ECO 360 1st Midterm Study Guide
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b) 2 issues addressed by William lewis in the Power of Productivity
1) -undistorted competition in the product market
- in order to have a healthy economy, the most productive firms should win
- more productive firms expand and take market shares,overall productivity of the country increases.
- less productive firms go out of business or increase productivity.
-Competition makes productivity increase,
-less intense competition, slower productivity growth.
-Market distortions explain difference between GDP per capita of US and other rich countries
2)-Innovations, allow innovators to make more profits, invest more, take market share away from
competitors, profits will return to normal after a period, in which the level of productivity is at a higher
3)-Too much government influence restricts productivity growth
-Protection of less productive firms is a regular occurrence in industrial countries such as France,
Germany and Japan.
-best practice retailers are prevented from expanding as fast as they can thus, productivity growth is
-Too much government influence has proved that old factories and companies are protected against
bankruptcy while they keep productivity at a minimum.
Unsuccessful owners be allowed to fail and workers have to find new jobs.
-Product market distortions are much more important than labor market distortions.
-govt tax heavily on legitimate business as part of economy is informal
c) role played by investment in economic infrastructure-^}v(}Z}o}vP]}v_
-when multiplier is in downturn, there is something needed for prolonged depression in the long waves
cycle, social overhead investment is completed, thus there is no additional investment needed
-when the Kondratieff cycle enters prosperity, replacement investment of SOHD type 1-direct
infrastructure investment, req. For basic plants to get going, type 2 investment-whole economy
expands, multiplier pushes, demand for infrastructure investment increases, swarm of investment, cycle
-at recession stage of the cycle, little investment in sohd
d) significance of the model of the kinked demand curve
-oligopolist faces downward sloping demand curve
-Assumptions: firms want to maintain high level of profit and market share, rival assumed to follow price
cut but not price increase, MC cuts MR
-rival wont follow price increase, demand is elastic
-rival will follow price cut to avoid loss of market share, demand is more inelastic
-kinked demand curve suggest price stickiness in the markets, firms rely more on non-price competition
to boost sales
-other output other than Q1, firm not maximizing profits
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