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OU ECON 1123 - Review of Part 3

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ECON 1123 1st Edition Lecture 24 Outline of Last LectureI. Game TheoryA) Prisoner’s DilemmaB) Nash EquilibriumII. Summary of Market StructuresA) Pure CompetitionB) Monopolistic CompetitionC) OligopolyD) Pure MonopolyOutline of Current LectureI. Monopolistic CompetitionA) Short RunB) Long RunII. OligopolyA) Price Leadership/Dominant firm/ competitive fringe modelB) Game theoryIII. Pure Monopoly Incurring a lossIV. Tax Incidence (and subsidy) AnalysisV. Public Goods and Public Bads (externalities)Current LectureVI. Monopolistic CompetitionC) Short Run- in monopolistic competition, positive economic profits will cause new entrants to come into the market who are after those profits (Firm is making a profit if the ATC curve is below the demand schedule in short run)D) Long Run- In the long run the monopolistic competition model will always have the ATC coming tangent to demand meaning zero economic profit. This is because new entrants come in when firms are making positive econ profitThese 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.VII. OligopolyC) Price Leadership/Dominant firm/ competitive fringe modelD) Game theoryVIII. Pure Monopoly Incurring a loss- Just because a firm is a monopoly does not mean that it is always going to be profitable. You still have to look at the demand versus the average total cost to make the product. Clark used the example of a rubber fryingpan monopoly. Sure, this monopoly is the only firm selling the product (which is why it is a monopoly), but that doesn’t mean there is a demand for rubber frying pansIX. Tax Incidence (and subsidy) AnalysisIncidence=BurdenYou can have legal incidence or economic incidence (they are not necessarily related)Legal- who the tax laws say will pay the tax.Importance: if the law says sellers will pay the tax-supply shifts up (left)If the law says buyers pay the tax, demand shifts downTypically, (depending on the elasticity of supply and demand) both buyers and sellersshare in the burden of taxNote: consider a per unit excise subsidy (payment to the firm from the government) legally granted to sellers-> supply schedule shifts downWho bears the tax burden?- depends on the elasticitiesEcon Burden on Buyers/ Econ burden on sellers = price elasticity of supply/ price elasticity of demand*Try this with extreme examples like perfectly elastic demand (the sellers will take the burden) or perfectly inelastic demand (the buyers will take the burden) **This is due to the fact that if the buyers want the good so badly that they are willing to pay whatever the price is, the firm can keep the price the same but wit the tax, and they will see no change in the demand for their productX. Public Goods and Public Bads (externalities)Private Goods- Rival consumption, excludabilityRival consumption- consumption by one person reduces consumption by all othersExcludability- Buyers must pay a market price in order to consumePublic Goods- Non-Rivalry and Non-Exclusion*Implies potential for simultaneous consumption i.e. consumption by one does not necessarily reduce how much others can consume*Difficult or costly to prevent non-payers (free riders) from consumption once the public good is producedExample: National Defense*We are forced to pay for it through taxes (once you get it… even if you put someonein prison for not paying taxes, they still are benefiting from national defense)Externalities= Effects of production or consumption that are not taken into account by private market participants i.e., these effects are external to the marketExternal benefits: Education brings better healthcare, Inoculation means that even if you don’t get the shot you are less likely to get the disease from someone else around youExternal Costs:


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