Recently in Microeconomics Category

Naked Economics - Chapter #4 - "Government and the Economy, II"

We didn't talk much about this Friday, so I'll repost it here. While our focus will be on review, we'll take a few comments here if people have things to say.

• Department of Motor Vehicles
• US Postal Service 
• Margarita Space Pak
• Soviet Union - command economies
• regulation
• dead weight loss
• taxes

• Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?
• How much monopoly is too much? (In what ways are monopolies beneficial?)
• Should the government work harder to regulate potential monopolies?
• If you were trying to gain a monopoly, how would you work to limit competition?
• Are oligopolies necessarily bad for an economy? Why or why not?
• How is product differentiation achieved? What methods do you believe are most effective?
• Which market structure do you believe is best for consumers?

Sample Business Plans: There's no great insight here, but I thought this was kind of interesting. "Moot Corp. Competition," also known as the "Super Bowl of Business Plan Competition," invites business students to submit "plans" for a fictional business. In addition to giving you a chance to see what a plan might look like, some of these are just plain interesting ideas.

Do this: Choose one of the plans listed at the link above. Read through it to get an idea about the good/service and the plan for selling it. We'll have you share your quick impressions about these with the rest of us.

I'm happy to spend the remaining time helping anyone with review and/or getting caught from absences.

Homework for next session - Monday, November 17th

We'll have you take the Microeconomics quiz on Monday after we do some reviewing. There will be multiple choice questions and some basic graphs/problems. Remember that there is a review page posted on the blog.

Your Blog Entry #4 should be posted before class time begins on Tuesday, November 18th.

Chapter #5 of Naked Economics, "Economics of Information," should be read before the start of class on Wednesday.

We'll look at different types of businesses and the markets in which they compete today. On Monday, November 17th, you'll take our quiz on microeconomics. I'll have more information about that yet this week, and we'll also be sure to get a terms list posted for you.

You were asked to have Chapter 3 from Naked Economics, "Government and the Economy," read for today. I'm interested in hearing what you thought about that. If you need some reminders, here are twelve things we could talk about:

• SUVs
• dog poop
• crying babies
• cigarettes
• taxing externalities
• good and bad government
• copyright law
• pharmaceutical companies
• Indians: South Asian justice and American real estate
• public goods
• free riders
• redistributing wealth

You were asked to put your newly found business skills to work analyzing "Andrea's Software Business" from a handout. Let's make sure that worked out for everyone.

Here is a useful web page illustrating these ideas: Costs: Fixed, Variable, and Sunk. Let's look here for a minute.

Types of Business: We'll finally look at the various classifications of businesses that you find in the economy. This matrix will help you fill in the necessary information, especially since I've now posted this three straight days...

Competition - Market Structures: You were asked to begin our look at various competition models with a quick activity. Let's talk about the reading/ chart of the various market structures. We'll expand upon that beginning with some additional information and examples.

These characteristics help determine the market structure for a given good:

• number of firms in the industry
• the presence (or absence) of product differentiation
• ability (or lack of ability) of any or all firms to influence the market price

Perfect competition: This is a theoretical market structure, but it is very closely approximated in an industry like agriculture. Here are the characteristics of perfect (or "pure") competition:

• There are numerous sellers in the market, all selling identical products. This means there are no quality differences, no brand names, no need for advertising, etc.
• There is free entry into and exit from the market. Anyone who desires to produce and sell goods in a given market can do so.
• No individual seller or buyer can influence market price. It is instead determined by market supply and demand. Firms in perfect competition are "price takers."
• All sellers and buyers are informed about markets and prices. Cost advantages will not remain secret for long...

In perfect competition, economic profits tend to be low because of the ease with which firms can enter the industry. Short term profits will attract more firms.

Monopolistic Competition: This is a market structure in which relatively many firms supply similar but differentiated products, with each firm having a limited degree of control over price.

• Product differentiation is the major characteristic. This is the practice of establishing real or imagined characteristics that identify a firm's product as unique.
• Profits tend to be minimized as a lot of money is spent on packaging, advertising, etc. It is also relatively easy for firms to enter the market.

Oligopoly: This is a market structure in which relatively few firms produce identical or similar products.

• The actions of any one firm in terms of price and output will be noticeable by others.
• There is interdependence among firms in setting their pricing policies.
• Firms may be reluctant to engage in price competition because of the possible reaction of competitors. Product differentiation is more often used. Firms may also rely on collusion or practice "price leadership."

Cartels are organizations of independent firms that agree to operate as a shared monopoly by limiting production and charging the monopoly price.

Monopoly: This is the market structure in which only one producer or seller exists for a product that has no close substitutes. The only true monopolies that exist in our country today are probably some government-regulated public utilities.

• The seller holds a large degree of control over price. The monopolist is a "price maker."
• The key to obtaining and maintaining a monopoly lies in erecting barriers to the entry of other firms into the industry.
• Sources of monopoly:
• Economies of scale
• There are some "natural monopolies" like bus companies and public utilities.
• Control of raw materials can lead to a monopoly. (For example, ALCOA controlled almost all the world's bauxite.)
• Patents- These give the exclusive rights to use, keep, or sell an invention for a period of years.
• Competitive tactics- These would include pirating, pressuring, and predatory pricing.

Anti-trust legislation: As you probably learned in history, the federal government has passed a series of laws designed to maintain competition and prevent restraint of trade.

• Sherman Antitrust Act of 1890 - outlawed restraint of trade and attempts to monopolize
• Clayton Act of 1914 - outlawed certain business activities including price discrimination, tying contracts, exclusive dealings, interlocking directorates
• Federal Trade Commission Act of 1914 - created an organization to police unfair business practices

Questions to Discuss:

• Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?
• How much monopoly is too much? (In what ways are monopolies beneficial?)
• Should the government work harder to regulate potential monopolies?
• If you were trying to gain a monopoly, how would you work to limit competition?
• Are oligopolies necessarily bad for an economy? Why or why not?
• How is product differentiation achieved? What methods do you believe are most effective?
• Which market structure do you believe is best for consumers?

Homework for tomorrow - Thursday, November 13th

Your Blog Entry #3 - Naked Economics is due to be posted before the start of class time on Thursday. 

Please have Chapter #4 of Naked Economics read for Friday's class. 

We spent quite a bit of time yesterday with the election and its aftermath. That's fine, as we'll still have time to wrap up supply and demand today. Our focus will shift to the world of business next week.

You were asked to have Chapter 2, "Incentives Matter," in Naked Economics read for yesterday, but we didn't get there. We'll see what you found interesting and/or enlightening in here.

Your Blog Entry #2 was to be posted by class time today, but I extended the deadline to 6 PM on Sunday since we didn't talk about the chapter yesterday at all.

Online Simulation on Supply and Demand: The University of Omaha has done a neat on-line "tutorial" as well as their Exploring Supply and Demand quiz. Now would be a good time to chat about either of those if you have any questions.

Solid job with the prompts yesterday. I'm going to give you a slightly more challenging set of examples here called, "Going Bananas." 

Review Problems: It's your turn. You and a partner have five minutes to come up with one or more situations for your classmates to work through. The more terms and concepts you can incorporate, the better. Remember to be informa