ECONONE – FINALS REVIEWER Market Failure
- When left left in the the hands of househo households lds and rms, market is ineective - Occurs when when there there is a misallocation misallocation of resources, resulting to wastage and loss of value - Benign Benign and benevolent benevolent govern government ment must intervene SOUR!S O" #$R%!& "$'(UR! )* !+istence of ublic oods !+cludable
.on e+cludable
Riva rivate goods l e+/ food, homes
ommon goods e+/ hos0itals ublic goods e+/ 0rivateoogle, ta+ based- human rights
.on (ow-congestion goods e+/ wi, Riva cable &1 l
!+cludable 2 3as a 0rice .on-!+cludable 2 "ree Rival 2 onsumed individuall4 .on-Rival 2 onsumed b4 grou0s of 0eo0le ublics oods 2 3igh in demand, no su00l4 overnment5s Role 2 rivate rms don5t want to 0roduce these goods because the4 will not earn6 overnment must 0roduce
7* !+terna !+ternaliti lities es 2 costs costs 8 benet benets s e+ternal to the transaction !+am0le/ roduction rivate osts 2 Rent, wage, interest, 0rot !+ternalities 2 ollution, waste 9aka social costs: overnment5s Role 2 "orce rms to internali;e costs6 regulation !+am0le/ &a+ 0olluting rms, green tech
<* 'm0erfect 'm0erfect 'nformat 'nformation ion 2 leads leads to to disadvantageous transactions a* .o infor informa matio tion n availa available ble b* 'nformat 'nformation ion avai availabl lable e at a cost cost c* =isinf =isinfor orma matio tion>W n>Wro rong ng information overnment5s Role 2 rovide accurate information, no false advertising
?* 'm0erfection 'm0erfecti on #arket Structure 2 When individual rms have some control over 0rice of their out0ut #arket ower 2 $bilit4 to raise 0rices without losing all demand overnment5s Role 2 'ntroduce com0etition
C.O&!/ O#U&$&'O.SC O#U&$&'O.SC #ono0ol4 1S erfect om0etition #ono0olies have less goods at a higher 0rice Perfect Competition i*
om0o om0os sed of man4 rms rms and consumers, each too small to aect the market 0rice 3omo 3omoge gene neou ous> s>'d 'den enti tica call good goods s .o ent entr4 r4 or e+it ba barriers iers erfe rfect infor format mation ion
ii* ii* iii iii* iv*
'm0lications 3ori;ontal demand curve rot ma+imi;ing condition @ # @ #R
Monopoly
Oligopoly i*
"ew rms rms whic which h ar are lar large ge enou enough gh to aect the 0rices of goods ii* ii* ood oods s can can be homo homoge gene neou ous s or dierentiated>substituted iii* iii* Behav Behavior ior of of ) rm rm de0en de0ends ds on the the behavior of other rms in industr4 iv* iv* Strive Strive to be mono0o mono0olie lies s MODELS of BEHAVIOR
)* oll ollus usio ion n #ode #odell "irms agree to oer same 0rice, act as if mono0ol4 =ownwards slo0ing demand curve #R @ # Out0ut is controlled 'ncentives to collude/ a* =ecre =ecreas ased ed com0et com0etit ition ion 8 uncertaint4 @ higher 0rots b* "acilitat acilitation ion of new entra entrants nts Success factors/ a* =emand =emand for for 0rodu 0roduct ct must must be be inelastic 9basic goods: b* $ll 0roduce 0roducers rs must must agree agree to to coo0erate and 0la4 b4 the rules artels 2 su00liers that o 0ur0osel4 maintain 0rices at high levels and restrict com0etition 7* our ourno nott #ode #odell =uo0ol4 a* 7 rms in the market which each take the out0ut of the other as a given, wherein #R @ #
i*
Sing Single le rm rm 0rod 0roduc ucin ing g a good good whic which h has no close substitutes !+am0le/ $ir0lane ars and>or boats are forms of trans0ortation too but not are not close
ii* ii*
Sign Signi ica cant nt entr4 ntr4 bar barrier riers s a* over overnme nment nt "ran "ranchi chise se #ore eAcient for one rm to 0roduce a 0articular good overnment wants to remain in control of 0roduct>market b* atents atents 2 rant rants s e+clus e+clusive ive use use of 0roduct>service to inventor c* !con !conom omie ies s of of Sca Scale le d* Ownershi Ownershi0 0 of Scarce Scarce Resou Resource rces s iii* "irm5s irm5s deman demand d curve curve is is downwa downwards rds slo0ing curve of market 9one and the same curve: iv* #R @ # v* &o sel selll mor more, e, #R rice must decrease to increase demand
o
"or ever4 )DD restaurants oke gets ED 8 e0si gets ?D #ono0ol4 in their own markets
'nformation 'nformation of how o00onents are HleaningI ma4 be available
F*)* =ominant Strateg4 2 Best strateg4 no matter what o00osition does F*7* .ash !Juilibrium 2 When all 0la4ers>rms use their best strateg4 given what their com0etitors are doing
<* %ink %inked =ema =emand nd urv urve e Other rms will onl4 change 0rice when there is a decrease, not when there is increase
F*<* #a+imin Strateg4 2 Strateg4 that ma+imi;es the minimum game that can be earned Monopolistic Competition i* ii* ii* iii* iv* iv*
?* rice rice (ead (eaders ershi0 hi0 One rm dominates and controls industr4 8 0rices Bigger rm @ economies of scale @ discounts @ lower average costs @ lower 0rices (eading rm can drive out smaller rms b4 drasticall4 decreasing 0rice !+am0le/ S8R, Walmart
om0 om0ri rise sed d of of a larg large e num numbe berr of of rm rms s .o ent entr4 r4 bar barrie riers #R @ # &here &here is 0roduct 0roduct dierenti dierentiati ation on a* $llows $llows rms rms to control control 0rices 0rices b* oods are are substi substituta tutable ble but but not not homogeneous !+am0le/ )FD h0 shirt from =ivisoria 1S )F,DDD h0 shirt from (acoste .ote/ $dvertising is im0ortant
RO=U& ='""!R!.&'$&'O. ros/
F* ame ame &heo &heor4 r4 'n all conGicts, there are decision makers, rules, and 0a4os la4ers choose strategies without knowing o00onent5s strateg4
)* ives ives mark market et 0ower 0ower to rms rms 7* Satises Satises enormous enormous range range of of 0references <* !nsures !nsures high high Jual Jualit4 it4 8 eAcien eAcientt 0roduction ?* rovid rovides es consume consumers rs with with valuabl valuable e information on 0roduct availabilit4, Juantit4, and 0rice ons/ )* Source Source of of ineAcie ineAcienc4 nc4 and wast waste e 7* Rais Raises es cost costs s
<* Usuall4 Usuall4 lack lack of informa information tion ?* #a4 serve serve as as a barrier barrier to entr4 entr4