KSU ECON 22060 - CHAPTER 16-MONOLISTIC COMPETITION

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CHAPTER 16-MONOLISTIC COMPETITION- Perfect competition: many firms,identical products- Monopoly: one firm- Monopolistic competition : many firms sell similar but not identical products- Many sellers, productdifferentiation, free entry and exit- Long run economic profits=zero- Demand curve facingfirm=downward sloping- To maximize profit: produce Q where MR=MC, D curve used to set P- Monopolistic competition: is less efficient than perfect competition- Excess capacity : monopolistic competition operates on the downward sloping part of its ATC curve, produces less than the cost minimizing output, under perfect competition firms produce the Q that minimizes ATCTC/Q- Markup over marginal cost: under monopolistic competition P>MC (market Q is below the socially efficient Q); under perfect comp. P=MC- Product-variety externality: surplus consumers get from the introduction of new products- Business-stealing externality: losses incurred by existing firms when new firms enter market in general, the more differentiated the products the more advertising they buy, economist also disagree on the use of brand names as signs of quality. - Short run : under mono. comp.firm behavior is very similar tomonopoly.- Long run : under mono. comp.entry & exit drive economicprofit to zero- Profits in short run firmsenter market… prices &profits fall- Losses in short run firms exit market… remaining firms enjoy higher demand & prices- Entry & exit occur until P=ATC and profit=0CHAPTER 17-OLIGOPOLY - Concentration ratio : the percentage of the market’s total output supplied by its four largest firms. The higher the concentration ratio, the less competition.- Oligopoly: a market structure in which only a few sellers offer similar or identical products.- Has high concentration ratio- A firms decision about P or Q can affect otherfirms & cause them to react- Game Theory: the study of how people behave instrategic situations- Duopoly : oligopoly with 2 firms- Collusion : an agreement among firms in a marketabout quantities to produce or prices to charge- Cartel : a group of firms acting in unison- Both firms would be better off if both stick to the cartel agreement, but each firm has incentive to renege on the agreement- Nash Equilibrium : a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all others have chosen- Increasing output has 2 effects on firms profit:1.) Output effect : if P>MC, increasing output raises profit2.) Price effect : raising output increases market quantity, which reduces price & profits on all unites sold- If output effect>price effect firm increases production... If price effect>output effect, firmreduces production- Size of a oligopoly: as the # of firms in a market increases…- The price effect becomes smaller- The oligopoly looks more like a comp. market- P approaches MC- The market quantity approaches the socially efficient quantity- (Trade, goes up, the # of firms competing increases Q, brings P closer to MC)- Dominant Strategy: strategy that’s best for a player in a game regardless of the other strategies chosen by the other players- Prisoners’ dilemma : a “game” between two captured criminals that illustrates why cooperation is difficult even when it’s mutually beneficial- When oligopolies form a cartel to try to reach the monopoly outcome, they become likethe prisoners- Non-cooperative oligopoly equilibrium: bad for oligopoly firms (prevents them from achieving monopoly profits); good for society (Q is closer to the socially efficient out, P is closer to MC)- “Tit-for-tat”: whatever your rival does in one round (whether renege or cooperate) you do it in the next round. - Role for policymakerspromote competition, prevent cooperation to move the oligopoly outcome closer to the efficient outcome… Sherman antitrust act forbids collusion;Clayton antitrust act strengthens individual’s rights.CHAPTER 10: EXTERNALITIES- Externalities: The uncompensated impact of one person’s actions on the well being of a bystander…can be negative or positive- Public policy can improve efficiency in these situations- Welfare economics supply cure shows private cost, demand curve shows private value.Social cost: private +external cost v.s. Social value: private value + eternal benefitExternal cost: value of the negative impact on by standards- Internalizing the externality: altering incentives so that people take account of the external effects of their actions- When market participants must pay social costs, market eq’m =social optimum- If a negative externality, market Q>socially desirable- If positive externality, market Q<socially desirable- (Remedy?”int. the ext.” tax goods with negative externalities,subsidize goods with positive ones)- Public policies toward externalities: 1.) Command & Control:regulate behavior directly. 2.) Market-based: provide incentives so that private decision makers will choose to solve the problem themselves.- Corrective tax: designed to induce private decision makers to take account of the social costs that arise from a negative externality (aka pigouvian tax) corrective taxes are better for the environment.- Pollution efficient outcome: firms with low abatement costs reduce pollution the most. Regulation is not efficient. Taxes create incentive to be cleaner. Firms with low abatement cotsrise WTP taxes- Gas Tax  corrective tax addressing 3 negative externalities: congestion, accidents, and pollution- Tractable Pollution Permits system reduces pollutions at lower cost than regulation- A firms demand for ability to pollute=downward sloping function of the price of pollutingCHAPTER 11-PUBLIC GOODS & COMMON RESOURCES- A good is excludable if a person cant be prevented from using it- A good is rival consumption if one persons use of it diminishes another’s uses.- Free rider : person who receives the benefit of a good but avoids paying for it.- Cost-benefit analysis: study that compares the costs & benefits of providing a public good.- Important public goods: national defense, knowledge created through basic research, fighting poverty.- Cost-benefit analyses are imprecise, so the efficient provision of public goods is more difficult than private goods- It is the role of gov’t to see that common resources are provided- Tragedy of the commons: a parable that


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KSU ECON 22060 - CHAPTER 16-MONOLISTIC COMPETITION

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