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| | 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. | | 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. |
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| | + | == Review: Different Types of Markets == |
| | + | |
| | + | You instructor wonders what topic will maximize our marginal utility next. 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). That's a large chunk of questions, and with some extra review here we can probably convert wrong answers to right ones. |
| | + | |
| | + | 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. Some of these questions are special cases and should simply be memorized: a cartel is an oligopoly that illegally agrees to fix (set) its prices, and an oligopoly is an industry where just a few firms dominate the market. When given a grid about where an oligopoly ends up selling its goods (its Nash Equilibrium), the answer is always symmetric (all firms sell at the same price) and usually not the highest price that a monopoly could sell at. |
| | + | |
| | + | The monopoly questions look harder than they really are. The monopolist sets his price higher than marginal cost, which would be the optimal price from the standpoint of the public (or government). Instead, the monopolist price sets his price where marginal revenue equals marginal cost (MR=MC). If shown a graph, you may have to find the quantity where MR=MC, and then find the corresponding price on the demand curve. Note that a monopolist has no supply curve, because a supply curve represents many firms in an industry and a monopolist is the only firm in the industry. |
| | + | |
| | + | There can be general questions about these markets. A perfectly competitive market uses resources in a perfectly efficient way. At the other end of the spectrum, a monopoly uses resources the least efficiently of all. Its high pricing causes a huge social loss ("deadweight loss") by eliminating consumer surplus. The monopoly reduces output in order to cause a scarcity that increases the price to an artificially high level. This is bad for everyone, except the owner of the monopoly, who enriches himself. This is how Bill Gates became the wealthiest person in the world. |
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| | + | Be sure to spend time on the review sections in the prior lectures for more information about this and other topics on the exams. |
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| | ==Review: Government Regulation/Policy== | | ==Review: Government Regulation/Policy== |
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| − | 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.
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| | 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. | | 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. |
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| | 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. | | 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 ==
| |
| − |
| |
| − | You instructor wonders what topic will maximize our marginal utility next. 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). That's a large chunk of questions, and with some extra review here we can probably convert wrong answers to right ones.
| |
| − |
| |
| − | 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. Some of these questions are special cases and should simply be memorized: a cartel is an oligopoly that illegally agrees to fix (set) its prices, and an oligopoly is an industry where just a few firms dominate the market. When given a grid about where an oligopoly ends up selling its goods (its Nash Equilibrium), the answer is always symmetric (all firms sell at the same price) and usually not the highest price that a monopoly could sell at.
| |
| − |
| |
| − | The monopoly questions look harder than they really are. The monopolist sets his price higher than marginal cost, which would be the optimal price from the standpoint of the public (or government). Instead, the monopolist price sets his price where marginal revenue equals marginal cost (MR=MC). If shown a graph, you may have to find the quantity where MR=MC, and then find the corresponding price on the demand curve. Note that a monopolist has no supply curve, because a supply curve represents many firms in an industry and a monopolist is the only firm in the industry.
| |
| − |
| |
| − | There can be general questions about these markets. A perfectly competitive market uses resources in a perfectly efficient way. At the other end of the spectrum, a monopoly uses resources the least efficiently of all. Its high pricing causes a huge social loss ("deadweight loss") by eliminating consumer surplus. The monopoly reduces output in order to cause a scarcity that increases the price to an artificially high level. This is bad for everyone, except the owner of the monopoly, who enriches himself. This is how Bill Gates became the wealthiest person in the world.
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| − | <more>
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| | == Review: Public Goods == | | == Review: Public Goods == |