| Line 1: |
Line 1: |
| | {{Economics_Lectures}} | | {{Economics_Lectures}} |
| − |
| |
| | We’ve covered all the issues concerning individual decisions by companies and consumers. We’ve discussed supply and demand. We’ve addressed marginal revenue and marginal cost. We've discussed numerous other concepts of the free market, including substitutes, complements, consumer surplus, price controls (ceilings and floors), the Law of Demand, normal goods, inferior goods, elasticity, cost measures, utility and indifference curves. | | We’ve covered all the issues concerning individual decisions by companies and consumers. We’ve discussed supply and demand. We’ve addressed marginal revenue and marginal cost. We've discussed numerous other concepts of the free market, including substitutes, complements, consumer surplus, price controls (ceilings and floors), the Law of Demand, normal goods, inferior goods, elasticity, cost measures, utility and indifference curves. |
| | | | |
| Line 43: |
Line 42: |
| | == Review: Monopolistic Competition == | | == Review: Monopolistic Competition == |
| | | | |
| − | *product differentiation | + | We have thoroughly covered monopolies at one end of the economic spectrum, and we have also thoroughly covered perfect competition at the other end of the economic spectrum. But how well do we know "monopolistic competition," which is somewhere in the middle? |
| − | *profit maximization | + | |
| − | *inefficiencies | + | As its name suggestions, "monopolistic competition" has characteristics of both monopolies and competition. |
| | + | |
| | + | Recall that monopolistic competition is characterized by: |
| | + | |
| | + | *more than one firm, unlike a monopoly |
| | + | *the firms sell slightly different goods that are not perfect substitutes |
| | + | *low barriers to entry (new firms can easily enter the market) |
| | + | *firms have some "market power," meaning that they can raise the price and still have lots of buyers at the higher price |
| | | | |
| − | == Review: Production Costs ==
| + | How does monopolistic competition different from perfect competition? In monopolistic competition, the sales price is not the lowest possible cost. Instead, the firm is able to raise the price of sale above his marginal cost to earn an extra profit. This is how firms maximize their profits. |
| | | | |
| − | === Marginal Product ===
| + | How is monopolistic competition created? Firms engage in "product differentiation," as in Wendy's advertising that its hamburger is better than McDonald's. That type of advertising differentiates Wendy's product from its competitors, and gives Wendy's the benefits of monopolistic competition. It can then raise its price and earn more profits, because its customers cannot just switch to McDonald's and expect to obtain the exact same hamburger. |
| | | | |
| − | === Cost Minimization ===
| + | Inefficiencies result in any market that is not perfect competition, so there are inefficiencies in markets that consist of monopolistic competition. The sales price is higher than it would be under perfect competition. |
| | | | |
| | ==Trade== | | ==Trade== |
| Line 121: |
Line 127: |
| | You need to understand the supply and demand curves thoroughly. Know what elasticity is, in all its forms. Appreciate what substitutes and complements are. | | You need to understand the supply and demand curves thoroughly. Know what elasticity is, in all its forms. Appreciate what substitutes and complements are. |
| | | | |
| − | Know the difference between the “short run” and the “long run.” In the “short run,” inefficient changes to inputs and outputs are made. For example, an employee is asked to work overtime at wages 1.5 times ordinary wages. But in the “long run,” inefficiencies are eliminated by better planning. Overtime is avoided. | + | Know the difference between the “short run” and the “long run,” as discussed above. In the “short run,” inefficient changes to inputs and outputs are made. For example, an employee is asked to work overtime at wages 1.5 times ordinary wages. But in the “long run,” inefficiencies are eliminated by better planning. Overtime is avoided. |
| − | | |
| − | Acquire a solid understanding of “marginal cost” (MC), “average variable cost” (AVC) and “average total cost” (ATC). See Figure B (attached). Notice how an increase in MC causes a delayed increase in AVC and ATC. MC moves quickly because it is just the additional cost for one additional unit of output. AVC moves more slowly because it is an average over all the output. If a star baseball player bats “1000" in a game by going 4-for-4, his batting average for the entire season is not going to jump to that level. Nor does AVC jump around with every variation in MC. Meanwhile, ATC is always higher than AVC, because ATC includes fixed costs.
| |
| − | | |
| − | Why is AVC and ATC so important? Because that helps determine your profit or loss. You’ll shut down your company if you lose money from making additional goods, which happens in the short run when AVC > P.
| |
| | | | |
| | ==Assignment== | | ==Assignment== |
| Line 137: |
Line 139: |
| | <br>(c) as output increases, AFC increases | | <br>(c) as output increases, AFC increases |
| | <br>(d) AFC is part of average variable costs | | <br>(d) AFC is part of average variable costs |
| | + | |
| | + | Briefly explain your answer. |
| | | | |
| | 2. Some politicians complain about how people are losing their jobs to workers in China. Is this problem the result of "free trade" or "protectionism"? | | 2. Some politicians complain about how people are losing their jobs to workers in China. Is this problem the result of "free trade" or "protectionism"? |
| Line 144: |
Line 148: |
| | 4. Review: Suppose that after completing this course, you start a new company. In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits. After careful study of your market, you decide that you can increase your revenue by increasing your price. Therefore your good must be price elastic/inelastic (choose one). | | 4. Review: Suppose that after completing this course, you start a new company. In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits. After careful study of your market, you decide that you can increase your revenue by increasing your price. Therefore your good must be price elastic/inelastic (choose one). |
| | | | |
| − | 5. A monopolistic competitive firm has the following characteristic that is lacking for a perfectly competitive firm: | + | 5. A monopolistic competitive firm has the following characteristic that ''is lacking'' for a perfectly competitive firm: |
| | | | |
| | (a) There are low barriers to entry | | (a) There are low barriers to entry |
| Line 155: |
Line 159: |
| | 6. You can go on www.orbitz.com and watch the price of airline tickets change from day-to-day. If you pick fixed dates of travel, such as Jan. 15 to fly somewhere and Jan. 18 to return, then you notice that the closer you get to those dates, the higher the price of the ticket is. In other words, the earlier in advance that you can buy a ticket, the cheaper it usually is. Explain how this illustrates a basic difference between long run and short run costs. | | 6. You can go on www.orbitz.com and watch the price of airline tickets change from day-to-day. If you pick fixed dates of travel, such as Jan. 15 to fly somewhere and Jan. 18 to return, then you notice that the closer you get to those dates, the higher the price of the ticket is. In other words, the earlier in advance that you can buy a ticket, the cheaper it usually is. Explain how this illustrates a basic difference between long run and short run costs. |
| | | | |
| − | 7. What is "Keynesian economics" and what is your view of it? | + | 7. Pick any aspect of monopolistic competition (other than problem 5 if you answered that) and explain it. |
| | | | |
| | ===Honors:=== | | ===Honors:=== |
| | | | |
| − | Complete 2 out of the following 3 questions, and use extra time to fig out the process for you to sign up for the CLEP exam in your area. | + | Complete 3 out of the following 4 questions: |
| | | | |
| | 8. Economics is sometimes called the “dismal science” because economists predicted population to grow faster than the food supply, marginal returns to diminish, and profits to vanish. But, in fact, there is an abundance of food and profits have not vanished. Why is economics not so dismal after all? | | 8. Economics is sometimes called the “dismal science” because economists predicted population to grow faster than the food supply, marginal returns to diminish, and profits to vanish. But, in fact, there is an abundance of food and profits have not vanished. Why is economics not so dismal after all? |
| Line 165: |
Line 169: |
| | 9. "Protectionism" is a pejorative (negative) word. Can you think of a more positive, flattering word to express the same concept in a supportive way? | | 9. "Protectionism" is a pejorative (negative) word. Can you think of a more positive, flattering word to express the same concept in a supportive way? |
| | | | |
| − | 10. Question about monopolistic cmopetition | + | 10. What is "Keynesian economics" and what is your view of it? |
| | + | |
| | + | 11. Explain why in long-run equilibrium the price charged in monopolistic competition is greater than marginal cost but equal to average total cost. |
| | | | |
| | [[Category:Economics lectures]] | | [[Category:Economics lectures]] |
| | {{DEFAULTSORT: Economics Lecture 13}} | | {{DEFAULTSORT: Economics Lecture 13}} |
| | + | f |