Econ 101 Essay

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Notes for the 4th class Long-Run Equilibrium Assumptions 1. Large number of buyers and sellers a. Sellers are price takers (Microsoft can’t really change its price without loosing a lot of money) 2. Free entry and exit a. Free enterprise: no artificial barriers to entry or exit b. No social, political, or economic impediments to entering/exiting a market 3. Many close substitutes a. Products are homogeneous Þ buyers prefer the lowest price b. Differentiation: i. Physical characteristics, marketing/advertising, etc ii. Defined in the mind of the consumer regardless of reality 4. Zero transactions costs 5. Buyers and sellers have complete information 6. Firms have identical costs and technology (Not required. Makes life easier in class) In a competitive market: • Companies face a perfectly elastic demand curve due to competitive process • Market price is also marginal revenue o P = MR • Golden Rule o Profit maximizing equilibrium is an price/output level where MR = MC o Real Life Decision Making:  MR > MC →Do more!  MC > MR → Do less! o Average and total costs are not relevant Marginal costs are what matter!  Fixed costs do not change as Q increases  Average costs may not reflect marginal changes (Often MC MR Þ do less • Windows Operating System: • Protection from profit erosion due to competitive forces comes from a Sustainable Competitive Advantage (SCA) • Decisions are made on the margin • Other decision points and profit maximaze mistakes • Competitive process restricts profits towards above normal rate of return • Monopoly power: • Power to raise prices above competitive levels or restrict competition • Arises from competitive advantages and barriers to entry • Network effects (demand-side effects) • Not all monopolies are

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