ECO 108 Chapter Notes - Chapter 7: Invisible Hand, Economic Rent, Reservation Price
25 Feb 2018
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Two functions of price: rationing function of price distributes scarce goods to the consumers who value them most highly, allocative function of price directs resources away from overcrowded markets to markets that are underserved. Invisible hand theory states that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources. Barriers to entry: control of resources or inputs, exclusive agreements with key distributors or retailers. Intellectual property: patents, trademarks and service marks: switching costs (network effects,, tariffs - taxes on imports prevent foreign firms from entering domestic markets, zoning, government regulations (licenses, advertising. Invisible hand and cost-saving initiatives: competitive firms are price takers, cost management required. Innovation lowers cost for once firm: profits increase by amount of cost savings. Industry costs decrease: equilibrium price decreases by amount of cost savings.
