Lacey Casey 08 57 30 AM 08 57 30 AM Freedom is just another word for nothing left to lose And nothin ain t worth nothin but it s free Janis Joplin has absolutely nothing to do with this course So much the worse for us 08 57 30 AM Market Equilibrium and the wonders of perfect competition Ideological concepts 08 57 30 AM Big IDEAS In a perfectly competitive market equilibrium in price and quantity maximizes the sum of consumer and producer surplus If a perfectly competitive market maximizes social welfare then government regulations must make things worse But markets are never perfectly competitive and they always have problems externalities maldistribution of income monopolistic behavior 08 57 30 AM Social Welfare is the Sum of Consumer and Producer Surplus The difference between costs sum of MC and benefits sum of MU 08 57 30 AM Perfect competition and market equilibrium Enjoy it if you can Supply demand and everyone is as happy as possible They might be happier if costs were lower But this is as good as it gets in this world A monopoly lowers consumer surplus in two ways It reduces output by not producing where MU MC causing a loss of both consumer and producer surplus It redistributes surplus from consumers to producers by raising prices Price MC Transferred from Consumers to producer Lost Demand MU MR Q Monopoly reduces total surplus M o n o p o l y a n d P e r f e c t C o m p e ti ti o n 8 0 0 6 0 0 P r i 4 0 0 c e R e d is trib u te d w e lfa re Lo st w e lfa re 2 0 0 0 0 0 1 2 3 4 5 6 7 8 9 10 Q u a n ti t y R e d u c e d o u tp u t M C Dem a nd Price A v er a g e to ta l c o s ts M R M onopoly price It doesn t produce some units where MU MC It also redistributes consumer surplus to producers Perfectly Competitive markets maximize net welfare If and only if 1 Externalities are included in MC 2 Income is distributed fairly so that demand reflects real social MU 3 There is no nonmarket production 4 Perfect competition producers sell at MC MU 08 57 31 AM Under these extreme circumstances We will be in EQUILIBRIUM Prices will be such that no one wants to produce more or consume less There are no opportunities to increase welfare by changing the output level 08 57 31 AM In perfect competition market equilibrium the right amount is produced Where MU MC produce Where MU MC don t This happens spontaneously no need for inefficient social planners 08 57 31 AM So why do we get junk like this In equilibrium Everyone is satisfied with their situation given the prices they face No one could be made better off except by making someone else worse off 08 57 31 AM We owe this way of thinking to Vilfredo Pareto 1848 1923 Pareto Optimality is only about efficiency As long as we are efficient produce as much as possible with existing technology and resources Pareto has nothing more to say Can you evaluate efficiency without regard for the distribution of income Pareto optimality is about being on the production possibility frontier as if any point is of equal value 08 57 31 AM Is Paris Hilton s bejeweled dog collar equal to these children s food 08 57 31 AM Pareto Optimality is trivial If one person had everything it would be Pareto Optimal because no one could be made better off without taking from him Or her 08 57 31 AM In case you forgot He admits that he has about 250 million 08 57 31 AM They don t have a car to live in In the orthodox world market competition will make everything as good as it can be People could be happier If they were richer younger prettier Or if they lived in Paris Or Amherst But life is hard 08 57 31 AM These are pretty strong assumptions Nonmarket production Easily violated Monopoly Externalities 08 57 31 AM Income Distribution Paris Hilton versus orthodox welfare economics She wins Of course 1 She has inherited money so she distorts consumer demand leading producers to make more of what she wants and less of what others want 2 She works at home caring for needy puppies and this work is not included in our social product 3 Her alcohol consumption produces negative externalities on others driving in LA 4 She is a monopolist the only one of her celebrity status 08 57 32 AM Perfect competition rewards productivity and innovation With better technology productive firms can earn extra profits rents on their innovations 08 57 32 AM With perfect competition consumers benefit from innovation and technological progress First innovator makes huge profits These encourage others to copy to get a share of the profits New entrants drive down prices to the new lower cost of production eliminating super profits Consumers benefit 08 57 32 AM Once one company innovates others follow to earn super profits They drive down prices until extra rents disappear Consumers benefit from cheap good stuff 08 57 32 AM 12 52 01 Oops that was a little too interesting visually Try this 08 57 32 AM 12 52 02 This happened to Xerox A Dream of Destiny This happened to Xerox In the early 1960s Xerox made super profits on its photocopiers So much that the company president commissioned a musical 08 57 32 AM 12 52 02 Who is the outfit that gives you the breaks Long on the profits and short on mistakes Who s copy business is all that they claim Why Xerox Xerox Xerox s the name Xerox Xerox Xerox s the name Xerox s the Name from Take It From Here Xerox Xerox invented the office copier In the 1960s its 914 plain paper copier was called the most successful product ever marketed in America Profits were huge 08 57 32 AM 12 52 02 In 1970 IBM introduced a copier followed by Kodak Ricoh Canon Xerox s market share fell from 85 to 40 and down Profits fell for everyone By the 1990s Xerox was laying off workers Another Example Apple Apple invented the home computer and made a ton of money Soon others IBM entered the business Apple s market share and profits disappeared Until the IPod 08 57 32 AM 12 52 02 Apple continues to profit from IPod They charge more than other MP3 players They continue to have a monopoly Reputation for quality Status Lock in through ITunes Apple does not want everyone to have an MP3 player they want people to pay for an IPod 08 57 33 AM I got my IPad for free I was entered into a lottery for filling out a survey And I won I still can t believe it Someone did …