Economics By: Umar Suffian Ahmad 25-27

Oligopoly A situation in which a particular market is controlled by a small firms! roup of

An oli opoly is much like a monopoly" in which only one company e#erts control o$er most of a market! %n an oli opoly" there are at least two firms controllin the market!

Monopolistic Competition A type of competition within an industry where: &! 2! '! )! All firms produce similar yet not perfectly substitutable products! All firms are able to enter the industry if the profits are attracti$e! All firms are profit ma#imi(ers! All firms ha$e some market power" which means none are price takers!

Normal Profit under Monopolistic Competition

Economics By: Umar Suffian Ahmad 25-27

Note: In monopoly MR and AR curves are more steeper. While in monopolistic competition MR and AR curves are more flatter curves.

Sources of Market Imperfection *arket failure occurs when resources are misallocated" or allocated inefficiently! +here are four important sources of market failure" each of which results from the failure of one of the assumptions basic to the perfectly competiti$e model! Each also points to a potential role for o$ernment in the economy! Public Goods +he second type of market failure occurs when the market in ,uestion is for a public ood! A public ood is a special type of ood that can be consumed by e$eryone" re ardless of whether they ha$e paid for the ood! An e#ample of a public ood is national defense!

Economics By: Umar Suffian Ahmad 25-27

+here is no way the o$ernment can pre$ent people from benefitin from national defense e$en if they did not pay for it! As a result" many people would consume the ser$ice -take ad$anta e of national defense. without payin for it! +his situation is called the freerider problem! Externalities A third form of market failure occurs when the actions of suppliers and demanders in a market impose costs -or benefits. on firms or people who are not part of that market! +his form of market failure is caused by an e#ternality! +ake" for e#ample" smokers and second-hand smoke! +he smoke that surrounds a person who is smokin a ci arette can be dan erous to people who are around the smoker" e$en thou h they are not smokin ! iffernce bet!een MicroEconomics and MacroEconomics Microeconomics is the study of decisions that people and businesses make re ardin the allocation of resources and prices of oods and ser$ices! *icroeconomics take into account ta#es and re ulations created by o$ernments! *icroeconomics focuses on supply and demand and other forces that determine the price le$els in the economy! /or e#ample" microeconomics would look at how a specific company could ma#imi(e it0s production and capacity so it could lower prices and better compete in its industry! Macroeconomics" on the other hand" is the field of economics that studies the beha$ior of the economy as a whole and not 1ust on specific companies" but entire industries and economies! +his looks at economy-wide phenomena" such as 2ross 3ational 4roduct -254. and how it is affected by chan es in unemployment" national income" rate of rowth" and price le$els! /or e#ample" macroeconomics would look at how an increase6decrease in net e#ports would affect a nation0s capital account or how 254 would be affected by unemployment rate! Ob"ecti#es of Macroeconomics 7b1ecti$e of macroeconomic policies is to ma#imi(e the le$el of national income" pro$idin economic rowth to raise the utility and standard of li$in

Economics By: Umar Suffian Ahmad 25-27

of participants in the economy! +here are also a number of secondary ob1ecti$es: Sustainability 4rice stability $ $ /ull employment

E#ternal balance

E,uitible distribution of income %ncreasin producti$ity

Instruments of Macroeconomics +here are two instruments of macroeconomics -i. monetary policy -ii. fiscal policy! *onetary policy deals with the issuance of paper money and reser$e re,uirement! /iscal policy deals with o$ernmnet re$enues and o$ernment e#penditures! Measuring Economic Success +he most fundamental measurement used to e$aluate our success in allocatin our resources is economic rowth! %ndi$iduals monitor their income and the chan in $alue of their assets! Businesses track their profits and their market s%are! 3ations monitor a $ariety of statistics to measure economic rowth such as national income -the total income from all sources earned in a nation o$er specified period of time. and gross domestic product or G P -the total market $alue of all oods and ser$ice produced within a country durin a specified period.!