ECN 203 1st Edition Lecture 15Outline of Last Lecture II. General Equilibrium Theory a. Nice Assumptions III. General Competitive Equilibrium and Equity a. General Competitive Equilibrium b. Two Conditions IV. Perfect Competition and Efficiency V. GCE and Distributive Justice VI. Nice Assumptions VII. Market PowerVIII. Relaxing No Market Power – the Consequences IX. Forms of Market Power Outline of Current Lecture X. Market Power a. Naturally Occurring Market Powerb. Economies of Scale c. Artificially Created Market Power i. Rent Maintenanceii. Rent Seeking Current LectureLecture 2/20/15- Market Powero Naturally Occurring Market Power Comes from nature Example – beauty, athleticism These traits are a source of market power - Although, a pro male basketball player will make more than a female player because there is a bigger market for men’s basketball. 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. A natural gift is an opportunity to exploit an advantage in the market. o Economies of Scale and Natural Market Power Scale of production – the size of the process of production. - Changing scale means increasing all the factor inputs in the same proportion to expand production. Returns to scale – the degree to which a change in the scale of production changes the level of output. - Generally, we refer to decreasing, constant, or increasing returns to scale.- Decreasing returns to scale refers to the case in which as the scale of production is increased the output expands proportionally less. - Increasing returns to scale means scale of production increases the productivity goes up. o Artificially Created Market Power If a firm’s natural economies of scale are threatened by an emerging firm’s new technology, the old might choose to use the resources it has accumulated to buyup the new firm and its patents on new technology. - Patents are artificially created power. Rent Maintenance – resources being allocated for the purpose of sustaining market advantage. - Power – a complementary term for rent maintenance- Using resources to sustain a power advantage. - Rent - is a return to control based on power and rent maintenance is an effort to sustain a return to power – to sustain a rent. Rent Seeking – an effort to achieve an artificially created advantage that will payoff, and the payoff is rent. - Using resources in pursuit of a power advantage A key distinction between naturally occurring market power and artificially created market power is – - The former is a free gift of nature. - The latter requires using recourses to get or maintain the market power advantageo The fact that seeking or maintaining artificially created market power requires using resources adds to the inefficiency of market
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