construction, where the risk of unemployment is greater 3. Geographic differences - people have a strong incentive to sell their resources in the market where they earn the most Example: thousands of foreign-trained physicians migrate to the United States each year for the high pay Workers often face migration hurdles → any reduction in these hurdles would reduce wage differentials across countries

Discimination

Sometimes wage differences stem from racial or gender discrimination in the job market Although such discrimination is illegal, history shows that certain groups— including African Americans, Hispanics, and women—have systematically earned less than others of equal ability

Pork-barrel Spending

Special-interest legislation with narrow geographical benefits but funded by all taxpayers

Right-to-work States

States where workers in unionized companies do not have to join the union or pay union dues Over the years, the number of right-to-work states has increased to nearly half of all states, and this has hurt the union movement

Profit Maximization

Subtracting total cost from total revenue is one way to find the profit-maximizing output → Profit is maximized at the rate of output where total revenue exceeds total cost by the greatest amount

Labor Supply

Supply of labor to a particular market is the horizontal sum of all the individual supply curves The horizontal sum at each particular wage is found by adding the quantities supplied by each worker

Normal Profit

The accounting profit earned when all resources earn their opportunity cost Equal to implicit cost

Marginal Cost

The change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC = ΔTC/Δq Changes in marginal cost reflect changes in the marginal productivity of the variable resource When the firm experiences increasing marginal returns, the marginal cost of output falls; when the firm experiences diminishing marginal returns, the marginal cost of output increases Marginal cost is the key to economic decisions - indicates how much total cost increases if one more unit is produced or how much total cost drops if production declines by one unit

Marginal Resource Cost

The change in total cost when an additional unit of a resource is hired, other things constant A typical firm hires such a tiny fraction of the market supply that the firm's hiring decision has no effect on the market price of the resource Thus, each firm usually faces a given market price for the resource and decides only on how much to hire at that price

Marginal Product

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant MP = change in total product/change in units of variable resources As long as marginal product is positive, total product increases Once marginal product turns negative, total product starts to fall Sort production into three ranges: increasing marginal returns, diminishing but positive marginal returns, and negative marginal returns, which correspond with total product that increases at an increasing rate, increases at a decreasing rate, and declines

Marginal Revenue Product

The change in total revenue when an additional unit of a resource is employed, other things constant Marginal revenue product depends on how much additional output the resource produces and at what price that output is sold An individual firm in perfect competition can sell as much as it wants at the market price → the marginal revenue product is the change in total revenue from hiring an additional unit of the resource For firms selling with some market power, the marginal revenue product curve slopes downward both because of diminishing marginal returns and because additional output can be sold only if the price falls A profit-maximizing firm is willing and able to pay as much as the marginal revenue product for an additional unit of the resource → thus, the marginal revenue product curve can be thought of as the firm's demand curve for that resource

Allocative Efficiency

The condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost The demand and supply curves intersect at the combination of price and quantity at which the marginal value, or the marginal benefit, that consumers attach to the final unit purchased, just equals the opportunity cost of the resources employed to produce that unit As long as marginal benefit equals marginal cost, the last unit produced is valued by consumers as much as, or more than, any other good those resources could have produced → there is no way to reallocate resources to increase the total value of all output in the economy When the marginal benefit that consumers derive from a good equals the marginal cost of producing that good, that market is said to be allocatively efficient

Productive Efficeincy

The condition that exists when production uses the least-cost combination of inputs; minimum average cost in the long run The entry and exit of firms and any adjustment in the scale of each firm ensure that each firm produces at the minimum of its long-run average cost curve Firms that do not reach minimum long-run average cost must, to avoid continued losses, either adjust their scale or leave the industry Perfect competition produces output at minimum average cost in the long run

Resource Demand Curve

The demand curve for a resource, like the demand for the goods produced by that resource, slopes downward As the price of a resource falls, producers are more willing and able to employ that resource In developing the demand curve for a particular resource, we assume the prices of other resources remain constant

Excess Capacity

The difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost Firms with excess capacity could reduce average cost by increasing quantity The marginal value of increased output would exceed its marginal cost, so greater output would increase social welfare Examples: gas stations, drugstores, convenience stores, funeral homes, restaurants, motels, bookstores, flower shops, and firms in other monopolistic competitive industries

Total Cost

The sum of fixed cost and variable cost, or TC = FC + VC When output is zero, variable cost is zero, so total cost consists entirely of the fixed cost Because total cost is the opportunity cost of all resources used by the firm, total cost includes a normal profit but not an economic profit The slope of the total cost curve at each rate of output equals the marginal cost at that rate of output

Marginal Social Benefit

The sum of the marginal private benefit and the marginal external benefit of production or consumption Example: The greater the marginal benefit of reducing greenhouse gases, other things constant, the cleaner the air

Marginal Social Cost

The sum of the marginal private cost and the marginal external cost of production or consumption When marginal social cost exceeds marginal benefit, too much of a product is produced

Earnings on Resources

The division of earnings between opportunity cost and economic rent depends on the resource owner's elasticity of supply → in general, the less elastic the resource supply, the greater the economic rent as a proportion of total earnings If the supply of a resource to a particular market is perfectly inelastic, that resource has no alternative use → thus, there is no opportunity cost, and all earnings are economic rent In the market in which a resource can earn as much in its best alternative use as in its present use → all earnings reflect opportunity cost and there is no economic rent The horizontal supply curve determines the equilibrium wage, but demand determines the equilibrium quantity If the supply curve slopes upward, most resource suppliers earn economic rent in addition to their opportunity cost When resource supply slopes upward, as it usually does, earnings consist of both opportunity cost and economic rent In the case of an upward-sloping supply curve and a downward-sloping demand curve, both demand and supply determine equilibrium price and quantity

Use of Resources

The firm employs more resources as long as doing so adds more to revenue than to cost, or as long as that resource's marginal revenue product exceeds its marginal resource cost The firm stops adding the resource once the MR = MC This equality holds for all types of resources employed, whether the firm sells in perfectly competitive markets or sells with some market power

Maximization of Profit

The firm maximizes economic profit by finding the quantity at which total revenue exceeds total cost by the greatest amount The firm's total revenue is simply its output times the price Total cost already includes a normal profit, so total cost includes all opportunity costs Total revenue minus total cost yields the producer's economic profit or economic loss in column Total cost always increases as more output is produced

Marginal Revenue

The firm's change in total revenue from selling an additional unit; a perfectly competitive firm's marginal revenue is also the market price In perfect competition, marginal revenue is the market price The firm increases production as long as each additional unit of output adds more to total revenue than to total cost—that is, as long as marginal revenue exceeds marginal cost Because marginal revenue in perfect competition equals the market price, the marginal revenue curve is a horizontal line at the market price At any quantity measured along the demand curve of a perfectly competitive firm, marginal revenue is the price In a perfectly competitive firm's demand curve, market price = marginal revenue = average revenue At lower rates of output, marginal revenue exceeds marginal cost, so the firm could increase profit by expanding output At higher rates of output, marginal cost exceeds marginal revenue, so the farm could increase profit by reducing output

License

The government gives legal permission to engage in an activity or produce a product of service which blocks entry and often gives firms market power

Minimum Efficient Scale

The lowest rate of output at which a firm takes full advantage of economies of scale

Increasing Marginal Returns

The marginal product of a variable resource increases as each additional unit of that resource is employed

Resource Supply Curve

The market supply curve for a resource sums all the individual supply curves for that resource Resource suppliers are more willing and more able to increase quantity supplied as the resource price increases and resource owners are more able to increase the quantity supplied as the resource price increase, so the market supply curve slopes upward

Market Demand for Private Goods

The sum of the quantities demanded by each consumer Horizontal sum of the individual demand curves Efficient quantity of private goods occurs where the market demand curve intersect the market supply curve

Profit Maximizing Output in a Monopoly

The monopolist supplies the quantity at which total revenue exceeds total cost by the greatest amount The profit-maximizing output occurs where marginal revenue equals marginal cost The profit-maximizing rate of output is found where the marginal cost curve intersects the marginal revenue curve

Monopolistic Competition in the Long Run

The monopolistic competitor produces less than required to achieve the lowest possible average cost → the price and average cost in monopolistic competition exceed the price and average cost in perfect competition If firms have the same cost curves, the monopolistic competitor produces less and charges more than the perfect competitor does in the long run, though neither earns economic profit

Increasing marginal disutility

The more you work, the greater the marginal disutility of working another hour

Economies of Scale in Oligopolies

The most important barrier to entry in an oligopoly is economies of scale The minimum efficient scale is the lowest output at which the firm takes full advantage of economies of scale If a firm's minimum efficient scale is relatively large compared to industry output, then only a few firms are needed to satisfy industry demand

Social Welfare

The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers

Market Power

The power to charge prices above the competitive level without losing all their customers

Collective Bargaining

The process by which union and management negotiate a labor agreement A tentative agreement, once reached, goes to the membership for a vote If accepted, the agreement holds for the years of the contract. If the agreement is rejected, the union can return to the bargaining table to continue negotiations If negotiations reach an impasse and the public interest is involved, government officials may ask an independent mediator to step in

Innovation

The process of turning an invention into a marketable product

Production Function

The relationship between the amount of resources employed and a firm's total product

Monopoly

The sole supplier of a product with no close substitutes where there are many demanders, so no buyer has any control over the price Long-lasting monopolies are rare because economic profit attracts competitors, and over time, technological change tends to break down barriers to entry Because a monopoly, by definition, supplies the entire market, the demand for a monopolist's output is also the market demand All along the demand curve, price equals average revenue → the demand curve is also the monopolist's average revenue curve A monopolist is not assured an economic profit → although a monopolist is the sole supplier of a good with no close substitutes, the demand for that good may not generate economic profit in either the short run or the long run

Barriers to Entry in Oligopolistic Industries

The total investment needed to reach the minimum efficient size is often gigantic so entry into the market has a high cost High start-up costs and well-established brand names create huge barriers to entry, especially because the market for new products is so uncertain Product differentiation expenditures create a barrier to entry Oligopolies compete with existing rivals and try to block new entry by offering a variety of products → multiple products from the same brand dominate shelf space and attempt to crowd out new entrants

Unions

The union must somehow ration the limited jobs available, such as by awarding them based on worker seniority, personal connections within the union, or lottery Unions are less successful at raising wages in more competitive sectors, and unions have greater success in services, government, transportation, and construction

Inclusive (Industrial) Approach

The union tries to negotiate industry-wide wages for each class of labor Once this wage floor is negotiated for the industry, each firm faces a horizontal supply curve of labor at the collectively bargained wage With the inclusive, or industrial, union, which negotiates with the entire industry, the wage is higher and employment lower than they would be in the absence of a union Ordinarily this excess quantity supplied would force the wage down, but because union members agree collectively to the union wage, individual workers can't work for less, nor can employers hire them for less

Sources of Utility

The utility derived from consumption serves as the foundation of demand Leisure is a normal good, so the more leisure time you have, the less you value an additional hour of it

Net utility of work

The utility of the additional consumption possibilities from earnings minus the disutility of the work itself Usually makes some amount of work an attractive use of your time

Market Demand for Public Goods

The vertical sum of each consumer's demand for the public good Efficient quantity of public goods occurs where the market demand curve intersect the marginal cost curve, or where the sum of the marginal valuations equals the marginal cost It is the vertical sum, because the goods are nonrival

Market Work

Time sold as labor In return for a wage, you surrender control of your time to the employer

Nonmarket Work

Time spent getting an education or on do-it-yourself production for personal consumption Includes the time you spend doing your laundry, making a sandwich, cleaning up after yourself, and the time spent acquiring skills and education that enhance your productivity

Leisure

Time spent on nonwork activities

Maximize Political Support

To maximize political support, elected officials may cater to special interests rather than serve the interest of the public Because candidates aim to please the median voter anyway, they often take positions that are similar. Voters realize that each of them has but a tiny possibility of influencing public choices → less voters have a special interest in the legislation, they adopt a stance of rational ignorance The cost to the typical voter of acquiring information about each public choice and acting on it usually exceeds any expected benefit

Golden Rule of Profit Maximization

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures

Average Total Cost

Total cost divided by output, or ATC = TC/q The sum of average fixed cost and average variable cost, or ATC = AFC + AVC

Average Revenue

Total revenue divided by quantity, or AR =TR/q; in all market structures, average revenue equals the market price

Median Voter Model

Under certain conditions, the preferences of the median, or middle, voter will dominate the preferences of all other voters The median voter in an electorate often determines public choices → political candidates try to get elected by appealing to the median vote Under majority rule, only the median voter gets his or her way, because other voters must go along with the median choice → other voters usually end up paying for what they consider to be either too much or too little of the public good

Featherbedding

Union efforts to force employers to hire more workers than demanded at a particular wage The union attempts to dictate not only the wage but also the quantity that must be hired at that wage, thereby moving employers to the right of their labor demand curve

Common Pool Problem

Unrestricted access to a renewable resource results in overuse People exploit any resource as long as their personal marginal benefit exceeds their personal marginal cost

Average Variable Cost

Variable cost divided by output AVC =VC/q

Control of an Essential Resource

When a firm controls a critical resource and monopoly profits often spring from supplying something that other producers can't match Local monopolies are more common than national or international monopolies → in rural areas, natural monopolies may include the only grocery store, movie theater, restaurant, or gas station for miles around → these are natural monopolies for products sold in local market Examples: 1. Professional sports leagues try to block the formation of competing leagues by signing the best athletes to long-term contracts and by seeking the exclusive use of sports stadiums and arenas 2. Alcoa was the sole U.S. maker of aluminum from the late 19th century until World War II 3. China is a monopoly supplier of pandas to the world's zoos 4. For decades, the world's diamond trade was controlled primarily by De Beers Consolidated Mines, which mined diamonds and also bought most of the world's supply of rough diamonds

Should a Firm Shut Down

When facing a loss, even if the firm shuts down it still must pay its fixed costs A firm produces rather than shuts down if total revenue exceeds the variable cost of production If average variable cost exceeds the price at all rates of output, the firm shuts down In the short run, even a firm that shuts down keeps productive capacity intact Fixed cost is sunk cost in the short run, whether the firm produces or shuts down If average variable cost exceeds price at all output rates, the firm shuts down in the short run If price exceeds average variable cost, the firm produces the quantity at which marginal revenue equals marginal cost

Marginal Revenue Product Curve

Whether a firm sells its product in a competitive market or sells with some market power, the marginal revenue product of a resource is the change in total revenue resulting from a 1-unit change in that resource, other things constant The marginal revenue product curve of a resource is also the demand curve for that resource—it shows the most a firm would be willing and able to pay for each additional unit of the resource For firms selling in competitive markets, the marginal revenue product curve slopes downward only because of diminishing marginal returns to the resource For firms selling with some market power, the marginal revenue product curve slopes downward both because of diminishing marginal returns and because additional output can be sold only if the price falls For all types of firms, the marginal revenue product is the change in total revenue resulting from hiring an additional unit of the resource

Individual Labor Supply

Your labor supply to each market depends, among other things, on your abilities, your taste for the job, and the opportunity cost of your time Your supply to a particular labor market assumes that wages in other markets are constant, just as your demand for a particular product assumes that other prices are constant