Economics: Part 5 - Profits, Competition, Eternality, & Public Good

Profit Maximization

  • Firms maximize profit, which means they are not going to settle for anything less than the highest possible difference between total revenue and total cost

  • The perfectly competitive firm cannot change the price; it can only adjust output

  • To maximize profit, the firm selects the output to maximize:

    • Economic profit = total revenue (TR) - total cost (TC)

Imperfections of a market economy

Desirable government intervention

Examples of current government policies

Inefficiency:

  • Imperfect competition


  • Externalities



  • Public goods


  • Encourage competition among sellers

  • Intervene in markets


  • Encourage beneficial activities


  • Antitrust laws, deregulations


  • Antipollution law, antismoking ordinance

  • Provide and finance public education, build roads, and other public infrastructures


Imperfect competition

  • It describes market structures where one or more assumptions of perfect competition are not met, granting firms some market power to influence prices and output

  • Key examples include monopolies (one seller), oligopolies (few dominant sellers), monopsony (one buyer), and monopolistic competition (many sellers with differentiated products)

  • This market structure is more common than perfect competition and can lead to market inefficiencies, but it also provides product variety

Externality

  • A cost or benefit caused by an economic actor that is not suffered or enjoyed by that same actor

  • An indirect cost or benefit imposed on a third party by the economic activity of another party who is not directly involved in the transaction, and these costs or benefits are not reflected in the market price of the good or service

  • Externalities can be negative, imposing costs like pollution, or positive, conferring benefits like improved public health from vaccinations

Public good

  • It is a product or service that is both non-rivalrous and non-excludable, meaning that one person’s use does not diminish its availability for others, and no one can be prevented from using it

  • Examples:

    • National defense, street lighting, and clean air

    • Because private markets often under-provide public goods, they are typically funded and provided by governments or businesses through taxes and other revenues

Imperfections of the market economy

Desirable government intervention

Examples of current government policies

Inequality:

High disparity between the rich and the poor, which is caused by inequality of income and wealth



Redistribute income

Progressive taxation of income and wealth (income tax, TRAIN law)

Income support or transfer programs (e.g., 4Ps)

Macroeconomic problems:


High inflation and unemployment


Stabilize through strong macroeconomic policies

Monetary policies such as changes in money supply and interest rates

Fiscal policies like changing tax percentages and spending programs like the Build, Build, Build Program

Slow economic growth

Stimulate growth

Improve the efficiency of the tax system

Raise the national savings rate by reducing the budget deficit or increasing the budget surplus