Chapter 17 Blog

In this chapter, we are introduced to the concept of oligopoly. Oligopoly is similar in many ways to monopolistically competitive markets, which we learned about in the last chapter, but differs in a few key ways. An oligopolistic market is characterized as a market in which a few sellers control the majority of the market. An oligopolistic firm aims to maximize their total profits by forming a cartel, or a group of firms acting in unison, and acting as a monopoly within the cartel. If oligopolists fail to act as a monopoly, the resulting quantity is too high and the resulting price is too low. The more firms that are involved in an oligopoly, the more the firms will act like firms in a competitive market, and the quantity and price will approach the socially efficient quantity. One of the ways you can understand oligopolists and their choices is by examining the prisoner's’ dilemma, in which you can see that while the choice to cooperate will always have a more beneficial outcome, self-interest will point people toward their “dominant strategy”, which might be beneficial for them but not as beneficial as if they had cooperated. This dilemma is an example of game theory and can easily be applied to oligopoly, as well as a variety of other situations. Policymakers do not like cooperation and collusion between oligopolists because it is not socially efficient, so they forbid these behaviors with antitrust laws.

Chapter 16 Blog

In this chapter, the concept of the monopolistically competitive market is introduced. A monopolistically competitive firm is similar to a perfectly competitive firm in that there are many firms in the market and free entry and exit, however it differs from a perfectly competitive market in that its firms sell differentiated products. While the equilibrium in a monopolistically competitive market is similar to that of a monopolistic market in that it has a profit maximizing position where marginal cost is equal to marginal revenue, it differs from both monopolies and perfectly competitive firms in many ways. It is different from a perfectly competitive market because it has excess capacity, meaning it operates on the downward sloping section of the average total cost curve. Additionally, there is a markup from price to marginal cost, meaning that price is greater than marginal cost. One way that monopolistic competition is less desirable than perfect competition is that in a monopolistically competitive firm, like in a monopoly, has a deadweight loss associated with the markup from marginal cost to price. Also, based on different positive and negative externalities associated with monopolistically competitive firms, there may be too many or too little. Because of this, policy makers cannot correct any inefficiencies in monopolistically competitive markets because every firm sells a slightly different product. Another thing to consider within monopolistically competitive markets is the prevalence of advertising, which is present because of the differentiation of products within monopolistically competitive markets. This can influence consumer decisions greatly.

Article Review #5

Essentially in this article, Scott Adams, the creator of the extremely popular cartoon “Dilbert”, explains his theory of how to be successful, which is mainly centered around his theory that experiencing failure is an integral part of learning how to be successful. In order to succeed in whatever venture you choose to pursue in your life, you must believe that failures are tools you can use to learn from and be better next time. Another point he hits in the article is that in order to succeed, you should adopt a habit of having a system, not a goal. A goal-based lifestyle will lead you to believe that you have succeeded once you have reached your goal, when in reality you should have a system in order to constantly be on the lookout for more ways to succeed. Adams also points out that in order to succeed, you should not necessarily pursue your passion. If you pursue your passion, you can become too wrapped up in the feelings surrounding the project, and you will be crushed if/when the project goes under. If you pursue something practical that you logically know is likely to do well, you are more likely to be successful in the end, and if the project does fail, you won’t be devastated. Furthermore, Adams acknowledges something that is not usually acknowledged by those advising on how to be successful: luck is a huge part of success. While this is true, Adams sugests a way to game the system in that you must position yourself in places where your luck is higher.

Chapter 15 Blog

In this chapter, Mankiw explains how a market works when a monopoly exists within a market. A monopoly is defined as a firm in a market where they are the sole seller of the good in the market (any competition is negligible). A monopoly can arise when the government grants a firm the exclusive right to produce a good, a firm owns a key resource for producing the good, or if a single firm is able to supply the entirety of the market of the good at a smaller cost than more than one firm would be able to. This last example is called a natural monopoly. Because a monopoly acts as the only producer for the entire market for a good, the demand curve for the firm functions as the demand curve for the entire market. This means that the demand curve for a monopoly is downward sloping, as most demand curves are, but different from the flat demand curve of a firm in a competitive market. However, a monopoly is similar to a firm in a competitive market in that it wants to maximize profit, and it does this by producing at the quantity where the marginal revenue and marginal cost curves intersect. The monopoly then is able to choose the price they want to sell the good for, and they choose a price above the marginal revenue and marginal cost in order to maximize profit. This level of production is often below the level that maximizes total surplus in a market because it raises the price and lowers the demand for the good, so some buyers don’t purchase the good and the market shrinks. This also causes a deadweight loss.  

Chapter 14 Blog

In this chapter, Mankiw begins to discuss how competitive markets work. One of the main details to keep in mind when analyzing a competitive market is that a firm in a competitive market is a price taker, which means that they must accept the price that the market determines for their good. Because of this, their revenue is directly proportional to the amount of output of the good it produces. The price that the good is sold for (determined by the market) is equal to the firm’s average revenue (total revenue divided by quantity sold) and its marginal revenue (the change in total revenue from one additional unit sold). In order to maximize profit, the main goal of any firm, a firm must choose a quantity of output where the marginal revenue equals the marginal cost. Because of the fact that marginal revenue is equal to the market price, the marginal cost curve is the supply curve for a competitive firm. One choice that a firm is able to make is to either shut down temporarily or exit the market. If a firm is unable to recover its fixed costs because the price of the good is less than the variable cost, it may choose to shut down temporarily (short run). In the long run, if the market price is less than the average total cost, a firm may choose to exit the market. Also in the long run, in a market where firms are free to exit and enter the market at will, profits will be driven to zero eventually.