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Re: Let's talk microeconomics!!!

Postby funatic » Wed Dec 01, 2004 9:41 pm

[quote="Baseballer02"]Have to write a two-page essay for micro-economics, 10% of my grade. Not that hard of an essay but I've got a major headache. What I'm looking for is people's opinions on the following discussion questoins.

1)Suppose a firm invents a technology that reduces its costs so far that it can drvie all of its competitors out of business, even though the price that maximizes the firm's profits is well above its marginal costs. Would consumers be better off if this firm was forbidden from introducing its cost-saving technology?

If you have to write a 2 page paper on these 4 questions, that shouldn't be a problem! If not, I would pick question 1 or 4, or 3, since your prof would be impressed that you actually understand the question. Anyhow, my guess is that the consumers would definitely be better off in the short run, but the long run is not so certain. In the short run, obviously lower prices benefit the consumer. In the long run, when the firm becomes a monopoly, it depends on the barriers to entry, whether or not a firm can come in when the monopolist raises the prices too much.

Also, I don't see how the firm can be forbidden to introducing this technology. Maybe I am not getting this.

2)Some music groups are in favor of allowing people to distribute their songs at no charge through P2P networks, while other are strongly opposed. Can you suggest why there are these differences?

It seems like just a matter of what the bands think. For example, The Offspring might have even suggested putting their new song(s) out on kazaa/napster some years ago, if I remember correctly, and that is because they feel that that is a good way to introduce it to the most number of people. U2 on the other hand, don't like sharing their music, because they "worked hard for it", and thus would rather make a deal with i-pod to sell special edition U2 i-pods...

3)Are the network effects present with the Internet fudamentally any different from those present with telephone systems or even from old-fashioned 3.5-inch disk drives and diskettes?

er... No?

4)Some people argue that copyright protectoin and patent protectoins should be abolished, because the owners of patents and copyrights are effectively monopolists when it comes to supplying the goods for which they have these rights. What do you think would happen to the rate of innovation if patents and copyrights were abolished? What would be the likely impact on the well-being of consumers?

They CanNOT be abolished. This is just too simple, without any protection, why would someone invest a lot into researching, only to have his/her glorious invention copied just like that. However, monopolists certainly isn't great, but at least some form of reward must be given to the inventor. The consumers are definitely better off paying a higher price for something wonderful, than not even having the chance to get this something wonderful. At least patents have an expiry date.
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Re: Let's talk microeconomics!!!

Postby funatic » Wed Dec 01, 2004 9:44 pm

:-P
Baseballer02 wrote:Have to write a two-page essay for micro-economics, 10% of my grade. Not that hard of an essay but I've got a major headache. What I'm looking for is people's opinions on the following discussion questoins.

1)Suppose a firm invents a technology that reduces its costs so far that it can drvie all of its competitors out of business, even though the price that maximizes the firm's profits is well above its marginal costs. Would consumers be better off if this firm was forbidden from introducing its cost-saving technology?

If you have to write a 2 page paper on these 4 questions, that shouldn't be a problem! If not, I would pick question 1 or 4, or 3, since your prof would be impressed that you actually understand the question. Anyhow, my guess is that the consumers would definitely be better off in the short run, but the long run is not so certain. In the short run, obviously lower prices benefit the consumer. In the long run, when the firm becomes a monopoly, it depends on the barriers to entry, whether or not a firm can come in when the monopolist raises the prices too much.

Also, I don't see how the firm can be forbidden to introducing this technology. Maybe I am not getting this.


2)Some music groups are in favor of allowing people to distribute their songs at no charge through P2P networks, while other are strongly opposed. Can you suggest why there are these differences?

It seems like just a matter of what the bands think. For example, The Offspring might have even suggested putting their new song(s) out on kazaa/napster some years ago, if I remember correctly, and that is because they feel that that is a good way to introduce it to the most number of people. U2 on the other hand, don't like sharing their music, because they "worked hard for it", and thus would rather make a deal with i-pod to sell special edition U2 i-pods...

3)Are the network effects present with the Internet fudamentally any different from those present with telephone systems or even from old-fashioned 3.5-inch disk drives and diskettes?

er... No?

4)Some people argue that copyright protectoin and patent protectoins should be abolished, because the owners of patents and copyrights are effectively monopolists when it comes to supplying the goods for which they have these rights. What do you think would happen to the rate of innovation if patents and copyrights were abolished? What would be the likely impact on the well-being of consumers?

They CanNOT be abolished. This is just too simple, without any protection, why would someone invest a lot into researching, only to have his/her glorious invention copied just like that. However, monopolists certainly isn't great, but at least some form of reward must be given to the inventor. The consumers are definitely better off paying a higher price for something wonderful, than not even having the chance to get this something wonderful. At least patents have an expiry date.

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Re: Let's talk microeconomics!!!

Postby LBJackal » Thu Dec 02, 2004 1:59 am

I'm an economics major so I should be able to answer this... but don't blame me if I'm wrong :*)

I'll answer #1 since it has to do with economics, while #2 and #4 are more common sense and have been answered. #3 is just weird.

Baseballer02 wrote:1)Suppose a firm invents a technology that reduces its costs so far that it can drvie all of its competitors out of business, even though the price that maximizes the firm's profits is well above its marginal costs. Would consumers be better off if this firm was forbidden from introducing its cost-saving technology?


The price to maximize profits in the short-run isn't being met, but monopolists don't always sell at profit maximizing levels like perfect competitors do. If the firm has this technology that can make it price their goods at a cost that would put the competition out of business... the market is beocming a monopoly. If they can gain a long-run advantage they should do it, assuming the barriers to entry will be great enough to deter new firms from entering the market by using similar technology.

As for the consumer surplus, AKA "how well off the consumers are", they would be better off if the market remained in perfect competition. If it is a monopoly, then they can charge whatever the consumer will pay, regardless of how much it costs them to make it. AKA, average cost of production is less than price. That's not good for the consumer. If the price that keeps the barrier to entry in effect is less than the equilibrium cost in perfect competition without the new technology being used, then the consumers are probably going to be better off with a monopolist running things.

So bottom line: if the longrun price that consumers are paying is lower, then they are better off, so long as the amount supplied (in the case of a monopolist) remains at a level that keeps total consumer surplus higher than the consumer surplus in the perfectly competitive market. It's all about the consumer surplus - they're better off with the more consumer surplus there is (that's the definition of "better off" in microeconomics). That might mean paying a higher price if the producer is willing to supply a greater amount, it really depends on the specifics. For example say they use the new technology and charge $10 per unit when the old price was $200 per unit. If the only firm left is onyl selling 100 of those units, and before they implemeneted the new technology, there were 10,000 units supplied, then the consumer surplus is probably going to be lower even though the price is $180 cheaper, since 9,900 people are without the good even though it costs less.

And sorry if I confused you, that's a pretty big mess of words and after going over it I'm kinda confused myself :-b
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Postby Baseballer02 » Thu Dec 02, 2004 2:09 am

Understood it completely, now I know who to run to when I'm taking Macroeconomics next semester. ;-D
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Postby LBJackal » Thu Dec 02, 2004 2:22 am

Well Macro I might not know as much about..... I'm taking it next semester too. I took Intro Macro last year but it didn't go so well.... at least I passed. And I could have used a little brush up on my micro, I have an intermediate micro exam in a couple weeks :-o
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Re: Let's talk microeconomics!!!

Postby funatic » Thu Dec 02, 2004 2:44 am

LBJackal wrote:So bottom line: if the longrun price that consumers are paying is lower, then they are better off, so long as the amount supplied (in the case of a monopolist) remains at a level that keeps total consumer surplus higher than the consumer surplus in the perfectly competitive market. It's all about the consumer surplus - they're better off with the more consumer surplus there is (that's the definition of "better off" in microeconomics). That might mean paying a higher price if the producer is willing to supply a greater amount, it really depends on the specifics. For example say they use the new technology and charge $10 per unit when the old price was $200 per unit. If the only firm left is onyl selling 100 of those units, and before they implemeneted the new technology, there were 10,000 units supplied, then the consumer surplus is probably going to be lower even though the price is $180 cheaper, since 9,900 people are without the good even though it costs less.

And sorry if I confused you, that's a pretty big mess of words and after going over it I'm kinda confused myself :-b


I have to write about with some of your bottomline. Don't worry, Econ is my major too.

Anyhow, obviously you have to assume that consumers have perfect knowledge of the market, and want to maximize their own utility. Now, you have to assume that the monopolist is a profit maximizer, also with the intention to maintain the monopoly. If the barriers to entry are high, then he is certainly going to either charge a Lot more than $10, or he is going to produce a Lot more than 100, or he is going to do both. If the barriers of entry are low, and if the old price was $200, it is More than possible that the other 9900 people are eager to buy the good at the much higher price. Therefore, the one monopolist will now share the market with inefficient newcomers who would still be able to make a profit.

Now, why did I choose to write about microeconomics on a baseball forum instead of sleeping... :-[
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Postby LBJackal » Thu Dec 02, 2004 3:02 am

Yes if the monopolist could do that..... they probably would. But if selling 100 items at $10 brings economic profits, and anything mroe than that doens't, then they'll choose the package that provides economic profits. For most goods that isn't likely, since marginal cost of production usually drop as you use more of them, but it's possible to have the situation I gave as the profit maximizing level. Economic profits include opportunity costs so if the resources could be better used in another market, they will be. The firm would probably charge more than $10 per unit if they only produced 100 of them, but not in all cases. Demand does not always increase when price decreases.
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Postby Arlo » Thu Dec 02, 2004 3:50 pm

No, and it's an unrealistic scenario anyway. Because different music groups have different opinions just like everyone else. You better believe it. And long-term, probably not much.

Fill in remaining 1.96 pages with bibliography. :-D

(And yes, I know everyone's going to disagree with me on #4. ;-) )
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Postby funatic » Thu Dec 02, 2004 4:51 pm

LBJackal wrote:Yes if the monopolist could do that..... they probably would. But if selling 100 items at $10 brings economic profits, and anything mroe than that doens't, then they'll choose the package that provides economic profits. For most goods that isn't likely, since marginal cost of production usually drop as you use more of them, but it's possible to have the situation I gave as the profit maximizing level. Economic profits include opportunity costs so if the resources could be better used in another market, they will be. The firm would probably charge more than $10 per unit if they only produced 100 of them, but not in all cases. Demand does not always increase when price decreases.


Economic profits? I may be wrong, but in intermediate microeconomics at least, it is not even considered; only accounting profits. If I am wrong, then it should be included in the profit maximizing mentality.

As for ""Demand does not always increase when price decreases."", well, it Does. Only for the special case of the Giffen good, but we can assume that we aren't talking about new selling Irish potatotes, or the like. Otherwise, just state it as a common assumption. Besides, a good can only be a Giffen good for a certain interval.

Otherwise, I like the points that you brought up in your earlier post. ;-D
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Postby LBJackal » Thu Dec 02, 2004 5:51 pm

I'm taking intermediate micro and we're learning about accounting profits and economic profits... but when not specified, we assume economic profts are being used, so opportunity costs are always an issue. And demand doesn't always have to increase when price decreases....... most of the time, yeah, but there are times when it doesn't. I was just covering all the ground because you can't assume things that seem to be common sense in economics. Most of the time you just assume as price decreases, demand increases. I guess what I'm talking about if a giffen good - with positive price elasticity of demand. But there are also luxury items that have a positive price elasticity of demand if I'm not mistaken. At least, that's what I was taught.
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