ECON 101 Final Review Slides

ECON 101 Final Review Slides - ECON 101 FINAL Agenda...

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Unformatted text preview: ECON 101 FINAL Agenda Chapter 6: Markets in Action Chapter 13: Monopoly Chapter 14: Monopolistic Competition Chapter 15: Oligopoly 6. Markets in Action • Price ceiling – Illegal to trade above a certain price – Eg. Rent ceiling • Price floor – Illegal to trade below a certain price – Eg. Minimum wage 6. Markets in Action Q1. A price ceiling that is set below the equilibrium price will result in a) Excess supply b) Excess demand c) Increase in supply d) Decrease in demand 6. Markets in Action Q1. A price ceiling that is set below the equilibrium price will result in a) Excess supply b) Excess demand c) Increase in supply d) Decrease in demand 6. Markets in Action • Housing Markets and Rent Ceilings – Search activity -> increased opportunity cost – Black market -> higher cost than unregulated cost 6. Markets in Action • Is rent ceiling fair? – Inefficiency in the market – Blocks voluntary exchange – Allocates scarce housing based on: • Lottery • First-come, first-served • Discrimination 6. Markets in Action • Minimum wage – Increased job search -> inefficiency – Black job market 6. Markets in Action • Taxes – Who really pays for them? • Tax incidence – Division of burden of a tax between buyers and sellers – Price rise by full amount of tax -> buyers pay – Price rise by less than amount of tax -> buyers and sellers share – Prise does not rise -> sellers pay 6. Markets in Action • Tax on sellers and tax on buyers has the same effect • We cannot change the tax incidence • In this case: $1 tax on buyers, $0.50 tax on sellers 6. Markets in Action • So what determines who really pays the tax? • Perfectly inelastic demand -> price increases -> buyers pay • Perfectly elastic demand -> price unaffected -> sellers pay 13. Monopoly • Market power: ability to influence market price and total quantity offered for sale • Perfect competition: all firms are price takers, share market power • Monopoly: one supplier has absolute market power 13. Monopoly • How monopoly arises: – No close subsitutes – Barriers to entry: legal or natural constraints to protect a firm from potential competitors – Legal barrier: entry to a market is restricted; public franchise (Canada Post), government license (law or medicine professionals), patent and copyright – Natural barrier: entry to a market is inefficient, one firm can supply the entire market at a lower price than two or more firms can 13. Monopoly • Example of natural barrier: One firm can produce at 5 cents per KwH, two firms can produce at 10 cents per kwH, four firms can produce at 15 cents per KwH 13. Monopoly • Monopoly price-setting strategies: – Price discrimination: selling different units of a good or service for different prices – Single price monpoly: selling each unit for the same price 13. Monopoly • Single-price monpoly strategy: – A monopoly is a price setter – Monopoly’s demand curve is the market demand curve – To sell a larger output, monopoly must set a lower price 13. Monopoly • P = a-bQ • R = PQ = (a-bQ)Q = aQ – bQ^2 • MR = dR/dQ = a -2bQ 13. Monopoly • Optimal price and quantity is when marginal revenue is zero 13. Monopoly 13....
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ECON 101 Final Review Slides - ECON 101 FINAL Agenda...

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