ECO401 Final Term Short Notes Lectures 19-45 by Mr Shahbaz

ECO401–INTRODUCTION TO ECONOMICS · Final term Short notes by · Mʀ Sɦǟɦɮǟʐ

Final term exams of the current semester Fall 2023 will comprise of the contents from Lecture 19 to 45. This paper will cover both objective (MCQs) and subjective type questions (3 and 5 Marks). So, kindly prepare your exam accordingly.

Perfect Competition (Long Run):

• All factors variable, firms can enter/exit.
• Supernormal profits attract, increasing supply.
• Losses lead to exits, reducing supply.
• Perfectly competitive firms earn normal profits in the long run.

Allocative & Productive Efficiency:

• Allocative: MR=MC for individual firms, P=MC for society. Achieved in perfect competition.
• Productive: P=MC=AC. Achieved by perfectly competitive firms in the long run.

Monopoly:

• Single producer in the market.
• Monopoly power inversely related to price elasticity of demand.

Profit Maximization under Monopoly:

• MC=MR for profit maximization.
• Demand curve downward-sloping, unlike perfect competition.

Retaining Monopoly:

• Natural reasons or active policies.
• Economies of scale, product differentiation, brand loyalty.
• Active pricing strategies (limit pricing).
• Threat of takeover, control of key factors, patents or copyrights.

Limit Pricing:

• Established firms, like monopolies, exploit the cost advantage over new entrants.
• Monopolist charges price PM to maximize profits at output QM .
• To deter new entrants, monopolist can set a price lower than PM .

Monopolies and Public Interest:

• Disadvantages:

i. Produce lower quantities at higher prices than perfectly competitive firms. ii. Earn supernormal profits. iii. Most surplus benefits the monopolists. iv. Lack sufficient incentive to increase production efficiency.

Equilibrium under Perfect Competition and Monopoly:

• Monopolists do not produce where P=MC or P=AC minimum.
• Higher prices and lower quantities compared to perfect competition.

Advantages of Monopolies:

i. Natural Monopolies are efficient for society. ii. Supernormal profits can fund R&D, innovation, and expansion into foreign markets.

Government Regulation:

• Government can regulate monopolies to set prices at the intersection of AR and MC for allocative efficiency.
• Ensuring productive efficiency is challenging, and subsidies or taxes may be required.
• Governments may regulate at the point where AR intersects AC to approach efficiency without subsidies or taxes.

Price Discrimination (PD):

Types of PD:

1. 1st Degree PD: Charging different prices based on what each customer can pay. Example: new and used car sales.
2. 2nd Degree PD: Charging different prices for different quantities. Examples: last-minute hotel and airline deals, retail discounts for buying multiple items.