Micro Review

By now you should know that competitive markets are in most cases preferred to noncompetitive markets. The competitive markets are represented by pure competition and monopolistic competition. In pure competition, the long run result is productive efficiency and allocative efficiency. With many firms in the industry, easy entry, and a standardized product, the competitive firm has no market power and must provide the quantities desired (allocative efficient) and produce at lowest cost (productive efficient). It is because pure competition is the efficient market structure that in most cases we as a society wish for more competition in markets rather than less. The noncompetitive markets are represented by pure monopoly and oligopoly (when oligopoly forms a cartel). A monopoly is assumed to be the result of a barrier to new competitors (entry). Natural Monopoly is created by the barrier of large economies of scale. The other barriers are considered artificial. Know all 4 barriers to entry. The reason we dislike most monopolies and oligopoly cartels is that they use their market power to artificially reduce production which bids up the product price. Monopoly and oligopoly do this to get monopoly rents (undeserved profits.) Monopoly is associated with a higher price and less quantity. In cases of artificial monopoly we use antitrust laws to break up or prevent monopoly, since competition can do a better job. Know the Clayton Act and the Sherman Act. The natural monopoly is a rare case. Some industries require very large capital expenses and require a large customer base to spread the cost of the capital. A natural monopoly is a situation where the capital expense is so large it can only be afforded if one firm controls the entire industry. If competition occurred in such an industry, none of the competing firms would be able to afford the capital which would minimize long run costs. In this rare case monopolies are preferred. We keep them, but we industrially regulate them. We prefer a natural monopoly to competition because it can afford bigger capital and with the bigger capital it will have lower per unit costs of production (lower ATC), but we do not want the monopoly to charge monopoly prices. We therefore use industrial regulation to regulate the price. The government forces the firms to charge either the fair return price or the socially optimal price. Each regulated price has a problem associated with it. Know the dilemma associated with these two prices (end ch10). Once a monopoly or oligopoly is charged with violating antitrust laws, they have the ability, like anyone else, to defend themselves. The behavior approach and structure approach describe how the courts have interpreted the antitrust laws when dealing with monopoly or cartel situations. Deregulation occurred for a number of reasons. Cost complications in ch10 and problems with regulation in ch18 describe some of these reasons. In conclusion, in most cases today it is assumed that competition is the better result and the job of government is to encourage it.

Policy Test 1d
Covers chapters 8,9,10,11, and 18. Multiple choice questions are on all the material covered in the these chapters with an emphasis on the four market structures and how the government has dealt with monopoly. 27 multiple choice questions and 4 short essays. This is closed book and closed notes. For your essay questions: know the economic effects of monopoly, know about industrial regulation and about deregulation, know how the courts have decided on cases using antitrust law, know about cartels, what they are, why they form, and why they are difficult to maintain. Take the test at a testing center between October 10th-October 17th. You'll need about an hour and a half, so please arrive at least an hour an a half before the testing center closes.