Monopolistic competition.

1. Major characteristics:
1. Very many firms in an industry
2. A firm can’t influence the price by means of its individual supply, it can influence price because:è
3. Product is differentiated
4. The entry to the market is rather free
5. Dem. curve for the product is sloping down, but it’s rather flat, as there are many rivals on the market.

!!! As the product is differentiated, it’s important to tell about it to customer by means of advertising.

1. SR equilibrium (!!! like in pure monopoly).

a. MR = MC

b. P > MR and MC è no allocative efficiency(! it takes place only under p. competition)

c. If AC₁ è AC_(av.costs) = OM è P >AC and TR > TC è ec. profit

i. TR = OPKQ; TC = OMLQ; TП = PKLM.

d. If AC₂ è ec. losses.

e. Conclusion: In the SR firm can earn ec. profit, suffer losses or earn normal profit(AC = P)

1. LR equilibrium

a. In the LR mon. competitive firm earns normal profit, because competition is pretty high and it eliminates LR ec. profit, loss and all the firms earn only economic profit.

b. Ec. profit in the SR è in the LR new firms will enter the industry and the existing firms will expand è the dem. curve for a single firm becomes flatter as competition grows, until it toches the AC –curve(at the point of LR equilibrium).

i.!!! This is not a min point of AC-curve, because the dem. curve doesn’t become horizontal.

c. P>LRAC_min è no productive efficiency.

1. Minuses”-”.
1. No allocative efficiency(P>MC)
2. No productive efficiency(P>LRAC_min)
3. Underproduction and overpricing
4. Deadweight welfare loss and Waste of resources on advertising
2. Pluses”+”.
1. High degree of competition
2. Differentiation of the product helps to satisfy various human wants
3. Firms have incentives to innovate
4. There is practically no necessity in gov. regulation(as competition is close to perfect and all the negative outcomes are not great)

The theory of distribution of income (production and the dem. for ec. resources).

1. Derived dem. for ec. resources.
1. Dem. for ec. rsources depends upon:

i. The dem. for good produced with this resource

ii. The price of the good

iii. Productivity of the resource(productivity↑ è demand↑)

iv. Prices of other resources(complementary and substitute)

1. Results of the usage of one additional unit of a factor:

i. additional product(MPf – marg. product of a factor)

ii. add. revenue((marg. revenue product of a factor) MRPf = MR * MPf)

iii. add. value((value of marg. product of a factor) VMPf = P_good * MPf)

1. !!! In perf. competition P_good = MR, so MRPf = VMPf
2. !!! Under imperfect compet. P > MR, so VMPf > MRPf
1. Equilibrium of the firm on the resource market.
1. SR equilibrium:

i. In the SR a firm confronts the law of diminishing marg. productivity of a variable factor.

ii. MRC – marg. revenue cost – the cost of employing on more unit of a var. factor.

iii. MC – marg. cost – cost of producing of one more unit of a product.

iv. The dem. for resources will be realized by the firm until MRPf ≥ MRCf, and equilibrium è MRPf = MRCf

v. If we assume a perf. compet. market structure è. MRCf = Pf è a firm is a price-tajer è price of hiring a new worker will be equal to the av. market wage.

vi. MRCf = Pf – eq. rule for perfectly comp. markets.

vii.!!! (Neo)Classical schools used this theory to conclude that owners of resources are awarded according to the MP_roductivity of resources.

b. LR equilibrium(all factors are variable):

i. Two or more factors can be used; all the units of labor and cap. are identical

ii. Both factors are substitutes and compliments(used together)

iii. Substitution and output effects of a price change.

1. Assume(L,K - factors):

a. P_k↑ è

i. Costs↑ è Output↓ è D_L↓ and Q_Dk↓ - output effect

ii. Labour relative costs↓, though èD_L↑; D_K↓ P_L=const – substitution effect

b.!!! Both effects are negative(P↑ è Q↓)

c.!!! Cross-effects work in the opposite direction(разные изменения от одного)

d.!!! In some cases factors are complement è no substitution effect(only output(scale) effect)

-- cost min. rule -- Profit maximization rule(eq. in LR)

1. Wage determination under Perfect competition.

1. Transfer payments – shows at what levels of the wages workers are willing and able to be at the labor market.
2. MDU ↑(marg. disutility of labour) è P↑ to compensate disutility
3. Economic rent – the difference between the current market wage rate and the transfer payments.
4. For absolutely unique worker è all the earnings are economic rent.

1. Wage determination under imperfect competition.
1. Monopsony – monopoly of an employer on the market.
2. To attract more workers è W↑ to all the workers.
3. !!! As there is no competition between employers è W will be as low as possible.

Conclusion: Monopsony underemployes and underpays to workers.

The theory of distribution of income II. Capital(K) and Land.

1. Concepts of capital.
1. Marx: K is the industrial (economic) relation between the worker/owner. This relation can be presented in different forms (equipment, labor force, goods produces, etc).
2. Classical/Neoclassical: K is identified with manufacture goods used to produce final G/S.
3. Modern Economists: recognize different forms of K. It can be:

Tangible	Intangible
Equipment, residential structures, non-residential structures, inventories of inputs/outputs….	Human K (investments in education, training, etc), R/D, goodwill of the firm….

K yields valuable productive services over time. It is used to produce final G/S.

1. Measuring K.
1. Though K isn’t identical to money, still the stock of K is measured in money terms.
2. K is a stock concept (Measured at a certain date).
3. Analyzing K we introduce the notions of Investment and depreciation à both are flow concepts.
4. Investment is a flow that increases the stock of K. 3 major reasons:

i. Inv occurs when e.g. a firm buys new equipment.

ii. This happens as equipment wares off and is to be replaced.

iii. Inv takes place, when the firm needs to innovate and expand.

1. Depreciation is the opposite flow, which decreases the economic value of an asset over time.
2. How does the firm invest?

i. Ask for a loan. Demand the loanable funds and may get them the financial market. The households supply loanable funds to the market, as they make decision to save. So, another way is to:

ii. Sell bills/bonds to the households.

g. As K exists over time, it’s possible to separate K services. Buying equipment à purchase of K, but if you hire it (lease) you use one of K services.

Capital Equipment	Owner Can	It brings
§ Use in productionà   § Sell it à   § Hire it outà	§ Profit   § Price of equipment § Rentals

1. Demand and Supply for K services.

1. SR rentals include:

i. Depreciation

ii. Repairing and maintenance costs, as to rent equipment a firm needs to keep it in good condition.

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