econ review

A. Monopolistic Competition

  • Categorization of Market Structures

    • Various categorizations include: number of firms, type of products, barriers to entry, and degree of market power.

  • Characteristics of Monopolistic Competition

    • Many firms in the market.

    • Differentiated products that are similar but not perfect substitutes.

    • Some control over price due to product differentiation.

    • Free entry and exit in the long run.

  • Similarity to Other Market Structures

    • Monopoly: Single seller, high market power.

    • Oligopoly: Few firms with significant market power.

    • Perfect Competition: Many firms, similar products, no price control.

    • Monopolistic competition shares features from all these structures, particularly in terms of product variety and competition.

  • Key Characteristic of Monopolistic Competition

    • Product differentiation is the key characteristic, leading to varying levels of pricing power among firms.

  • Allocative Efficiency

    • Occurs when resources are allocated in a way that maximizes total welfare.

    • Price equals marginal cost (P = MC).

  • Productive Efficiency

    • Achieved when goods are produced at the lowest possible cost.

    • Occurs when the production is at the lowest point on the average total cost curve.

  • Formulas

    • Allocative Efficiency: P = MC.

    • Productive Efficiency: P = min ATC (Average Total Cost).

  • Long Run Case for Monopolistic Competition

    • In the long run, firms can enter and exit, leading to zero economic profits.

  • Allocative Efficiency in Long Run

    • Firms do not achieve allocative efficiency in the long run as price exceeds marginal cost (P > MC).

  • Productive Efficiency in Long Run

    • Firms typically do not achieve productive efficiency in the long run since they do not produce at minimum average total cost.

  • Societal Benefits of Monopolistic Competition

    • Offers product variety and choices for consumers, leads to innovation and better services.

B. Strategic Behavior & Game Theory

  • Prisoner’s Dilemma

    • A situation in which two rational individuals may not cooperate, even if it is in their best interest to do so.

  • Nash Equilibrium of Prisoner’s Dilemma

    • A situation where neither player can benefit by changing their strategy while the other player keeps theirs unchanged.

  • Dilemma of Prisoner’s Dilemma

    • Each participant's decision to betray or cooperate results in a suboptimal outcome for both.

  • Prisoner’s Dilemma and Cartel Behavior

    • Illustrates the difficulty of maintaining cooperation in a cartel; individual incentives often lead to defection.

C. Input Market Formulae

  • Cobb-Douglas Production Function

    • A function representing the output (Q) as a product of inputs: Q = A * L^α * K^β, where "A" is total factor productivity, "L" is labor, "K" is capital, and α and β represent the output elasticities.

  • Formulas

    • Average Product of Labor (APL): APL = Q / L.

    • Marginal Product of Labor (MPL): MPL = ∆Q / ∆L.

    • Producer Equilibrium: MRP = MRC.

    • Marginal Revenue Product (MRP): MRP = MPL * P.

    • Marginal Resource Cost (MRC): MRC = ∆TC / ∆L.

    • Minimizing Cost of a Single Input: MRP = MRC.

    • Maximizing Profits on Output Side: MR = MC.

    • Maximizing Profits on Input Side: MRP = MRC.

D. Labor, Land, Capital, & Entrepreneurship

  • Elasticity of Land Supply

    • The supply of land is generally inelastic, as land is a fixed resource.

  • Economic Definition of Rent

    • Payment to landowners for the use of their land, often determined by market forces.

  • Demand Curve for Labor

    • Reflects the relationship between the wage rate and the quantity of labor demanded by firms.

  • Backward Bending Supply Curve of Labor

    • Illustrates that higher wages can lead to a decrease in labor supply as individuals prioritize leisure over work.

  • Substitution Effect in Labor Supply

    • As wages increase, individuals may choose to work more hours instead of leisure due to the higher opportunity cost of not working.

  • Income Effect in Labor Supply

    • As wages increase, individuals might choose to work fewer hours because they can maintain their standard of living with less work.

  • Backward Bending Section of Labor Supply

    • In this section, an increase in wages leads to a reduction in the quantity of labor supplied.

  • Price Taker in Labor Market

    • A firm or worker who has no control over the market wage and must accept the prevailing wage.

  • Price Maker in Labor Market

    • A firm or labor organization that can influence the wage rate due to its market power.

  • MRC Curve Above the Supply Curve of Labor

    • Indicates that firms pay more for each additional unit of labor than what they pay for the average unit, reflecting diminishing marginal returns.

  • Exclusive Union

    • A labor union that restricts membership to increase wages by reducing labor supply.

  • Inclusive Union

    • A union that allows all workers in a sector to join, aiming to increase cooperation and bargaining power.

  • Expected Return Formula

    • Expected Return = Σ (Probability of Outcome * Return of Outcome).

  • Variance Formula

    • Variance = Σ (Probability of Outcome * (Outcome - Expected Return)^2).

  • Standard Deviation Formula

    • Standard Deviation = √(Variance).

  • Variance as a Measure of Risk

    • A higher variance indicates greater volatility in returns, hence greater risk.

  • Payments to Factors of Production

    • Payment to Land: Rent; Labor: Wages; Capital: Interest; Entrepreneurship: Profit.

E. Public Choice Theory & Taxation

  • Public Choice Theory

    • Analyzes how public decisions are made and the implications of political actions on economic outcomes.

  • Median Voter Theorem

    • Suggests that in a majority rule voting system, the preferences of the median voter will dominate.

  • Quid Pro Quo (Logrolling)

    • Refers to an arrangement where two or more parties agree to exchange favors, often seen in legislative bargaining.

  • Condorcet's Paradox

    • Situations in which collective preferences can become cyclic and contradictory despite individual preferences being transitive.

  • Arrow’s Impossibility Theorem

    • Demonstrates that no voting system can perfectly translate individual preferences into a collective decision without violating some fairness criteria.

  • Riker’s Theory of Minimal Coalitions

    • Analyzes how political coalitions form with the minimum number of members required to achieve a majority.

F. Market Failure & Government Failure

  • Market Failure

    • Occurs when the allocation of goods and services is not efficient and could be improved in terms of economic welfare.

  • Government Failure

    • Happens when government interventions cause a more inefficient allocation of resources than the market would.

  • Definitions

    • Antitrust: Laws designed to prevent monopolistic practices and promote competition.

    • Externalities: Costs or benefits that affect third parties not directly involved in a transaction.

G. Regulation & Deregulation

  • First Regulatory Agency in the U.S.

    • The Interstate Commerce Commission (ICC) established in 1887.

  • First Agency to be Deregulated in 1978

    • The airline industry was first, leading to significant changes in pricing and operational structures.

  • Regulatory Capture

    • When regulatory agencies are dominated by the industries they regulate, leading to policies that favor industry interests over public good. Example: FDA approval processes influenced by pharmaceutical companies.

  • Principal-Agent Problem

    • Occurs when an agent (individual or entity) makes decisions on behalf of a principal (another party) and has different interests from the principal.

  • Revolving Door Problem

    • Situation where individuals move between roles as regulators and industry, creating conflicts of interest.

  • “Amakudari”

    • A Japanese term referring to the practice of retired bureaucrats taking influential positions within the industries they once regulated.

  • Differences between Regulation and Deregulation

    • Regulation often limits competition and can lead to higher prices, while deregulation can increase competition and lower prices but may lead to monopolistic practices in some cases depending on market conditions.

H. International Trade

  • Shift of Production Possibility Frontier (PPF) to the Right

    • Can be caused by economic growth, technological advancements, or increases in resources.

  • When Not to Trade

    • If an opportunity cost of production in both nations exceeds the benefits from trade.

  • CAFTA, NAFTA, FTAA, GATT, WTO, EU, USMCA

    • CAFTA: Central America Free Trade Agreement; NAFTA: North American Free Trade Agreement; FTAA: Free Trade Area of the Americas; GATT: General Agreement on Tariffs and Trade; WTO: World Trade Organization; EU: European Union; USMCA: United States-Mexico-Canada Agreement.

  • G-2, G-5, G-8, G-10, G-20, G-67

    • Groups of major economies that meet to discuss international economic policy; G-2: U.S. and China; G-5: Five major economies; G-8: Major advanced economies; G-10: Group of ten industrialized nations; G-20: Group of twenty, including both developed and developing economies.

  • International Trade vs. Other Levels of Trade

    • Factors include cross-border regulations, differing currencies, and national trade agreements.

  • Quality of Oranges in NYC vs. Atlanta

    • NYC potentially has access to a greater variety and quality due to climate, trade routes, and demand.

  • Four Cases of International Trade

    • Comparative advantage, absolute advantage, protectionism, and trade barriers.

  • Tariff vs. Quota

    • A tariff is a tax on imports, while a quota limits the quantity of a good that can be imported.

  • Absolute Advantage & Comparative Advantage

    • Absolute Advantage: When a country can produce a good more efficiently than another.

    • Comparative Advantage: When a country can produce a good at a lower opportunity cost than another.

  • Determine Absolute and Comparative Advantage

    • Absolute: Compare total production capabilities.

    • Comparative: Analyze opportunity costs for each country.

  • Limits on Terms of Trade

    • Determined by the opportunity cost of the producing goods involved in trade.

  • Gains from Trade

    • Measured by the increase in overall economic welfare and the ability to consume beyond the PPF.