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ARE BUSINESSES EFFICIENT?
We learned in lessons 2a and 3c that
competitive markets are efficient (except when there are
externalities or public goods - lessons 5a and 5b). But what
happens if markets are NOT competitive? We said that
competition is the "invisible hand" that forces businesses
to be efficient. If the market is not competitive we will
not get the efficient quantity. This means that the profit
maximizing quantity that businesses will produce (WHAT
WE GET; quantity where MR=MC) will not be the same as
the allocatively efficient quantity that society wants
(WHAT WE WANT; quantity where P=MC).
Remember the word "competition" has a
different meaning in economics. This is NOT the competition
that occurs between Ford and Chevrolet. "Competition" in
economics means there are many buyers and sellers in the
market so that firms have no influence over the price; i.e.
they are price takers. Much of the business world is not
competitive, and therefore, not efficient.
In this lesson we will look at
monopolistic industries - industries with only one firm.
There are few pure monopolies. Though there are few true
monopolies, they do exist, but we will also study monopolies
because most firms are a combination of competition and
monopoly.
For each of the four product market
models (lessons 8-11), including monopolies, you should use
the following general outline to guide your
studying:
General Outline for Each Product
Market Model:
1. Know the model's
characteristics and examples (See the "8/9a QUIZ - 4
PRODUCT MARKETS" quiz on our Blackboard site.)
2. Be able to explain the shape of the demand curve
3. Draw the short run equilibrium graphs for (a) profit
maximizing firms, (b) loss minimizing firms, and (c)
firms that will shut down
4. Draw the long run equilibrium graph and find the
profit maximizing quantity (WHAT WE GET), allocatively
efficient quantity (WHAT WE WANT), and the productively
efficient quantity. See the last 13 pages of the Unit 3
Yellow Pages ("3 Rules and 4 Models").
5. Understand any other issues associated with the
model
Never forget this: To maximize
profits business will produce the quantity where MR=MC.
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