Changes

== Review: Different Types of Markets ==

== 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 for the public (monopoly).  That's a large chunk of questions, and with some extra review here we can probably potential convert wrong answers to right ones.

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 for the public (monopoly).  That's a large chunk of questions, and with some extra review here students can convert potentially wrong answers into correct 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 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.

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.

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.

Here is a 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?  In which one (competitive v. monopoly) might a clever price ceiling actually increase quantity?  Think about it, and learn to ask yourself questions like this in order to master economics.  The answer is in this footnote.<ref>A price ceiling is a maximum price limitation, just as a real ceiling in house limits the height.  A perfectly competitive industry is already selling at its maximum output, so a price ceiling can't help there.  But a monopoly increases its price by reducing its output.  If a price ceiling is imposed against a monopoly, then it must reduce its price and increase its output, which benefits the public.</ref>

Here is a 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?  In which one (competitive v. monopoly) might a clever price ceiling actually increase quantity?  Think about it, and learn to ask yourself questions like this in order to master economics.  The answer is in this footnote.<ref>A price ceiling is a maximum price limitation, just as a real ceiling in a house limits the height.  A perfectly competitive industry is already selling at its maximum output, so a price ceiling can't help there.  But a monopoly increases its price by reducing its output.  If a price ceiling is imposed against a monopoly, then it must reduce its price and increase its output, which benefits the public.</ref>

Be sure to spend time on the review sections in the prior lectures for more information about this and other topics on the exams.

Be sure to spend time on the review sections in the prior lectures for more information about this and other topics on the exams.

:(E) increase labor until the ratio of the price of the output to labor's marginal product equals the wage rate

:(E) increase labor until the ratio of the price of the output to labor's marginal product equals the wage rate

This type of question benefits from being reread.  “Capital is fixed,” according to the question.  So capital cannot be increased.  Answers (A) and (C) can be eliminated that easily.  Many students miss the obvious sometimes on economics exams.  They fail to read and understand the question.

This type of question benefits from being reread.  “Capital is fixed,” according to the question.  So capital cannot be increased.  Answers (A) and (C) can be eliminated that easily.  Many students sometimes miss the obvious on economics exams.  They fail to read and understand the question.

Only labor can be increased, which is possible under answers (B), (D) and (E).  We've improved our odds of success to a 33% chance.  Those are good odds on a difficult question like this.  But we can improve our chances even more.

Only labor can be increased, which is possible under answers (B), (D) and (E).  We've improved our odds of success to a 33% chance.  Those are good odds on a difficult question like this.  But we can improve our chances even more.