ECO 360 1st Midterm Study Guide

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3 Aug 2010
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1st midterm
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
level
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
slower.
-Wξ‚Œ}ξ‚šξ€žξ€ξ‚š]vP}oξ€šξ€ƒξ€‚vξ€šξ€ƒZu}uvξ€šξ€ƒξ‚‰}[ξ€ƒξ‚Œξ€žξ‚šξ€‚]oξ€žξ‚Œξ‚ξ€ƒΓ]ooZ]vξ€šξ€žξ‚Œξ€ƒξ€žξ€}v}u]Pξ‚Œ}Γξ‚šZX
-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-^ξ‚Œξ€žξ€‚ξ‚}v(}ξ‚Œξ€ƒξ‚šZξ€žξ€ƒξ‚‰ξ‚Œ}o}vPξ€žξ€šξ€ƒξ€šξ€žξ‚‰ξ‚Œξ€žξ‚ξ‚]}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
in prosperity
-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
-ξ€žoξ€‚ξ‚ξ‚š]]ξ‚šΓ‡ξ€ƒ}(ξ€ƒξ‚šZξ€žξ€ƒξ€Β΅ξ‚ŒΓ€ξ€žξ€ƒξ€šξ€žξ‚‰ξ€žvξ€šξ‚ξ€ƒ}vξ€ƒξ‚Œ]Ào[ξ‚ξ€ƒξ‚Œξ€žξ€‚ξ€ξ‚š]}vξ€ƒξ‚š}ZvPξ€žξ€ƒ]vξ€ƒξ‚‰ξ‚Œ]ξ€ξ€žξ€ƒξ€‚vξ€šξ€ƒ}Β΅ξ‚šξ‚‰Β΅ξ‚š
-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
-l]vluξ€žξ€‚vξ‚ξ€ƒξ‚šZξ€‚ξ‚šξ€ƒξ‚šZξ€žξ‚Œξ€žξ€ƒ]ξ‚ξ€ƒξ€š]}vξ‚š]vΒ΅]ξ‚šΓ‡ξ€ƒ]vξ€ƒξ‚šZξ€žξ€ƒ(]ξ‚Œu[DZξ€ƒξ€Β΅ξ‚ŒΓ€ξ€ž
-ξ‚Œ]ξ‚ξ€žξ€ƒ]vDÁ}v[ξ‚šξ€ƒoξ€žξ€‚ξ€šξ€ƒξ‚š}Z]PZξ€žξ‚Œξ€ƒξ‚‰ξ‚Œ]ξ€ξ€žξ‚Uξ€ƒξ€Β΅ξ‚šξ‚ξ€ƒDZξ€ƒξ€Β΅ξ‚ŒΓ€ξ€žξ€ƒξ€‚ξ‚šξ€ƒξ‚ξ€‚uξ€žξ€ƒ}Β΅tput
-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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Document Summary

1st midterm: 2 issues addressed by william lewis in the power of productivity, -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. 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 level. Protection of less productive firms is a regular occurrence in industrial countries such as france, Best practice retailers are prevented from expanding as fast as they can thus, productivity growth is slower. Too much government influence has proved that old factories and companies are protected against bankruptcy while they keep productivity at a minimum.

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