Chapter 17

While the previous chapter introduced oligopolies, this chapter greatly expanded upon them. It first introduced the example of the market for tennis balls, which has four main competitors. The essence of this market is that there are only a few sellers. In analyzing oligopolies, we come across game theory, the study of how people behave in strategic situations or how people react when faced with alternative courses of action in relation to how others might respond to the action they take. Later in the chapter, we get fun buzz words like collusion and cartel. Collusion is the act of cooperating over production and price charged, and a cartel is the name for the group of firms acting in unison. Unfortunately, legal restrictions often prevent firms from working together, and people operating in their own self-interest often leads the end market outcome to not maximize total market profit, but for an individual firm to try and get a bigger piece of the pie. When all firms operate in their own self-interest, they reach what's called a Nash equilibrium, where the best strategy is chosen based on the strategies that others have chosen. Each decision made is made with two concepts in mind, the output effect, and the price effect. The output effect says that selling an extra gallon of water will raise profit, but the price effect says that an additional unit into the market will decrease the price of the good and decrease the price on all the other goods in the market. You have to identify the trade-offs before you make a decision. Overall, this chapter was very interesting, I would rate it 2/3 in terms of difficulty.

Chapter 16

Finally, we are beginning to define economics in less broad strokes and are getting into details and the nitty gritty. This chapter delves into another type of market, the monopolistically competitive market. Monopolistically competitive markets are defined by imperfect competition, where firms have some degree of control over their prices, and had some degree of market power, but not so much so that the firms can be defined as a monopoly. This chapter also brings up the concept of an oligopoly, which is a market with only a few sellers, each offering a product similar or identical to the products offered by other sellers. Some examples of oligopolies in the market include breakfast cereal, aircraft manufacturing, electric lamp bulbs, household laundry equipment and cigarettes. The problem I have with all of this is that everything is very loosely defined and up for debate. "Few firms" from "many firms" is very hard to distinguish between. A monopolistically competitive firm works in the same way a monopoly does, producing where marginal revenue equals marginal cost, and then using the demand curve to find what to price their good at. In the long run, monopolistically competitive firms have to reach an economic profit of zero for the same reasons a perfectly competitive firms must. The maximum profit is zero only if the ATC and the demand curves touch each other without crossing. This touching is called "tangency". Overall, this chapter was pretty easy to read, I would give it a 1:4 in terms of difficulty.

Chapter 15

Whereas last chapter was all about the price takers and perfectly competitive markets, chapter 15 is all about price makers and monopolies. The introduction provides a clear, if a bit outdated example of Microsoft having a monopoly on the Windows operating system. A key concept, introduced early, that separates perfectly competitive markets from monopolies are barriers to entry. These fall into three categories, monopoly resources, government regulation, and the production process. We had already talked a little bit about government regulation in the form of patents and copyrights, but thinking about specific examples like authors and pharmaceutical companies helped drive home the point. Natural monopolies also received a better definition in this chapter, and we learned that something like a bridge can be a natural monopoly because as more and more people use the bridge, the average total cost goes down because marginal cost in negligible. One important thing to remember is that for a monopoly, marginal revenue is not the same for each additional unit of output. A monopolist's marginal revenue is always less than the price of the good. Obviously, the lower the price, the more that is sold, increasing total revenue, but the price is lower, so it decreases total revenue. To maximize revenue for a monopolistic corporation, you need to determine where the marginal revenue curve and the marginal cost curve intersect. Overall, this chapter was okay in terms of difficulty. I would rate it a 2/3.

Chapter 14

Chapter 14 examines firms and their decision-making processes in perfectly competitive markets. The important conditions to remember when looking at firms in perfectly competitive markets are that individual buyers and sellers have a negligible impact on the market, and that the goods offered  by various sellers are largely the same. This means that largely, no single buyer or seller has the power to control market prices, so they are referred to as price takers. This is important because it helps understand that because price is fixed, when Q rises by 1 unit, the total revenue rises by a fixed amount of dollars, or in other words, for competitive firms, marginal revenue equals the price of the good. It was also interesting to note that rational people think at the margin, and in terms of maximizing profit, so they will only produce goods where the marginal revenue is greater than or equal to the marginal cost. To understand this, you need to know that a firm is under-producing when its marginal cost curve is below marginal revenue and that a firm is over-producing when the marginal cost curve is above marginal revenue. The ideal profit-maximizing quantity comes where marginal cost equals marginal revenue. In essence, because the marginal cost curve determines the quantity of the good the firm is willing to supply at any price, the marginal cost curve is also the competitive firm's supply curve. Overall, this chapter was relatively straightforward, and I understood it pretty well. I'd rate it a 2/3 in terms of difficulty.