ECONOMICS 200 PRINCIPLES OF MICROECONOMICS

1. ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

2. Economic Efficiency and Public Policy Two Types of Efficiency (1) Productive Efficiency – Requires minimizing cost Production Efficiency! – Firms will produce at the minimum points of their long & short run ATC curve. – MC of last unit of production should be the same for all firms in industry. * (This insures that the total industry is cost-minimizing).

3. Economic Efficiency and Public Policy Get productive efficiency under perfect competition. – not guaranteed under monopoly and oligopoly. – won’t get it under monopolistic competition. Perfect Competition Is Efficient...

4. Economic Efficiency and Public Policy Two Types of Efficiency (2) Allocative Efficiency Pareto Optimality – A situation where you can’t make someone better off without making someone else worse off. – occurs when the MC of producing a commodity is equal to its price. – If P = MC, then the value consumers place on a commodity equals value of resources that go into its production.  get allocative efficiency only under perfect competition.

5. P S P* D Q Producer Surplus The difference between the price a producer is willing to supply a commodity for and the price the producer actually gets. Producer Surplus

6. CS PS Another Undesirable Feature of Monopoly Deadweight Loss •Sum of CS + PS is maximized in perfectly competitive industry at Qo. CS deadweight loss PS – If you produce at Q1, you will lose some of the surplus area. CS = Consumer Surplus, PS = Producer Surplus

7. P MC (monopoly) =S(competition) F A PM PC C B D D QM QC Q 0 MR Competitive Industry That Gets Monopolized with Competition: QC, PC with Monopoly : QM, PM LOSSES: 1. Consumers lose ABC. 2. Producers lose DBC. 3. Consumer surplus under competition was PCFC. Consumer surplus under monopoly is PMFA. 4. PCPMAB is transferred from consumers to producers. 5. DAC is Deadweight Loss: a loss that is nobody’s gain.

8. Natural Monopoly An industry where economies of scale are so important that there is only room for one firm operating efficiently (i.e. with very low ATC). P3 ATC P2 MC P1 D 0 Q1 Q2 Q3 Q MR Unregulated Monopoly : Q1, P3 Regulated to MC-Pricing: Q3, P1  Problem Regulated to AC-Pricing : Q2, P2

9. Natural Monopoly Regulations state that firms should make a “fair rate of return” on their invested capital. Denominator is called “Rate Base”. Issue is : Replacement price versus purchase price. *Firms usually prefer replacement price.

10. Antitrust Policy 1. Sherman Antitrust Act of 1890 Outlawed all “combinations and conspiracies which are a restraint on trade.” 2. Clayton Act of 1914 (a) Put limitations on price discrimination, interlocking directorates, and buying up the stock of a competitors. (b) Excluded unions from antitrust prosecution. 3. Federal Trade Commission Act of 1914 Established the Federal Trade Commission to oversee antitrust investigations and make recommendations to the Justice Department. * Conglomerate mergers (across industries) fall between the cracks of antitrust.

11. THANK YOU! HAVE A NICE DAY.