Economics Notes (1) PDF

Economics 7.1 Competition and Market Structures → Market structure: Classification that describes the nature and degree of competition among firearms in the same industry. Pure Competition → Pure competition: theoretical market structure with three necessary conditions Conditions of a pure compet...

Economics 7.1 Competition and Market Structures → Market structure: Classification that describes the nature and degree of competition among firearms in the same industry. Pure Competition → Pure competition: theoretical market structure with three necessary conditions Conditions of a pure competitions Conditions of a Perfect competition Very large numbers of buyers and Very large numbers of buyers and sellers. None should be large enough sellers. None should be large enough to be affect price to be affect price Buyers and sellers deal in identical Buyers and sellers deal in identical products. products. Buyers and sellers have the freedom Buyers and sellers have the freedom to enter or leave business. to enter or leave business. Large number of well-informed of Independent buyers and sellers Efficient allocation of all resources Profit Maximization: - market supply and demand set the equilibrium price for the product. - The pure competitor is called “price taker”because they take the price as it is and dont have influence for it. Marginal analysis: - As long as the marginal cost of producing one more unit of output is less than the marginal revenue from the sale of that output the firm would continue to grow - Profit-maximizing quantity of output is found where the marginal cost of production is equal to the marginal revenue from sales or where MC = MR. Less than pure competition: - Understanding pure competition is important because economists use it to evaluate other less competitive market structures that lack one or more of the conditions required for pure competition. - These market structures are monopolistics competition, monopoly and oligopoly - In these market structures firms face less competition and as a result they supply lower quantities of their products and charge higher prices Monopolistic Competition → Monopolistic competition is a market structure that has all of the conditions of pure competition except for identical products How monopolistic competitors compete: - Monopolistic competition is characterized by product differentiation: real or perceived differences between competing products in the same industry - To make their products stand out producers use non price competition : the use of advertising , giveaways or other promotions designed to convince buyers that the product is better or more unique than other competitors - Advertising is important for competition. However advertising comes with a cost of production, therefore the consumer must pay that price - If the seller can convince the buyer that their product is differentiated then they will be able to raise the price of the product (think of it like you're convinced so you'll pay the price) Profit Maximisation in Monopolistic Competition: - Profit-maximizing quantity of output is found where the marginal cost of production is equal to the marginal revenue from sales or where MC = MR. - The monopolistic competitor will adjust its production until its marginal cost is equal to its marginal revenue - It's easy for firms to enter the monopolistically competitive industry because each new firm makes a product only a little different from others resulting in a large number of producers producing a variety of similar products. Oligopoly → oligopoly is a market structure in which a few very large sellers dominate the industry. The products of an oligopolist may have distinct features (different products) or it may be standardized (the same product). Interdependent Behavior: - Oligopolists are generally large and because they generally produce similar products whenever one firm acts, the other firms in the industry may follow them or else they run the risk of losing customers (basically if one company does something and it becomes the new wow then everyone in the oligopoly must copy them)  - Think of Apple, when Apple introduced the iphone notch it became the new standard of mobile phone design and all the other companies in the oligopoly started copying them. How Oligopolies Compete: - Oligopolists also compete using non price competition by enhancing their products and excessively advertising them. - It is possible that the interdependent behavior takes the form of collusion - Collusion is a formal agreement to set specific prices, limit output, divide markets or otherwise agree to reduce competition - One form of collusion is price-fixing, or agreeing to charge a set price for a product by several firms - Collusion and price fixing are ILLEGAL because they restrain trade. Profit maximization in oligopolists: - Profit-maximizing quantity of output is found where the marginal cost of production is equal to the marginal revenue from sales or where MC = MR. - Because non-price competition is expensive and because the oligopolist has so few competitors, the products final price in an oligopoly is going to be higher than it would be under a monopolistic competition Monopoly → Monopoly: a market structure characterized by a single producer in an industry. - Monopolies are a near impossible case, although there has been some in the past - In a laissez-faire monopolies might be more common because government had no intervention in controlling their development - Americans traditionally have always disliked monopolies and have tried to outlaw them - New technologies often introduce products that compete with existing monopolies ( For example fax machine companies that had monopoly in america fell off because the new technology of email was introduced) Types of Monopolies: Natural Monopoly Monopoly on which a single firm can produce the product more cheaply than any competitor in the market, so they take control of that industry → Example: Electricity distribution. One utility company typically manages the distribution of electricity within a region because building multiple sets of power lines is inefficient and costly. Geographic Monopoly Monopoly in which the absence of other firms or business in the area makes one seller the one and only seller → Example: A gas station in a remote town. If it's the only gas station for miles, it becomes the only place for locals to refuel, creating a geographic monopoly. Technological Monopoly Monopoly in which ownership or control of a manufacturing method, process is only available one seller The government can grant patents → an exclusive right to manufacture, use or sell any new and useful invention for a specific time to the inventor of it. These patents make that producer the only seller of that technology hence they become a monopoly → Example: Pharmaceutical company with a patented drug. A company that invents a new drug holds the exclusive right to produce and sell it until the patent expires. Government Monopoly Monopoly that is owned and operated by the government. They produce products or services that the private industry cannot properly supply. → Example: Postal services in many countries, such as the United States Postal Service (USPS). The government controls mail delivery, ensuring reliable service across the nation. Profit Maximization in Monopoly: - Profit-maximizing quantity of output is found where the marginal cost of production is equal to the marginal revenue from sales or where MC = MR. Monopolies are more likely to charge higher costs and supplier smaller quantities than the other market structures because: → The monopolist is larger than the other types of firm → Lack of competition might lead the monopolist to lose control of their price control The higher price and smaller amount of output is one measure of the inefficiency of a monopoly  7.2 Market Failures → What is a market Failure? A market failure occurs whenever a flaw in the market system prevents an efficiency allocation of resources 5 Main reasons market failures occur: Not enough competition - Over time, merging and combination of companies results in larger and fewer firms dominating an industry. This reduces competition which reduces the efficient use of scarce resources. For example, If i am a firm with little to no competitors why would i bother to use resources smartly when if i do or don't my profits stay the same - Inadequate competition can occur on both the demand and supply side of the market (buyers and sellers). For example, there will be little to no competition if the government is the only buyer of your product. So there is no need to adjust prices due to competition because you are the only one producing it (now you can make it expensive and they will still buy) Not enough Information - Everyone including consumers, producers and governments should have adequate information about market conditions if resources are to be allocated efficiently. If only one side of the market, like the government, knows the information, then the market will not be efficient. Resources That Can’t or Won’t Move - Resource Immobility causes market failure. If recourse that include: land, capital, labor and entrepreneurs cannot or will not move to markets where they can earn higher returns. - If laborers done move they remain unemployed and their skills cannot be  used in the market, therefore it might fail Too Few Public Goods - When markets do not produce the right amount of public goods, it can fail. - Public goods: products that are collectively consumed by everyone. - Private markets cannot efficiently make public goods because there is no profit to be made by producing them - Governments take the responsibility of producing public goods - Governments do not always spend enough money on public goods even if their production, repair or expansion are needed - This lack of expenditure can cause a market to fail, because the product output is too small or too low quality. Externalities or spillovers - Failure of markets in compensating for spillovers causes market failure - Spillovers are: uncompensated side effects that either benefit or harm a third party not involved in the activity that caused it. Also called externalities There are two types of spillovers Positive spillover Negative spillover - Benefits received by someone - Uncompensated harm, cost or who was not involved in the inconvenience suffered by a third activity party Example: expanding flight routes from 2 Example: expanding flight routes from days to 2 weeks benefits the families of 2 days to 2 weeks creates too much flyers who want to spend more time noise that disadvantaged the with them neighborhood near the airport the problem arises when travelers' ticket prices do not reflect the extra costs (like noise or pollution) or benefits (like economic growth from new routes) that air travel creates for people not involved in the flight. So: If negative effects (like pollution) aren't included in the price, flying seems cheaper than it actually is, leading to too much air travel (overuse). If positive effects (like economic benefits to a city) aren't considered, there may be too little investment in beneficial routes (underuse). Both situations create inefficiency, leading to market failure.  3 Ways to Deal with Spillovers Taxing Harmful Spillovers - Taxing harmful sillovers creates a cost of production for the producer who, in turn, increases the cost of their productor service making it more expensive for the consumer. Like this less of the product that causes harmful spillovers wll be purchased, reducing the impact of it. - As a result, more efficient allocation of resources will be achieved - Introducing taxes to firms that create harmful spillovers requires government interventions. Subsidizing Helpful Spillovers - Helpful spillovers can benefit the overall market, therefore encouraging them is recommended. - To encourage a firm to continue producing something that is beneficial for everyone, we must give them motive, which in this case is reducing cost through subsidies( funds from the government) - Subsidies will increase production which will give firms incentive to continue producing helpful products and services. Using cost-benefit Analysis → Cost benefit analysis is a strategy that evaluates the costs and benefits of various projects to find the one that has the highest ratio of benefits to costs. - Governments can use this analysis to find which projects out of competing projects provide the most helpful spillovers. A Lot of the times the governments do not support projects that have positive spillovers because of other factors like the cost of production and allocation of funds. For example in the case of new orleans flood walls the repair of it was postponed because it would have created higher taxes and withdrawn money used to produce other goods A role for Government: - Government intervention and action is greatly increased when dealing with spillovers of both types - Charging individual firms or producers for their spillover effects is unrealistic because there are way too many producers spread throughout the market therefore we can never assign exact costs or benefits for specific named firms. - THEREFORE, governments generalize laws, taxes and subsidies to deal with spillovers on a larger scale to try to cover everyone. 7.3 The Role of Government Ensuring Competition 3 ways to maintain a competitive market Breaking Up Monopolies Trusts: combinations of firms designed to restrict competition or control prices in a particular industry In the late 1800s competition was threatened by trusts Standard Oil Company - owned by John D Rockefeller - controlled 90% of the domestic oil industry. Because of its size and power it could set any price it wanted for its product The government tried to restore competition in 1890 by passing the sherman antitrust act The sherman antitrust act : protects trade and commerce against unlawful restraint and monopoly” Standard Oil was sued under the Sherman Act and after the case reached the supreme court in 1911 was forced to break up into 34 separate companies. Preventing Monopolies from Forming Clayton antitrust act: outlawed price discrimination - selling the same product to different consumers at prices to lessen competition. The federal trade commission act: enforces the clayton antitrust act. The federal trade commission act set up the federal trade commission ( FTC) It gave the FTC permission to issue cease and desist orders. Cease and desist order: FTC ruling requiring a company to stop unfair business practice like price fixing which reduces competition Robinson-Patman act: strengthens the clayton act in where it deals with prince discrimination. Under this act companies could no longer offer special discounts to some customers while denying them to others Regulating Existing Monopolies Not all monopolies are bad, and not all should be broken up Firms can benefit from economies of scale Economies of scale : a situation in which the average cost of production falls as the firm gets larger If natural monopolies can benefit from these economies, it makes sense for the government to let the firm expand while regulating to ensure no unfair advantage occurs Local and state economies regulae many monopolies such as: - Cable television companies - Water and electric utilities If these monopolies that are regulated want to raise their price or engage in monopoly activity, it MUST argue its case before a commission or government agency to ensure proper regulation. Competition, Consumer Protection, and Regulation Prompting Transparency Transparency: information and actions are not hidden instead are easily available for review Public disclosure: requirement that business reveal certain information to the public If one wants information on a company they can check with the Securities and Exchange commission (SEC) The SEC requires corporations that sell stock to the public to disclose financial information on a regular basis to its shareholders and the SEC The information is public on the internet Disclosure requirements also exist for consumer lending. If you are lending something the lender must explain everything about the loan in writing. This happens because federal law require it to happen Truth-in-advertising laws enforced by the Federal Trade Commission (FTC) prevent sellers from making false claims about their products Consumer Financial Protection Mortgage: legal document that pledges ownership of a home to a lender as security for repayment of borrowed money (i will own your home if u dont pay the money for it i will take it back) Foreclosure: a lender reclaims a home because the borrowers has defaulted ( stopped paying) on agreed-upon payments (you didn't pay now i take home back) In the great recession of 2008-2009 millions of low-quality home mortgages ( mortgages given to people who can actually pay) where given out and this caused millions of people to lose their home and bank lost billions which pulled the economy down To stop something like this from happening again the Consumer Financial Protection Bureau was created Consumer Financial Protection Bureau( CFPB): regulates consumer protection for mortgages, credit cards,debt collectors, payday lenders and other consumer financial products. Things the CFPB did Ability to repay rule - assures both borrowers and lenders of reliable mortgage conditions Prescribing rules for debt collection policies Issuing guidance to debt collectors Federal Regulatory Agencies in Our Lives (DON'T NEED TO KNOW ALL JUST USE FOR IDEAS)  National Weather Service Reports: Provides weather forecasts and alerts to the public. NHTSA Automobile Recalls: National Highway Traffic Safety Administration issues recalls to ensure vehicle safety (e.g., faulty airbags or brakes). High-Profile Product Recalls: Common recalls involve baby cribs or car seats that fail to protect children, leading to potential risks. FDA Food Product Recalls: Food recalls are often due to contamination, such as E. coli, by the Food and Drug Administration to protect public health. Less-known Federal Agency Activities: FDIC Bank Audits: The Federal Deposit Insurance Corporation audits banks to ensure they operate safely and securely. FAA Airport and Pilot Oversight: The Federal Aviation Administration conducts airport inspections and oversees pilot training programs to maintain aviation safety. FTC Blocking Mergers: The Federal Trade Commission prevents mergers (e.g., Microsoft and Yahoo!) to avoid unfair market advantages that could hurt competition. Zoning and other Local Ordinances Zoning: A system for controlling land use in municipalities, to promote public health, safety, and welfare. Zoning divides land into parcels with specific regulations for residential, commercial, and industrial use. Impact of Local Regulations: Local government regulations, like federal ones, significantly affect daily life and community development. Residential Zoning: Designed to preserve neighborhood characteristics. Regulates minimum lot sizes and maximum building heights and sizes for homes. Commercial Zoning: Specifies types and sizes of retail establishments and parking requirements for commercial areas.  Industrial Zoning: Allows for manufacturing facilities, including regulations for medium to heavy industry and rail access. Zoning Challenges: Cities evolve, but zoning laws may not adapt, resulting in outdated regulations that do not meet current needs (e.g., urban decline due to population flight). Resistance to zoning changes may stem from fear of further change or the belief that zoning restricts personal freedom. Modified Free Enterprise What is the Modified Free enterprise system: The modified free enterprise system is an economic system where businesses and individuals have the freedom to make their own choices, but the government steps in with rules and regulations to keep things fair, protect consumers, and prevent problems like monopolies. It's a mix of free markets and government control to make sure the economy runs smoothly and benefits everyone. Market Failures and Monopolies: In the late 1800s, unchecked competition allowed powerful firms to dominate markets, creating monopolies and reducing competition. This led to exploitation of smaller businesses and workers, and overall inefficiency in the economy. Government intervention was necessary to prevent these monopolies ("evil monopolies") and protect market fairness. Protection of Consumer and Worker Rights: Without regulation, consumers were exposed to false advertising, harmful products, and price gouging, especially in essential services like utilities. Laws were enacted to regulate industries and ensure consumer safety (e.g., food and drug laws) and to protect workers’ rights. This created a need for a system where the government can oversee certain economic activities. Promoting Competition and Efficiency: While free markets are vital for innovation and choice, they can sometimes fail to address all societal needs, such as public goods or transparency in transactions. The government steps in to ensure these needs are met and to keep markets reasonably competitive by preventing anti-competitive behavior and promoting efficiency. Concerns about modified free enterprise system: There is ongoing debate about whether government regulation in the economy stifles innovation and freedom or is necessary to prevent market failures and ensure fairness and stability. MEMORISE BY HEARTTTT!!!!!  Vocabulary For Midterms Market structure Pure competition Industry Perfect competition Monopolistic competition Product differentiation Non-price competition Oligopoly Collusion Price-fixing Monopoly Laissez -faire Natural monopoly Geographic monopoly Technological monopoly Government monopoly Market failure Public goods Spillover effect Externalities Cost-benefit analysis Trusts Price discrimination Economies of scale Transparency Public discourse Mortgage Foreclosure The sherman antitrust act Clayton antitrust act: Robinson-Patman act: Modified free enterprise system Interstate commerce commission (ICC) Federal reserve system (FRS) Federal deposit insurance corporation (FDIC) Securities and Exchange Commission (NRC) National labor relations board (NLRB) Nuclear Regulatory commission ( NRC) Federal Energy regulatory commission ( FERC) Consumer financial Protection Bureau (CFPB)