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308 Green Canadian IO Policy Reading.docx

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Economics (Arts)
ECON 308
Christopher Green

Econ 308 Reading Notes Green: Canadian Industrial Organization and Policy - two most important units in study of IO are the firm and the industry - the firm is the basic decision-making unit - an industry is composed of one or more firms with products that are close substitutes - IO theory places more emphasis on the industry than microeconomic theory, which puts greater emphasis on the firm - Market structure (S), firm behavior and conduct (C), and industry performance (P) - The “mainline” IO paradigm places heavy emphasis on the number or size distribution of firms and the existence of barriers to entry: Mainline: StructureBehaviour Performance - Market structure is said to affect industry performance and the behavior of firms taken together is said to affect industry performance. For example, a common hypothesis is that monopolistic behaviour (collusion, price leadership) is more easily facilitated where industry concentration and barriers to entry are high, than where concentration and barriers are relatively low. - To remain a monopolist, barriers to entry must be sufficiently high to deter prospective entrants - The state of long-run competitive equilibrium has 3 properties: The price paid for the last unit of output produced is just equal to the cost of producing the last unit (marginal cost). When P=MC, the condition for profit maximization under pure competition (MR=P=MC) is consistent with the fundamental condition for welfare maximization: the marginal social valuation (MSV) of the product by consumers is equal to the marginal social cost (MSC) of producing it. In the absence of externalities, MSV is reflected in the price that consumers are willing to pay for the product while MSC is equal to the marginal opportunity cost (MC) of producing it. When MSV=MSC, the value of total output is maximized given available resources. - The market supply curve, the sum of individual market cost curves, reflects the MSC of the resources required to produce the commodity. - If not in equilibrium, society will gain by producing more of the commodity if MSV>MSC, less of the commodity of MSV
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