12.08.08 - ECONOMICS 1 Professor Kenneth Train 12/08/08...

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ECONOMICS 1 Professor Kenneth Train 12/08/08 Lecture 29 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. ANNOUNCEMENTS The final will be on Monday, December 15 from 5-8 PM. LECTURE Our final exam is a week from today, so our last lecture is today. I don’t think there will be any surprises. Are there any questions? Student : Will it cover everything since the last exam, or the entire course? The final will be for the whole course but there will be more of what we have covered since the midterm. Student : Will you be having office hours on Wednesday? Yes, and also next Monday. Student : Is the final here? No, there’s a listing of where it is. I’m not actually sure where. REVIEW Okay, so we’ll be doing a review today. It should be like common sense, and like the course I’ll be going through microeconomics and then macroeconomics. MICROECONOMICS COMPETITION - Free entry and exit - Firm cannot affect market price The mainstay of microeconomics is competition and its benefits, but it’s hard to see where the benefits come from. One of the factors that lead to competition is free entry and exit. Free entry is an extremely important force for pushing costs down. It implies that in equilibrium free entry and exit pushes costs down to average cost. Free entry and exit means P = AC Why enter a market if you earn zero profit? When entry occurs it drives prices down, and prices get driven down further and further (as long as they’re high enough to attract new entry) until it drops so much that firms decide to leave. It’s not like they’re making no profit, it’s just that if they made any less they would leave the industry. The second thing is that in business school you learn how to make profits. In economics we talk about zero profits. How does that work? They complement each other. In business school you learn how to make new opportunities arise; it’s the entrepreneurship that shows you how to make new profits.
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 12/8/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 Firms cannot affect market price Another effect of competition is that firms can’t affect price, making price equal marginal cost. This is often misstated as “Firms price at marginal cost.” That statement is contradictory; firms do not set price. And if they did, they would price above marginal cost. All the firm does is decide how much to produce. It chooses an output level and produces more and more until marginal cost equals price. The
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12.08.08 - ECONOMICS 1 Professor Kenneth Train 12/08/08...

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