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SU ECN 203 - Relaxing No Market Power
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ECN 203 1st Edition Lecture 14Outline of Last Lecture II. Examining the Factors of Production a. Factors of Production b. Natural Resourcesc. Labord. Capital i. Physical and human capital III. Allocations, techniques, and technology IV. Capital-Intensive vs. Labor-Intensive V. Factor Market Supply a. Shift Variables VI. Factor Market Demanda. Shift Variables b. Elasticity of Input Substitution Outline of Current Lecture VII. General Equilibrium Theory a. Nice Assumptions VIII.General Competitive Equilibrium and Equity a. General Competitive Equilibrium b. Two Conditions IX. Perfect Competition and Efficiency X. GCE and Distributive Justice XI. Nice Assumptions XII. Market PowerXIII. Relaxing No Market Power – the Consequences XIV.Forms of Market Power Current LectureLecture 2/18/158.1-8.2.4- General Equilibrium Theory- The analysis of markets as part of a web of connections, as part of a system. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o In this theory, all markets are part of a simultaneous system  A system in which all elements function as part of a larger whole, like an ecosystem - Some of the threads that weave markets into this web of a general system:o Product markets are connected to one another  Through cross price elasticity because of substitutes or complements. o Factor markets are connected to one another o Product and factor markets are connected to one another  Through product supply line – b/c it is cost structures in production, determines the shape and level of product supply.  Through product demand line  Through the factor demand line – demand is form product market sales- A Reviewo Necessary conditions The nice assumptions - No market power – equal access to info, to market- no market failure – markets… form when we need them function quickly and smoothly Given these assumptions…- Pareto Optimal- That unique pareto optimal general equilibrium condition is called a General Competitive Equilibrium - General Competitive Equilibrium and equity o Economists, can’t say that one more outcome is more “just” than another…o As a human being one can, but not as an economist. o An economist can, however, inform the conversation about equity. o An economist can say that under a perfectly competitive GCE condition… The shares of the distribution of the fruits of economic activity among individuals will map from shares of the resources brought by individuals to the system.o Under nice assumptions, if you believe that the distribution is morally unjust,  The solution does not lie in intervening in the market system because that would reduce efficiency.  Solution lies in redistributing the initial endowment  Which raises other moral issues. - GCE and Distributive Justiceo Distributive justice is an ethical concept. There is no theoretical answer as to what it is. o If our nice assumptions stay the same: The distributive outcome of the market process will directly reflect the distribution of society’s endowments of natural resources, labor, and capital. Under our nice assumptions the social product pie will be as large as it can be – the system is most efficient, Pareto optimal.9.1.1-9.2.6- The Nice Assumptions o No market power – individuals have equal access to info and marketo No market failure – markets form quickly when needed and function quickly and effectively- Market Power o Market power reduces efficiency two ways: 1. Those with power have little incentive to exert themselves in the market competition, they have the power to “win” anyway. - Larger distributive share comes from those with power does not come from productive contribution, it comes at the expense of others. A large piece for the power means a smaller piece for the others.  2. Those without power have little incentive to exert themselves because, try as they might, they are going to “lose” anyway. - Power distorts micro-market activity and makes the system less efficient,so the pie is smaller. - Those with the wrong side of the power structure get a smaller “piece ofpie”- Relaxing No Market Power: the Consequenceso Market Power affects equity  Those w/ power get a big share of pie, they win  Those w/o power get a smaller pie, they lose o But there is a redistribution, so equity is clearly affected. - Forms of Market Powero Monopoly – a single seller controls the supply side. The power that comes from being the only seller in the market o Monopsony – a single buyer controls the demand side. The power that comes from being the only buyer. o Oligopoly – collusion among a few sellers shared control of the supply side so long as one of the colluders cheat. o Oligopsony – collusion among a few buyers shared control of the demand side so long asnone of the colluders


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SU ECN 203 - Relaxing No Market Power

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