Assumptions of perfect competition
Many buyers and sellers
Identical products
Perfect information
Free entry and exit
Profit maximization (perfect competition)
Profit maximized where:
Marginal revenue = marginal cost
Since price = MR in perfect competition:
P=MCP=MC
Why profits go to zero
In the long run:
New firms enter if profits exist
Supply increases
Price falls
Result: economic profit = 0
Monopoly
A monopoly in its purest form is when one business dominates the whole market – it has 100% concentration. A monopolist will choose to produce where marginal cost equals marginal revenue.
Monopoly inefficiency
Monopolies may be inefficient because they:
Restrict output
Charge higher prices
Create deadweight loss
Monopolistic competition characteristics
Characteristics:
Many firms
Differentiated products
Some price control
Example: restaurants, clothing brands.
Oligopoly
Market dominated by a few large firms.
Features:
Interdependence
Strategic behavior
Possibility of collusion
Example: airline industry.
Why inefficiencies persist
Even near perfect competition, inefficiencies exist due to:
Externalities
Information problems
Adjustment costs
Natural monopolies
Occur when one firm can produce at lower cost than multiple firms due to huge fixed costs.
Example:
Electricity utilities
Water supply
Define the difference between microeconomics and macroeconomics
Microeconomics is the study of households, firms, or individuals, while macroeconomics is the study of the economy as a whole.
Difference between normative and positive questions
Positive economics: Describes facts and cause-and-effect relationships. It can be tested.
Example: “Raising minimum wage increases unemployment.”
Normative economics: Involves opinions or value judgments about what should happen.
Example: “Minimum wage should be increased.”
Intermediate vs final goals
Intermediate goals: Steps used to reach larger economic goals.
Example: education, investment.
Final goals: Ultimate outcomes society wants.
Example: well-being, quality of life, sustainability.
Traditional economic goals
Common traditional goals include:
Economic growth
Efficiency
Full employment
Price stability
Equity (fair distribution of income)
Economic growth measured by GDP
GDP (Gross Domestic Product): Total value of all final goods and services produced in a country within a given time period.
Higher GDP usually indicates economic growth and higher living standards.
Efficiency
Efficiency means using resources in a way that produces the maximum possible output with the least waste.
Productive efficiency: Producing at lowest cost.
Allocative efficiency: Producing the goods people want most.
Three broader economic goals
Efficiency – using resources well
Fairness / Equity – fair distribution of income and opportunity
Sustainability – maintaining economic activity without harming future generations
Four essential economic activities
Resource maintenance (maintaining natural and human resources)
Production (making goods/services)
Distribution (allocating goods and income)
Consumption (using goods/services)
Five types of capital contributing to productivity
Physical capital – machines, tools, factories
Human capital – education and skills
Natural capital – natural resources (land, water)
Social capital – networks, trust, institutions
Financial capital – money used for investment
Stocks vs flows
Stock: Measured at a specific moment in time.
Example: total wealth
Flow: Measured over a period of time.
Example: income per year
Tradeoffs, scarcity, and efficiency (PPF)
A Production Possibilities Frontier (PPF) shows the maximum output combinations of two goods.
Key ideas:
Scarcity: Limited resources
Tradeoffs: Producing more of one good means producing less of another
Efficiency: Points on the PPF
Inefficiency: Points inside the PPF
Unattainable: Points outside the PPF
Economics in context
This approach studies economic behavior within social, political, and environmental systems, rather than assuming people act purely rationally.
Different methods of investigation
Economists use:
Empirical analysis (data and observation)
Theoretical models
Experiments
Historical analysis
Neoclassical vs contextual models
Neoclassical approach
People are rational
People maximize utility
Markets move toward equilibrium
Strengths:
Simple and predictive
Weaknesses:
Unrealistic assumptions about behavior
Contextual approach
Includes social, environmental, and institutional factors
Strengths:
More realistic
Weaknesses:
Harder to model mathematically
Three spheres of economic activity
Core sphere – households, unpaid work
Public purpose sphere – government activity
Business sphere – firms and markets
