Difference between revisions of "Economics Lecture Fourteen"

Revision as of 19:29, December 16, 2009

Economics Lectures - [1 - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9 - 10 - 11 - 12 - 13 - 14]

This is the final lecture of this course.

Your Instructor's appearance on the Colbert Report last week was replayed again by its producers the following Monday evening. Let's consider that in economic terms. This show is funded by advertisements, and the advertisers pay higher amounts depending on how many watch a show. By choosing to rerun this particular show again the following Monday, its producers probably felt it could attract a higher viewership than other shows, and thereby maximize advertising revenue. Alternatively, Stephen Colbert may have liked the high quality of this particular show and chose to replay it for that reason, or perhaps he selected it again for its educational value.

Several of our students in this class are starting a new homeschooling publication, which will soon be announced on Conservapedia.com and available online. A student who took this class in 2007 and who is now excelling in college is publishing this observation:

Let's begin this lecture by summarizing the percentages the CLEP exam devoted to particular topics. This will be immensely helpful to our students who will be taking the CLEP exam, and will also assist everyone else by facilitating their organization of the material covered in this course. Our final exam next class will use a similar distribution in topics as the CLEP exam, but without over-emphasizing government policy as the CLEP exam does. Instead of so many government questions, we will substitute in some of the additional topics we covered in this course.

Topics on Exam

The above list is all that is on the CLEP exam, in the percentages shown. At first glance, the CLEP exam may not seem biased. But it is. The CLEP exam omits important conservative concepts like Gresham's Law, transaction costs, the time value of money, and the Coase theorem. These are essential topics, even the CLEP ignores them. Instead, the CLEP exam asks more about government regulation that one would expect for Microeconomics, which is the study of individual firms and markets. Also, the CLEP exam asks fewer questions about opportunity cost and other important conservative concepts than it should.

But nearly of the questions that are asked on the CLEP exam have unbiased, correct answers. The only exceptions where political bias becomes a factor are a few questions about government regulation. For these few questions, the CLEP exam pretends that government regulation can make a market more efficient. This is untrue, as proven by the Coase theorem, but the CLEP exam writers want people to think that more regulation is somehow good, and that government can somehow make a market more efficient.

Exam Bias Concerning Regulation and Efficiency

There are only two or three questions (out of nearly 100) on the CLEP exam that have biased answers. They concern regulation and efficiency. You can expect to see one or two CLEP questions where the correct answer is to support government regulation against pollution. The best way to think about pollution is in terms of its "negative externality," but the CLEP exam writers cast the issue in terms of an efficient use of resources. Under this view, pollution is inefficient because it results in inefficient harm to the environment. Under the CLEP view, government laws against pollution supposedly increase efficiency by preventing harm to the "resource" of the environment. These regulations that prohibit pollution cause less output but supposedly ensure a more efficient use of environmental resources.

While most of us support a cleaner environment, efficiency is not improved by the government interfering in the free market and reducing output. As the Coase theorem states, government interference and more transaction costs do not improve efficiency. That said, you can pick up one or two easy points on the CLEP exam by assuming that environmental regulation increase efficiency by protecting the "resource" of the environment for its better use.

Outside the topic of government regulation, there are no biased answers. Do not choose one answer instead of another for reasons of bias except in one or two rare cases.

General Preparation Advice

As always, be sure you fully understand the question before you answer it, and use common sense and logic. In fact, many of the questions can be answered correctly by carefully applying common sense and logic, even independent of economic principles.

To prepare for passing the CLEP exam, strive to know at least 80% of the issues covered in the table above extremely well. Go over the above list and see where you need to improve most. Then focus on those areas. But also be sure you understand the easy areas in order to pick up the easy points too.

Marginal Utility in Studying for Exam

Let's put our knowledge from this course to good use in studying for our final exam, and preparing for the CLEP exam. We maximize our utility by scoring as high as possible on these exams. To do so, we need to maximize our marginal utility in allocating our time towards the exam topics listed above. If we spend all our studying time on "price discrimination," which is only 1% of the exam, then we are not maximizing our marginal utility and will not score as well as we could.

This is similar to our homework problem earlier in the course about maximizing our marginal utility with respect to hiking and reading. This time, however, the decision each student must make is which topic to focus on next in the above list, and how much time to spend on it before moving on to another topic in the list. The answer may be different for each student.

This same challenge in optimizing strategy could be expressed as a problem of "allocative efficency": allocating resources (time and information) in the most efficient way. Just as efficiency is essential to successful businesses, efficiency is also important to becoming a successful student. Spending your time efficiently in preparing for the final exam, and preparing for the CLEP, is crucial to your ability to do well on them. Look at the above list of topics and how often they appear, and ask yourself: where should I focus first in order to pick up the most points in the shortest amount of time?

Should you simply start reviewing at the topic of the list and work your way down to the bottom? That strategy has the advantage of focusing on the most important topics first. If you run out of time in reviewing, then you will miss only the less important topics. But you might improve further on that strategy by moving more quickly through topics that you already understand well. Alternative, there may be topics that you find too difficult to understand, and you might give up some points there in order to focus better on topics where you can pick up more points.

For the rest of this class this lecture will focus on topics which might provide the greatest marginal increase in your exam scores. This takes into consideration the topics we have already reviewed (you have the materials for those), and avoids duplication of that review. You, however, may decide for yourself that you can benefit most from reviewing those prior topics.

Your instructor emphasizes studying strategy for a reason. The biggest reason why some students do not succeed is a lack of effort. But the second biggest reason is poor studying and test-taking strategies, like a football team that runs ill-advised plays. Education, like business and perhaps even life itself, rewards good strategies and punishes misguided ones.

Review: Inputs to a Firm (Espec. Labor)

For many students, the most additional points can be obtained by reviewing the "Inputs to a Firm" category. It will be on 10% of the questions on the final exam and the CLEP exam. That's a significant chunk of these exams. Without review, these questions that look hard and are easy to miss. But with some extra preparation, you should be able to answer nearly all of them correctly. In maximizing your score and making the best use of your time, this category may result in the biggest increase in correct answers with the least amount of effort. That's what maximizing marginal utility is all about.

Accordingly, in economic terms, the greatest marginal utility from studying for the exam is probably obtaining by focusing on this topic first. We've already covered the other two topics comprising 10% apiece of the exam (cost measures and government regulation), so there may not be many more points to pick up there. Realize that you will probably get some exam questions right already without additional studying, and other questions you may get wrong no matter how much you study. But in this category of "inputs to a firm," you can pick up some points that you would otherwise miss. Let's review it now.

Questions about inputs to a firm focus on what a firm will do with its inputs (usually labor, but sometimes capital) in order to maximize its profits. The questions usually concern the following:

1. impact of improvement in technology on the production by a firm
2. adjusting inputs to minimize the overall cost at a constant level of output
3. the effect of minimum wage on the competition for labor
4. comparing the cost of an input (usually labor) relative to the additional revenue that results
5. why a firm's "demand for labor" is called a "derived demand"
6. what causes an increase in demand for labor
7. the relation between hiring additional workers and the marginal cost
8. calculating overall costs (total cost and average variable cost) based on wages

Review the above list now. How many of the above 9 topics do you know well enough to answer a question about them correctly? Let's briefly review each of these concepts so you can maximize your score on this big chunk of the exam.

1. "the impact of an improvement in technology on the production by a firm"

If technology improves, as in helpful new inventions or advances in communication (like the internet), then this helps shift the Production Possibilities Frontier (Curve) outward. A firm can produce more output now. So an improvement in technology enables a firm to increase supply.

2. "adjusting inputs to minimize the overall cost at a constant level of output"

How does a firm adjust its inputs (e.g., workers or equipment) so that it has reached the lowest possible overall cost? By making sure that he is getting the most "bang for his buck" for each input. In other words, that each input is producing the most marginal product per dollar spent on that input. If one worker is producing more than another worker, and both are being paid the same, then the owner has not lowered his costs to a minimum. He could fire the lazy worker and hire a part-time worker like his good one, and then produce the same output at less cost.

Summarizing the above, the firm minimizes his overall costs by making sure the marginal product per cost for each input is equal. If one input (e.g., one worker) is producing more marginal product per cost than another, then the overall costs are not minimized. The unproductive worker is wasting the firm's money.

3. "the effect of the minimum wage on the competition for labor"

Increasing the minimum wage has the effect of increasing unemployment. Workers who have jobs make more money when the minimum wage is increased, but firms can afford to hire fewer people. The number of the unemployed (the people who cannot get jobs) increases when the minimum wage is increased.

Also, although this will never be asked on a CLEP exam, raising the minimum wage causes more high school students to drop out and pursue jobs rather than stay in school, which would enable them to obtain higher-paying jobs in the future.

Sometimes the CLEP exam will twist the question about minimum wage to obscure its harmful effect, by asking what happens when the labor supply increases when there is a minimum wage. The answer is the same: unemployment increases.

4. "comparing the cost of an input (usually labor) relative to the additional revenue that results"

This type of question probes how a firm increases its inputs in relation to the additional revenue that results from such an increase. The key here is to be very careful and very logical. A firm will increase an input (such as labor) until the value of the marginal product of that input equals the marginal cost of that input. Read that sentence over and over until you understand it. It simply means that the firm will equate the marginal cost of the additional input (such as an additional worker) to the marginal revenue that the additional input produces.

Often students miss this type of question because they are not careful to compare dollars to dollars. If you have the marginal cost in terms of dollars (such as a wage rage for the additional worker), then you need to equate it to the marginal value of the marginal product of the labor (dollar units), not the marginal product itself (which is a quantity itself).

5. "why a firm's "demand for labor" is called a "derived demand"

This is an easy point to pick up on an exam. A firm's demand for an input (such as labor) is called a "derived demand" because it depends on the demand for the goods produced by that input. For example, a restaurant's demand for waitresses is entirely dependent on the public's demand to be served at the restaurant. If there is no public demand to be waited on at the restaurant, then the restaurant (the firm) has no demand for waitresses!

6. "what causes an increase in demand for labor"

This is another easy issue, similar to the prior one above. If the public demand for the product of the labor increases, then there is an increase in demand for the labor itself. If more people want to eat McDonald's hamburgers, then there is more demand for workers to make McDonald's hamburgers.

How do we know when the demand by the public for the product of certain labor increases? When the price of the good or service produced by the labor increases. When that price goes up, then there is an increase in demand for the workers who make that good or service.

7. "the relation between hiring additional workers and the marginal cost"

This is a more challenging issue that requires two steps rather than one in order to answer correctly. Marginal cost is additional cost to a firm for making one more unit. It is measured in dollars, not in units. Making sure you have the right measure (dollars or units) for your answer will help you reduce mistakes. The answer for any question about marginal cost must be in dollars (or cents) per unit.

Accordingly, if you are told how many additional units are produced by each additional worker, then calculating the marginal cost requires dividing the cost of the additional worker by the additional number of units he produces. The more units an additional worker produces, the lower the marginal cost that results from adding that worker.

Example: suppose a firm hires Tom and sees the output increase by 20 units, and then hires Mary at the same wage and sees the output increase by 15 units. When is the marginal cost of the firm the lowest? After it hires Tom, but before it hires Mary. That's because the marginal cost of hiring Tom is his wage divided by 20, while the marginal cost of hiring Mary is the same wave divided by 15. A wage divided by 20 is less than the same wage divided by 15, so the marginal cost to the firm after hiring Tom is less than after hiring Mary.

8. "calculating overall costs (total cost and average variable cost) based on wages"

The key here is simply to be careful in doing the calculations, and then double-check your answer. You have to be sure you are using the correct level of output before you calculate the total cost (TC) and average variable cost (AVC) at that level of output. To find the total cost, add the fixed cost (FC) to the labor cost (total wages times the number of workers), for a given level of output. Then, to find the average variable cost, find the total variable cost (TVC=TC-FC) and divide by that level of output.

Example: a firm can produce 100 units with 5 workers and 200 units with 10 workers. Its fixed cost is $50 and its wage rate is $20 per day. What is its total cost and average variable cost to produce 100 units?

Answer: note first that the question asks about the costs at 100 units in output, not 200 units. Total cost at 100 units is the fixed cost ($50) plus the labor cost ($20 times 5 workers, or $100), for a total of $150. The average variable cost is the total cost ($150) minus the fixed cost ($50), divided by the output (100), for a total of $1 per unit.

Master the above eight issues, and you'll convert 10% of the exam from wrong answers to correct ones. That could easily put you over the top in order to earn college credit.

Review: Government Regulation/Policy

I bet you’re wondering how the CLEP exam can devote 10% of its microeconomic questions to government regulation or policy. I’m wondering the same thing. Question: What should government do to promote commerce? Answer: Nothing. That didn’t take long.

In reality, however, the government plays an enormous role in the economy. It produces goods and services itself. The Post Office is a mammoth example of such a service. Government also regulates “the private sector,” which means free enterprise. Some of its regulations, such as the antitrust laws, are designed to increase competition and efficiency. The government also redistributes wealth through taxation and welfare programs. Government is big and always there. And it keeps growing bigger.

Occasionally an exam question is designed to highlight the limitations of government. Is it efficient? No. Why not? It often has no competition (e.g., 44 cents now to mail a letter).

Can we eliminate government? Some say no, because private firms could never survive producing goods or services that have high positive externalities. A private firm could never produce a free public park, for example. The private firm would go bankrupt. Government is necessary, some say, to produce those goods and services that must be available to everyone. Public transportation in New York is made possible by the government. The subway could not survive on only the passenger fare. In a nutshell, private companies cannot produce public goods. Put another way, the use of public goods cannot be withheld from those who do not pay for them. Public goods are discussed further below.

Most people want government to reduce the negative externalities that occur in a purely free market. If government did not provide garbage service in cities, and everyone had to pay to remove garbage, then before long we might have rotten garbage filling the streets. The negative externality would be high, and we might beg government to remove the trash.

Likewise with pollution: if companies were allowed to pollute our rivers and streams, then many would. Many did, in fact. This is another negative externality. The companies are not paying for the full cost of their production, so their marginal cost (MC) is artificially lower than it should be. The companies are avoiding the cost of their own pollution. A lower MC means they will produce more goods than if their MC were higher. The term “marginal social cost” is used by economists to represent the true cost of their activities, including the cost of their pollution. In theory, perhaps there are free market responses to the polluter, such as people asserting property rights in the rivers being damaged. Historically, it has taken government regulation to reduce the negative externality.

Then there are the price floors, supports and ceilings that government imposes from time to time. Do we all know the differences? Price “ceilings” (or controls) are the easiest: the government says that the good cannot be sold for a higher price. Just as you cannot reach above your ceiling, the price is prohibited from rising above the ceiling that the government sets for it. It would be requiring gas to be sold for no more than $1.50, for example. The quantity supplied will decrease (move down the supply curve), while the quantity demanded will increase (move up the demand curve). Shortages result.

What is a price floor? Just the opposite of a ceiling. We cannot reach below the floor, and a price floor prevents the price from falling below a certain level. It would be a government law that prohibited milk from selling for less than $2 a gallon, for example. It would be intended to help the suppliers, such as dairy farmers. What happens when government imposes a price floor? There is a surplus of the good, as supply exceeds demand.

Now, how about a price support? That occurs when the government buys large quantities of good, such food, at prices higher than the competitive equilibrium. The government does this to “support” a higher price, instead of passing a law to require a higher price. A price support is designed to help the firms producing the goods, such as farmers. The rationale is that farmers are politically important and that pure competition is too brutal on their business and their lives, and also that foreign countries engage in the same practices. The effect of a “price support” is similar to a price floor: it creates a surplus of the good when the support is above the equilibrium price

When government regulates labor, the analysis is similar to its regulation of price. A “price floor” is created by the minimum wage: the buyer (an employer) must pay at least a certain amount for a service (labor). The minimum wage creates an oversupply of the service: too many workers. Not all of them will be able to obtain jobs at a wage higher than equilibrium. Unemployment results from a minimum wage that is higher than the equilibrium wage.

Review: Different Types of Markets

About 20% of the exam is devoted to questions about different types of markets, ranging from the most advantageous for the public (perfect competition) to the least advantageous (monopoly). The key to answering these questions correctly is to realize that the more competition there is, the lower the price of the goods and services and the lower the profits for the firms.

<more>

Review: Public Goods

A public good is a good which is nonexcludable and nondepletable. The first condition means that it is impossible to exclude consumers from partaking in the good, and the second condition means that one consumer's consumption of the good does not prevent others from consuming it.

Explained another way, a public good is available to all such that consumption by one person does not reduce its availability to others. An example of a public good is national defense, as it protects everyone and its benefits to one person does not diminish its benefits to others.

Other examples of public goods are law enforcement (protection by the police), public fireworks, clear air, street lights, radio and television transmissions, lighthouses, and some inventions. Some of these examples, such as lighthouses, are contested as to whether they must be a public good, as it is possible to charge ships port fees to pay for them. Also, while radio and television transmissions are available to all to receive them, it does cost money to buy radios and television sets, so these are not truly public goods either.

Liberals like to emphasize the concept of public goods on exams in order to support the argument for more government. Under this view public goods represent market failure and the need for government services supported by taxes.

Test-taking Techniques in Economics

Good test-taking techniques are particularly important to doing well on an economics exam. Simple questions are often intentionally disguised as something more complicated. It is easy to become confused and misguided in analyzing economic issues. 99% of the public would say that we would be better off if Congress put a price ceiling or cap on gasoline at $1.50 a gallon. It takes a bit more thought to realize that massive shortages would result, and we would all have to waste hours each week waiting in line for gasoline. Some who really need gas in hurry, such as people trying to take someone to a hospital, may not be able to obtain gas in time.

The ability to eliminate wrong answers is very important on economics exams. We have already seen questions on the mid-term exam that are best analyzed by eliminating two wrong answers, and then choosing the best answer among the remaining two.

Let’s try the elimination technique using questions based CLEP questions:

The poverty-level income for a family of four in America: which of the following can be said about how the government definition of this specific income level?

(A) It is used to determine eligibility for Social Security benefits.

(B) It proves that 50% of Americans live in poverty.

(C) It falls when welfare benefits increase.

(D) It is calculated by multiplying the cost of a nutritionally adequate diet by three.

(E) Government does not adjust this number due to changes in the cost of living (inflation).

Virtually none of you would know the answer to this question at first glance. The question is not really appropriate for a microeconomics exam, but CLEP asks it anyway. Questions about poverty, gaps between the rich and poor, and government programs are always favorites among liberal educators. You will see many more questions about these issues than about the invisible hand or the creation of wealth.

So what do we do when faced with this question? Simply give up? Move to the next question and hope it is easier? Blindly guess at an answer? None of the above.

We can narrow the choices, and thereby reduce our risk of error, by eliminating wrong answers. Basic economic principles (or common sense) serve as our guide.

Let’s start with choice (B). Think about it: is half of our nation living in poverty? What would that mean for elections? Who would pay to run government? If we called half of us "poor", then what word would be use for the really poor? Choice (B) can't be true. Using common sense, we can eliminate this answer.

Let’s turn to choice (E). Why wouldn’t it be adjusted? Poverty must be relative to the cost of living. If the cost of living doubled, then the numbers in poverty would increase greatly. But failure to adjust for the cost of living would miss that effect. Again, common sense leads us to eliminate this answer.

<>Next we can turn to choice (A): “It is used to determine eligibility for Social Security benefits.” That cannot be true: virtually everyone must pay Social Security taxes, and then receive benefits when they become old. All politicians, rich or poor, defend Social Security. “Social security” is not “security only if you’re poor.” We can eliminate this choice.

We’re left with only two possibilities: (C) and (D). Now our odds are 50% even if we just guess. If you took the CLEP and at least narrowed every difficult question down to two choices, then you would likely pass. But can we do better than a blind guess between these two choices?

Perhaps. Option (D) seems to have the right amount of detail, and fits the question well grammatically. “The official measure of the poverty-level income ... is calculated by multiplying the cost of a nutritionally adequate diet by three.” Option (C) does not fit the question so well: “The official measure of the poverty-level income ... falls when welfare benefits increase.” A “measure” “falls”? No, a “measure” “is calculated.” Even if you had no idea between (C) and (D), (D) is better grammatically and logically. It’s an educated guess. (D), indeed, is correct.

It also helps to think about the purpose of a question. These are not trick questions, and you do not want to outsmart yourself. Don’t be too cute in eliminating wrong answers. Don’t reach for the answer that you least expected initially. The purpose of this question is to ask about how poverty-level income is calculated. Answer (D) most directly relates to that purpose. It makes for a good guess if you did not otherwise know. You won’t always be able to guess the right answers, but by increasing your chances you can significantly increase your overall score.

Let’s try one more real CLEP question, this time relating to labor:

Assume that both input and product markets are competitive. If capital is fixed and the product price increases, in the short run firms will increase production by increasing:

(A) capital until marginal revenue equals the product price

(B) capital until the average product of capital equals the price of capital

(C) labor until the value of the marginal product of labor equals the wage rate

(D) labor until the marginal product of labor equals the wage rate

(E) labor until the ratio of product price to the marginal product of labor equals the wage rate

Whew! This looks far too difficult! Should we just give up right now?

Read the question again, and a third time. “Capital is fixed,” according to the question. So capital cannot be increased. Answers (A) and (B) can be eliminated that easily. Sounds too obvious, but many students miss this. They fail to read and understand the question.

Only labor can be increased, which is possible under answers (C), (D) and (E). We could just guess at this point, with a 33% chance of being correct. Those are good odds on a difficult question like this. But we can improve our chances even more.

(C) and (D) look similar so let’s turn to (E) first. It says to increase “labor until the ratio of product price to the marginal product of labor equals the wage rate.” At first glance, it seems awkward and contrived. If in a hurry, you may want to limit this immediately. When do we ever divide “product price” by “marginal product”? That’s dividing P by marginal Q, which isn’t done.

The “marginal product of labor” is the additional units (“product”) produced due to an additional unit of labor. Remember “MP”? The term does not include “revenue” or “price”, so it only gives you the quantity. We need to multiply that quantity by product price to obtain revenue, what the firm owner cares the most about. Choice (E) makes no sense by dividing terms that should be multiplied together. We can eliminate it.

Back to (C) and (D). The only difference between the two is the term “value of” in (C). Should we go for it? Think about what “marginal product” is. It is a quantity, not a dollar amount. Yet we are comparing it to “wage rate,” which would be in dollars. We need to insert “value of” to convert a quantity into equivalent dollars. (C) is the correct choice.

Remember that on these exams you don’t have to be correct every time. Batters who achieve hits only one-third of the time are elected to the Baseball Hall of Fame. You want to strive to do a bit better on these exams, but you don’t have be successful on every single question. You simply want to maximize your average.

Review

At the beginning of this lecture, there was a quote by a student who took this course in 2007. She referred to "Austrian economics." What is that?

Austrian economics is <define>.

Former MIT Professor Paul Samuelson, one of the best-known American economists, passed away on Sunday. He authored the most widely used college textbook on Economics, which focuses more on Macroeconomics (the big picture) than on Microeconomics (individual firms and markets, and the basis of our course). Samuelson was a disciple of the liberal economist John Maynard Keynes discussed in our Lecture Thirteen, but Samuelson did permit some conservative concepts to be included in his textbook and supported tax cuts during the Kennedy Administration in the early 1960s.Normal profit:

The term “normal profit” means “zero economic profits,” which occurs when total revenue equals explicit costs (like cash expenditures) plus implicit costs (like opportunity costs of wasted time). In Figure B (attached), at point A, what kind of profits does the company have: (a) more than a “normal profit”, (b) equal to a “normal profit” or (c) less than a “normal profit.”?

Correct mistake in Lecture 12 about shape of Lorenz curve with respect to actual income.

Knowing and understanding basic concepts are the key to mastering economics exams. Return to page one of this lecture and make sure you understand every concept listed. Return to the lecture in which they were discussed and explained, and reexamine the homework as you have difficulties. Don’t worry about the most difficult concepts discussed in the course, such as the Giffen good. Instead, master the basics and be ready to apply them logically to the final exam.

“Efficiency” is a basic economic concept that underlies many of the concepts on page one. In the long run, for example, a company’s production is at its most efficient level. All costs are optimized. In the long run, every cost is a variable cost that can be adjusted to attain maximum output for minimum input. In the “long run,” the firm can vary its output by varying all its factors of production, including its plant scale.

The efficient level of production for a company is somewhere on its production possibilities curve. Where would an inefficient level be represented graphically? At a point where production is less than an amount on the curve. This would be a point inside the curve, closer to the origin. If there is a technological improvement that enhances efficiency, then the entire curve shifts outward. All production can increase and a new curve represents the possibilities.

Like many fields, it is often helpful for the student to find something easy to understand and then relate difficult ideas to that concept. Which concept are you most comfortable with? Perfect competition? Elasticity? MR=MC? Monopolies? In perfect competition, economic profits are squeezed to zero. P=MC. P=ATC. From there, you can understand monopolies better. A monopoly must be something other than perfect competition. Economic profits are greater than zero; economic rent exists. P>MC. P>ATC. But in both competition and monopolies, MR=MC.

Other topics for review: monopolies, monopolistic competition, imperfect competition, and perfect competition. Only in perfect competition is the price of the good sold at its very lowest, P=MC. In all other markets, P can be greater than MC. There are a significant number of questions on the exams about these different types of markets, and they are worth reviewing in prior lectures.

Here is a final puzzle to leave you with. What is the impact on quantity of a price ceiling in a competitive industry compared to a price ceiling in a monopoly? If you can answer that correctly, then you have gone a long way to mastering this material. Hint: In which one (competitive v. monopoly) can a clever price ceiling actually increase quantity? Think about it.

Final Comments

You have all learned a great deal of material in this course, information that will help you the rest of your lives. The insights and powerful concepts covered by this course can yield greater and greater benefits the more you think about them. Every week I see still something new and helpful in concepts taught in this course. Many students say that this is the best course they took from me, among other helpful courses. Use this course for your benefit.

If there is one unifying theme to this course, then I suggest it is summarized in the Jesus's Parable of the Talents. Be productive, and give God the opportunity with your work. If you reach out, if you do more, if you make good use of your time, if you maximize your efficiency, if you consider the opportunity costs, and if you increase your output, then you give God more to work with. But if you bury your talent in the ground or if you are like the tree that does not bear fruit, then you give God less to use for His purpose.

Carpe diem. And be the good that drives out the bad as we discussed in connection with Gresham's Law.

Assignment

Read this lecture and study for the final exam, which will be January 7th (snow date, if needed, is January 14th). It will be a multiple choice exam similar to the mid-term exam. Knowing all the concepts asked on the mid-term exam is an excellent way to prepare, along with concepts learned since then.