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ECO 360 1st Midterm Study Guide

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University of Toronto St. George
Jack Carr

1 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. -9} ]L2}oLZK}KL}[]oZ]ooZ]L }L}K] 2}Z: -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-^Z}L}Z}o}L2ZZ]}L_ -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 -oZ] ]}Z LZ}L]o[Z ]}L} ZL2]L] L} -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]LlKLZZZ]Z]Z }L]L]]LZ]K[Z,Z -]Z]L, }L[o}Z]2Z] Z7 Z,Z ZK}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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