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In the long run, a monopolistically competitive industry ends up in zeroprofit equilibrium: each firm makes zero profit at its profit maximizing quantity. Firms in a monopolistically competitive industry have excess capacity: they produce less than the output at which average total cost is minimized

Class Notes
Monopolistic competition characteristics Many firms Differentiated products o Because of many firms and differentiated products there are: Low barriers to entry Some market power (limited) They cannot charge a much higher price Difficult to collude Because there are many firms A firm cant really price discriminating because many customers would stop doing business with the firm

In the short run, the number of firms is fixed, but in the long run, firms can enter and exit Key differences between firms in perfect competition and in monopolistic competition Additional sales at the posted price increase revenue more than cost because price is greater than marginal cost o A farmer can sell as much as they want but their incentive is very low o In a monopolistic competition, they are willing to accept more customers The monopolistically competitive firm is not producing at the point where its ATC is lowest o There is excess capacity

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You could serve more people but most monopolistically competitive firms are inefficient in terms of cost Excess capacity is the difference between where they could produce and where they are actually producing This is good for the consumer because they have more choices or more convenience

Check Your Understanding 1. a. In the short run, firms will exit the industry because fixed cost is too high. As firms exit the industry, the demand curve shifts to the right. b. If MC decreases, then in the short run, more firms will enter the industry shifting the demand curve to the left. 2. It is impossible because there isnt one company, or few companies in an oligopolists situation, therefore it is difficult for several firms to collude. 3. a. This is false. A firm in a monopolistically competitive industry only sells to those people who are willing to pay on the demand curve at the quantity where MC = MR. b. This is true because this would lower ATC. The more companies that are in the industry the higher the ATC. This industry might turn into a monopoly. c. This is true because monopolistic competition and oligopolies sell differentiated items therefore they have to make up advertisements in order to sell their goods. Tackle The Test: Multiple-Choice Questions 1. 2. 3. 4. 5. B. many sellers E. I, II, and III B. II only B. downward sloping E. a trade-off between higher ATC and more product diversity

Tackle The Test: Free-Response Questions

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2.

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A brand name is a name owned by a particular firm that distinguishes its products from those of other firms.

Class Notes
Types of Differentiation 1. Type & style

The type of product that you have and the way it looks
2. Location

Where do you want to be located: urban, suburban, rural setting

3. quality Controversies over Product Differentiation Advertising o Useful Producer New product Sales information Consumer Conveys information Sometimes its for entertainment

o Efficient MB > MC The sales outweigh the costs of advertising o Signaling Value of product Size/strength of firm Company can pay for an expensive advertisement Brand Names o You trust the brand name

Check Your Understanding 1. a. This is useful because it tells the consumer what aspirin does

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b. This is wasteful because the generic brand for aspirin is as good as Bayer c. This is useful because it gives a consumer the reassurance that they will have a quality job done 2. This might be true because if a company has a successful brand name it has a good reputation therefore that company must continually provide quality products, making it harder for a different company to receive new customers. Tackle The Test: Multiple-Choice Questions 1. 2. 3. 4. 5. E. I, II, and III D. II and III only A. consumer tastes and preferences E. signal quality D. attempt to create popular brand names

Tackle The Test: Free-Response Questions 2. Product differentiation is efficient when it gives information to the consumers because it influences the consumer to try the product. It is inefficient, however, when it doesnt provide any information because the consumer will be skeptical about purchasing a good from that company.

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Physical capital often referred to simply as capital consists of manufactured productive resources such as equipment, buildings, tools, and machines Human capital is the improvement in labor created by education and knowledge that is embodied in the workforce The demand for a factor is a derived demand. It results from (that is, it is derived from) the demand for the output being produced The factor distribution of income is the division of total income among land, labor, capital, and entrepreneurship The value of the marginal product of a factor is the value of the additional output generated by employing one more unit of that factor The value of the marginal product curve of a factor shows how the value of the marginal product of that factor depends on the quantity of the factor employed

Class Notes
Factors of Production Capital o Human capital Experience, Knowledge, Training, education o Physical capital Entrepreneurship Land Labor

Importance of Factor Prices Signals the value or demand for an input so that it is efficiently used to produce goals or services o If the price of inputs rises then the price of outputs rises as well

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Derived demand Demand for a factor based on the demand for the good or service produced o You want to purchase a book. The book is the demand, the paper inside is the derived demand Factor distribution of income How income is distributed among the different factors of production o Labor wages o Entrepreneurship wages o Land rent/investment o Capital investment In the US, most people receive their income from labor In the middle ages, a prince would receive their money from land During the industrial revolution, people received their money from capital

Value of Marginal Product Value of additional output produced by employing an additional unit of factor Equation (labor) o VMPL = Price x MPL How much labor to use? o Continue to add labor until the additional VMPL = W o VMPL = W

How much of a factor (labor) should be used? Rule o Increase labor until the VMPL = W or at the last worker where VMPL > W Equation o VMPL = W

Changes for Shifts of the Factor Demand Curve Changes in prices of goods (output)

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o Demand for labor will increase if the value of the product increases o Demand for labor will decrease if the value of the product decreases Changes in supply of other factors o A positive change in supply of other factors will increase the demand for labor More land = more workers (On a farm) o A negative change in supply of other factors will decrease the demand for labor Less land = less workers (On a farm) Changes in technology o If the technology enhances the labor then demand will increase o If the technology replaces the labor then demand will decrease

Check Your Understanding 1. This would decrease the number of college degrees because the number of professors who would work would be reduced. Because there are less professors who teach these classes, the college will have to admit less students. All sectors that depend on human capital would be affected. However, the sectors that would benefit are the jobs that the college professors might be able to work at. An accounting professor would be able to become an accountant, and so on and so forth. 2. a. The demand curve for labor shifts to the right. b. The demand curve for fishers shifts to the left because less fish will need to be caught. Tackle The Test: Multiple-Choice Questions 1. B. welding equipment 2. E. I, II, and III 3. D. is derived from the product market 4. B. labor 5. A. the VMPL curve

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Tackle The Test: Free-Response Questions 2.

a. It shifts down

b. It shifts up

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c. It can shift either up or down

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The rental rate of either land or capital is the cost, explicit or implicit, of using a unit of that asset for a given period of time. According to the marginal productivity theory of income distribution, every factor of production is paid the equilibrium value of its marginal product.

Class Notes
Demand Rental rate o Explicit or implicit cost of using a unit of that factor (land & capital) for a certain period of time Real cost o Buy or rent land (depending on how long you plan to use it (long run vs. short run)) o Buy equipment or loan with interest Opportunity cost o Use land for all purposes o Rent or sell capital to others Supply Land vs. Capital Land o Supply relatively inelastic (less sensitivity to price) Capital o Supply relatively elastic (greater sensitivity to price) S ERR

D = VMP

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EQ LAND

S ERR D = VMP

EQ CAPITAL Marginal productivity theory of income distribution every factor of production is paid the equilibrium value of its marginal product Check Your Understanding 1. a. Supply will increase therefore the equilibrium rental rate and quantity will increase b. Demand will increase therefore the equilibrium rental rate and quantity will increase 2. Because firms in different industries are competing for the same land at the same price, the cost of the previous land that they rented are equal to each other. Tackle the Test: Multiple-Choice Questions 1. A. the rental rate 2. C. III only 3. A. the rental rate 4. C. equal to the rental rate 5. E. each factor is paid the equilibrium value of its marginal product.

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Tackle the Test: Free-Response Questions

Market Rental Rate

30 Cost Per Ace (In Thousands of Dollars) 25 20 15 10 5 0 0 1 2 3 4 Acres of Land Supplied 5 6

Demand Supply

2.

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Decisions about labor supply result from decisions about time allocation: how many hours to spend on different activities. Leisure is time available for purposes other than earning money to buy marketed goods. The individual labor supply curve shows how the quantity of labor supplied by an individual depends on that individuals wage rate. The demand curve for labor for a firm operating in an imperfectly competitive product market is the marginal revenue product of labor curve. The marginal revenue product of labor (MRPL) is equal to the marginal product of labor times the marginal revenue received from selling the additional output. The marginal revenue product of land and the marginal revenue product of capital are equivalent concepts. MRPL = MPL MR The marginal factor cost of labor (MFCL) is the additional cost of hiring an additional worker. The marginal factor cost of land and the marginal factor cost of capital are equivalent concepts. A monopsonist is a single buyer in a factor market. A market in which there is a monopsonist is a monopsony.

Class Notes
In labor, you are supplying a good, meanwhile the firm is demanding your good Time allocation Amount of time spent on different activities Leisure Time spent on non-wage producing activities

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Optimum consumption rule You want to create a mix between work and leisure that maximizes your benefit Individual Labor Supply Curve Substitution effect o Pushes work over leisure Income Effect o Pushes leisure over work Check Your Understanding 1. a. Clive is worst off if he wanted to make more money by working more hours. b. Clive is equally well off if he does not find the desire to work more than 35 hours and has all of the normal goods that he can buy by working for 35 hours c. Clive is better off if leisure was his priority. 2. A fall in Clives wage can cause him to work more hours because he does not want any inferior goods. Therefore, in order for him to continue purchasing normal goods, he must work more hours in order to receive all of the money he needs to have all of the normal goods he desires. Tackle the Test: Multiple-Choice Questions 1. D. the substitution effect dominates the income effect 2. A. I only 3. E. an increase in labor market opportunities for women 4. C. cause an upward movement along the labor supply curve. 5. D. MRP Tackle the Test: Free-Response Questions 2. A&B

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Compensating differentials are wage differences across jobs that reflect the fact that some jobs are less pleasant or more dangerous than others. The equilibrium value of the marginal product of a factor is the additional value produced by the last unit of that factor employed in the factor market as a whole Unions are organizations of workers that try to raise wages and improve working conditions for their members by bargaining collectively According to the efficiency-wage model, some employers pay an above equilibrium wage as an incentive of better performance and loyalty. Check Your Understanding: 1. a. False because the marginal productivity theory of income distribution does take these disparities into consideration b. True, companies who discriminate are likely to earn less profit because they might hire workers who are less able because of their belief system. c. Ambiguous, it is a type of discrimination. However, it is not based on race, gender; it is based on work experience. Sometimes it can be based on gender or race. Tackle the test: Multiple-Choice Questions 1. A. White males 2. A. I only 3. A. danger 4. B. Surpluses of labor 5. E. with well-functioning labor markets, each factor is paid the equilibrium value of the marginal product of that factor Tackle the test: Free Response Questions 2. The three disparities are Market Power, Efficiency Wages, and Discrimination. In Market Power, employees set the wages through Unions who help raise the wages of the people that are part of the Union. In

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Efficiency Wages, an employer is willing to pay above the equilibrium wage in order to motivate the employee to work hard. In Discrimination, an employer chooses who to hire based on their belief.