Unit 2 (lecture notes) PDF

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Lecture notes throughout the course of the whole semester. ECON1 Ghuloum...

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Monday, November 15, 2021!

Exam 3 Chapter 11: Perfect Competition!

- A market structure describes the characteristics and organization of a particular market !

• Market: buyers and sellers trading goods and services for money ! - The market does not have to be physical! - Ex. Amazon, eBay, stock exchange, foreign exchange market ! - Market power: the ability for a firm to profitably raise their price above the cost of producing the good! Infinite number of buyers and sellers! Monopoly = 1 seller (unique product)! Barrier to entry: factor which makes it difficult for new firms to enter the industry !

- what if a new firm wanted to compete with Facebook?! - Examples of perfect competition! - Farmers Market! - Demand curve that’s flat (perfectly elastic)! The closer you get to the monopoly the steeper the demand curve!

- Stocks are perfect competition! - Lots of buyers and sellers of shares of amazon! - Sellers are price takers not the price makers! - Market price comes from supply and demand!

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In perfect competition, what price do sellers charge? Take the market price! What is the optimal to produce for a firm in a perfect competition? ! Can firms in perfect competition make long run profits?! When should firms enter and exit the industry?! What quality should one of those independents owned oil drillers produce?! Total revenue = quantity x price! The optimal quantity of production always occurs where Marginal revenue equals marginal cost!

- total profit will be maximized at this point! Chapter 13: Monopoly ! The second market structure that were going to talk about! First: Perfect Competition! Second: Monopoly!

- market structure describes the organization and characteristics of a market ! - What price will firms charge in various market structures?! - How efficient are these structures from societies perspective?! - What quantity will they produce?$ how much profit can firms make in the short run and long run?!

- When will firms enter and exit particular industries! Identical product! Infinite amount of buyers and sellers! No barriers to entry!

Barries to entry: High startup costs or other obstacles that precent new competitors from entering an industry!

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Chapter 14! Price Discrimination - charging different prices to different customers for the same goods or services! (Special kind of monopoly)!

- single price monopolist, monopolist charges the price which maximizes profit and finds that point by setting MR=MC! Combivir- Pharmaceutical made by GSK that was a life saving drug if you had HIV! $12.50 Huge Markup ! It costs 0.50 cents to make ! They have a patent, insurance companies are paying for it, barriers to entry so they charge a huge markup!

- they were only charging 12.50 in certain markets! - In USA and Europe they were charging 12.50 ! - In the African market they were charging 2 dollars a pill! - Africa has a lower income ! - They charge USA and Europe higher than Africa because people in Africa can’t afford it for 12 dollars and they wouldn’t get business! What kind of relationship is there between income and demand !

- Positive - when you have greater income you have a greater ability to pay for something!

- Negative! - Strained! - Abusive! - Toxic ! USA has a greater income snd greater demand, Africa has lower income and less of a demand!

Determinants of Elasticity of Demand! 4

- substitues ! - Time period under consideration! - Large fraction or small fraction! - Necessity or a luxury ! Smaller share of income in USA! Salt is inelastic !

Price discrimination examples:! 1. Coupons ! 2. Student discounts! 3. Airlines !

Chapter 15 ! Cartles- group of suppliers that try to act as if they were a monopoly by cutting supply drive prices up and increase profits! Famous cartels: drug cartels of mexico and Columbia ! OPEC: organization of petroleum exporting countries! If you can successfully maintain a cartel it will increase the profits of the cartel members! The problem is cartels are very hard to maintain because there is an incentive to cheat on the agreement

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