Economics Review Paper

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Economics 101
Fall 2006
The Final Review Sheet (Prof. Kelly)

Note: This is a list of important and key points for topics after the second midterm. This list should be used together with the previous two review lists as the final will be cumulative. As before, these review sheets should serve as a checklist for you to see whether you have studied everything you need to for the final. To do well in the final, you should focus on your lecture and section notes, as well as the practice questions. Good luck in your study!

MONOPOLY

1. Definition and fundamental sources of Monopoly.
---Barriers to entry (examples?):
a. exclusive ownership of a key resource;
b. exclusive right assigned by the government;
c. economies of scale;
d. threat of force or sabotage.

2. Natural Monopoly.
---arises where it’s more efficient for a single firm to serve the society. (Examples? What will happen if we have more than one firm in the market?)

3. Profit Maximization Condition (for a single-price monopoly): MR=MC. a. The demand curve facing a monopoly is the same as the industry demand curve; b. MC and ATC are similar to those for perfectly competitive firms; c. MR is less than the price: MR oligopoly price > competitive price. d. the size of an oligopoly: an oligopolistic market looks MORE like a competitive market if there are MORE sellers in the oligopoly!

4. Some Game Theory.
a. Definition--- a situation where the players or participants' payoffs depend both on own actions as well as on rival's actions.; b. Four elements to describe a game.
1. players;
2. rules: when each player moves, what actions are possible, what is known to each player at the moment they move…; 3. outcomes;
4. payoffs as a function of the outcomes.
c. Dominant Strategy;

IMPORTANT EXAMPLE: Prisoner’s Dilemma! (Definition? What real-life situations can be represented as a prisoner’s dilemma game?)

d. public policy toward oligopolies.
---restraint of trade;
---the Antitrust laws;
---controversies over Antitrust Policy.

MONOPOLISTIC COMPETITION

1. Definition---a market structure where many firms sell products that are similar but not identical.

2. Characteristics:
a. Many Sellers;
b. Product Differentiation;
c. Free Entry.

Note: you need to contrast these to those in perfect competition!

3. Short-Run.
---product differentiation gives the seller in a monopolistically competitive market some ability to control the price of its product.

4. Long-Run (free entry).
a. price exceeds marginal cost (Why?);
b. price equals ATC.
---firms in monopolistic competition also earn zero economic profit as in perfect competition. (Question: why a firm will continue to operate if it is earning “ONLY” zero economic profit?)

5. Monopolistic Competition VS. Perfect competition.
a. Excess Capacity;
b. Markup over MC.

6. Welfare of Monopolistic Competition.
---inefficiency:
a. one source is the markup of price over MC;
b. another source is the externality effects from entry (the product-variety externality and the business-stealing externality).

FACTOR MARKETS
We considered only the labor market (our work here could be extended to other types of factor markets). Important assumptions: labor market is competitive, product market is competitive.

Firms will hire labor up to that point where the marginal cost of hiring an additional unit of labor is equal to the additional revenue that the firm gets from hiring that additional unit of labor. The firm thus needs to equate the marginal factor cost (MFC) to the marginal revenue product of labor (MRPL) and hire that amount of labor where these two are equal. The marginal revenue product of labor is found by multiplying the marginal revenue from selling additional units of the good (in the case of a firm in a perfectly competitive industry the marginal revenue is equal to the price of the product) times the marginal product of the unit of labor....
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