ECON 308 Chapter Notes -Tacit Collusion, Competitive Equilibrium, Marginal Cost

44 views3 pages
Published on 19 Apr 2013
School
McGill University
Department
Economics (Arts)
Course
ECON 308
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: StructureBehaviour 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<MSC.
- What distinguishes monopoly and competition is the differential relation between
price and MC. Because the monopolist stops producing before price has fallen to
the level of MC, the MSV of goods produced by monopolists will exceed their
MSC. This means that there remain unsatisfied consumers who are willing to pay
Unlock document

This preview shows page 1 of the document.
Unlock all 3 pages and 3 million more documents.

Already have an account? Log in

Document Summary

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: 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.

Get OneClass Grade+

Unlimited access to all notes and study guides.

YearlyMost Popular
75% OFF
$9.98/m
Monthly
$39.98/m
Single doc
$39.98

or

You will be charged $119.76 upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.