09.17.08 - ECONOMICS 1 Professor Train 9/17/08 Lecture 6...

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ECONOMICS 1 Professor Train 9/17/08 Lecture 6 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Today we are going to talk about competition. Competition is a mainstay of Western civilization: our political and economic systems are established in belief in its efficiency. But many people don’t know why that’s true! We have firms trying to maximize their own profits, consumers trying to make themselves happy—and somehow that produces a standing that’s socially optimal. It’s truly amazing. I should say that after we talk about competition, we’re going to spend every other lecture in Microeconomics looking at what goes wrong in markets. There are some situations in which government should intervene because competition won’t right the market. But let us recognize, first, the amazing power of free markets. CONDITIONS FOR COMPETITION Where will competition arise? In situations with: - Many small firms - Homogeneous product - Free entry and exit - All firms face same costs 1. Many small firms First, you need to have many small firms. “Small” means that no one firm determines the market price. 2. Homogeneous product Homogeneous product means just what it says: “same product.” Each firm is creating exactly the same product. What does that mean? Ask if any consumer would be willing to pay more for one than the other. If the answer is yes, it’s not homogeneous. Homogeneous implies that a consumer always buys the cheaper one. 3. Free entry and exit Third is free entry and exit. This means that firms can come in and leave the industry freely. This doesn’t mean that it is costless: there’s still fixed costs, variable costs, etc. What we mean by “free” is that a firm coming into the industry doesn’t face a disadvantage compared to existing firms. An example would be sodas, like Pepsi and Coke. This market does not show free entry and exit because if a new firm came in it would face a huge cost—marketing. Gaining the same name- recognition equal to Pepsi and Coke would take a lot of resources. These kinds of barriers to entry make it hard to compete. 4. All firms face the same cost “Same cost” means that everyone has the same access to technologies; there are no patents, for example, holding any firm back. Seeing these conditions, it is rare that any pure competition still exists. But it does! Wholesale milk is an example. Wheat is another. Another one is electronics: TVs, microwaves, DVD players. It’s easy to get into that industry: the products are
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents
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09.17.08 - ECONOMICS 1 Professor Train 9/17/08 Lecture 6...

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