Page 6 - Microeconomics

MONOPOLY (continued)
ANTITRUST POLICY a. Raising the opportunity cost of leisure (wage EXTERNALITIES
• PURPOSE: is the price of leisure), and increasing the • DEFINITION: Benefits received or costs imposed on others as
1. Prevents oligopolists from colluding to eliminate time allocated to work because leisure has a result of an economic activity to which they are not a party. Such
become expensive. This is the substitution
competition. effect (A to B). activity can involve production or consumption.
2. Prevents a firm from growing so large that it can drive b. Or, by causing the individual labor supply EX: Environmental pollution involves a negative externality.
competition out of business by restraining trade. curve to bend backwards as workers choose Pollution abatement involves a positive externality.
• ANTITRUST LAWS: to increase leisure hours and decrease work • SOCIALLY OPTIMAL LEVEL OF PRODUCTION OR
1. Sherman Act (1890): Prohibits collusion and hours with an increase in income, workers can CONSUMPTION: Occurs when marginal social benefits equal
attempts to monopolize. buy more leisure. This is the income effect marginal social costs.
2. Clayton Act (1914): Outlaws actions that would (B to C). At high wages, the income effect • COASE THEOREM: In a system where legal damages can be
lessen competition and certain types of price dominates the substitution effect. Workers collected from a person or from a negative externality, the private
discrimination. may feel that they “can afford to take time market system will produce at the socially optimal level, provided
3. Federal Trade Commission Act (1914): off.” At low wages the opposite occurs. property rights are well-defined and costs of negotiations are low.
Established a government agency to investigate Consumption • WITHOUT COASE THEOREM CONDITIONS:
unfair and deceptive business practices. 1. An activity that generates
4. Robinson-Patman Act (1936): Further prohibits a positive externality $
price discrimination among customers. W 2 – W will be conducted at a Marginal
Private Cost
Evidence does not support the view that antitrust Price Slope = Price level below the social
laws have a big impact on the amount of optimum. This is because Marginal Social
competition in the economy. Many economists C IC 2 the activity will occur up Benefit
believe that fair international trade is the best B to the level where the Marginal Private Benefit
way of promoting competition. W 1 A IC 1 marginal private cost
Social Optimum
Private
Price equals the marginal Optimum Amount of Activity
private benefit.
RESOURCE MARKETS W 1 < W 2 Leisure 2. An economic activity that
RESOURCE DEMAND creates a negative externality $ Marginal
• RESOURCE TYPES – Labor, Land, Capital & will be conducted beyond the Social Cost
Entrepreneurship: Any or all of which are used Wage Rate Individual Labor Supply socially optimal level. This Marginal
(backward-bending)
Private Cost
by a company to produce its output. is because the activity will
• MARGINAL REVENUE PRODUCT (MRP): occur up to the point where the
The marginal revenue obtained from the marginal 40 Hours of Work marginal private benefit equals Marginal
unit employed. MRP FORMULA: MR × MP • LABOR UNIONS: Workers can join the marginal private cost, and the D L Private Benefit
(marginal revenue × marginal product). together to establish labor unions. Unions marginal private cost is lower Social Private Optimum
• MARGINAL FACTOR COST (MFC): The have three main effects: than the marginal social cost. Optimum Amount of Activity
marginal cost of the last unit employed. 1. Raise wages of unionized workers • PUBLIC POLICY approaches to the problem of externalities include:
• COMPANIES WILL EMPLOY UNITS OF 2. Lower employment in unionized occupations 1. Regulations limiting activities with negative externalities or requiring
A RESOURCE (i.e. man hours; pounds of a 3. Lower relative wages of non-unionized workers minimal levels of activities that have positive externalities.
raw material; machine hours) until the marginal 2. Taxes on activities that have negative externalities and subsidies on
revenue obtained from the increased production WAGE DETERMINATION activities with positive externalities.
generated by the marginal unit equals the • EQUILIBRIUM WAGE RATE (W*): 3. Sales of licenses that, in aggregate, permit socially optimal
marginal cost of that unit (MRP = MFC). Determined by labor supply and labor levels of the negative externality. Allowing these licenses to be
• IN PERFECTLY COMPETITIVE PRODUCT demand. traded provides firms with the incentives to reduce the amount
MARKETS: Marginal revenue product = Price × • COMPENSATING WAGE of the negative externality they produce.
marginal product. DIFFERENTIALS: • PUBLIC GOODS: Goods that are non-excludable and non-rival.
• IN PERFECTLY COMPETITIVE RESOURCE 1. Compensating wage differentials are paid to 1. Consuming public goods does not remove availablility to other
MARKETS: Marginal factor cost = The unit price workers in occupations that are less desirable. consumers.
of the input (wage rate in the case of labor). The A window washer may be paid more than a 2. Consuming public goods does not exclude other consumers from enjoying
supply curve is horizontal. janitor because the occupation is more risky. the same benefits. It would be impossible or impractical to do so.
• MRP CURVE is the firm’s demand curve for the 2. Workers cannot easily change occupations. 3. Each individual’s consumption leads to no subtraction from any other
firm’s combined factors of production, where the It takes time and money to acquire new individual’s consumption of that good.
skills (a bus driver cannot easily become a
marginal products per dollar spent are the same for doctor). 4. Does not have the free-rider problem in private goods (assuming
each factor: MP L MP where w is the wage 3. Occupations experiencing shortages will everybody pays his/her taxes).
K
w = r EX: Public parks, toll-free roads.
rate and r is the rental cost of capital. see wages rise.
• MONOPSONY: Monopoly in the Resource • LOW WAGE OCCUPATIONS: Elastic • MERIT GOODS: Goods identified in society to possess social
benefits beyond private demand for them.
Market is called Monopsony. The monopsonist will labor supply. 1. Individual choice is restrained by community values.
hire the factor (L) where MRP = MFC MS , which • HIGH WAGE OCCUPATIONS: Less 2. Merit goods remain within the realm of consumer sovereignty when
is less than in perfect competition, and pay wage elastic supply, especially in the short run. individual’s “higher” preferences are imposed on his/her “lower” ones.
(W MS ) lower than in perfect competition (W PC). • MINIMUM WAGES are set if the EX: Defense, fire protection, primary and secondary education, and
The monopsonist will pay the minimum wage labor equilibrium wage (W*) is considered too preventive health care.
low to afford basic needs and services. The
is willing to accept. disadvantage of minimum wage is that it
may increase unemployment in low wage
MFC MS
occupations. Workers will be willing to
S IC AUTHOR: John C. Mijares, Ph.D
supply H S hours at the minimum wage (W M ) PRICE: U.S. $6.95
W PC but will only find H D hours available.
S PC = MFC PC NOTE: This guide is intended for
W MS Minimum Wage Occupations informational purposes only. Due
MRP = Demand S L to its condensed format, this guide
cannot cover every aspect of the
subject; rather, it is intended for
w*
Wage
work and assigned texts. Neither
L MS L PC Wage Rate W M Minimum use in conjunction with course Customer Hotline # 1.800.230.9522
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