Chapter 17 Journal

Chapter 17 elaborated about the middle ground between the two extremes seen in the previous two chapters, monopoly and competitive market. Chapter 17 talked about oligopolies, markets with few sellers as competition and has market power but not significant compared to the others. They maximize their total profits by forming a cartel and acting like a monopoly. But if all the firms make decisions based on their self-interest, the result is a greater quantity of output and a lower prince than under the monopoly outcome. The larger the number of firms in the oligopoly, the closer the quantity and price will be to the levels of a competitive market. An example that clearly depicts this problem between oligopolies is the prisoners' dilemma. It shows that self-interest can prevent people from maintaining cooperation, even when it is in their mutual interest. Both sides will succumb to their self-interest and it ends up worse than if they actually would have cooperated. Government could also play a role in this market. Policymakers use antitrust laws to prevent oligopolies from cooperation and engaging in behavior that reduces competition. Although some behavior that may seem to reduce competition may have legitimate business purposes. Overall, this chapter was a nice read and it was good to finally see the market between the two extremes. The multitude of examples made this chapter really easy to grasp. It was a easy read and on a scale of 1-3, I would give this chapter a 1.

Chapter 16 Journal

In chapter 16, Mankiw introduces a new economic system that differs from perfectly competitive markets and monopolies. Chapter 16 focuses on monopolistically competitive markets, one type being an oligopoly. Monopolistically competitive markets are characterized by having many firms, differentiated products, and free entry. Now for monopolistically competitive markets, the equilibrium differs from perfectly competitive markets in two ways. One is that each firm in a monopolistically competitive market has excess capacity. That is, it operates on the downward sloping portion of the average total cost curve. Secondly, each firm charges a price above marginal cost. In monopolistically competitive markets, there are deadweight losses resulting from the fact that the price is set above the marginal cost. Additionally, the number of firms can be too large or too small, and these inefficiencies are hard to correct by the government. The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names. Critics of advertising and brand names argue that firms use them to manipulate consumers’ tastes and to reduce competition. Defenders of advertising and brand names argue that firms use them to inform consumers and to compete more vigorously on price and product quality. I would give this chapter a difficulty rating of 1/3 as there is not really any new complicated material. It contains the same content except we are just applying it differently. 

Chapter 15 Journal

Chapter 15 reintroduced and talked about a different type of market: monopolies. Instead of competitive firms being price takers, a monopoly firm is a price maker. A monopoly is a firm that is the sole seller of a product without close substitutes. There are three main sources that cause a monopoly: a key resource is owned by a single firm, the government gives a single firm the exclusive right to produce some good or service, and the costs of production make a single producer more efficient than a large number of producers. The book follows these three key points up with examples and case studies. Then, the book went into specific types of monopolies, such as a natural monopoly. A natural monopoly arises because a single firm can supply a good and it would be a smaller cost than two or more firms supplying it. The book goes over terms we have already learned before, such as marginal revenue, total revenue, etc. Afterwards, the book shows the graphs for monopolies and the different types of curves on a monopoly graph. In a monopoly graph, similar to the competitive market, the marginal cost curve and the ATC curve is the same. What differs is the demand curve and marginal revenue curve. The demand curve is a regular market demand curve because in a competitive market, demand takes the product at a fixed price. In a monopolistic market, as the firm (or firms) increase the price, quantity goes down, and vice versa. Also, the marginal revenue will be lower than the demand curve. Those are the only differences in the graphs between a competitive firm and a monopoly. To find profit, it’s the distance between the monopoly price minus the ATC multiplied by the quantity produced. This is because like the competitive firm, profit maximization occurs when marginal cost equals marginal revenue. I would give this chapter a difficulty rating of 1/3.

Chapter 14 Journal

Chapter 14 elaborates about competitive firms in the market place. Due to no single buyer or seller influencing the market price, they are price takers, and its revenue is proportional to the amount of output it produces. The price of the good in this market equals both the firm's average revenue and its marginal revenue. To maximize profit, the firm chooses a quantity of output such that marginal revenue equals marginal cost. This makes the firm's marginal cost curve equal to its supply curve. In the short run, the firm will choose to shut down temporarily if the firm cannot recover its fixes costs and if the price of the good is less than the average variable cost. In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than the average total cost. In a market with free entry and exits, profits are zero in the long run. In this equilibrium, all firms produce at the efficient scale and the number of firms adjusts to satisfy the quantity demanded at this price. Changes in demand have different effects in time horizon. In the short run, an increase in demand raises prices and leads to profits, and a decrease in demand lowers prices and leads to losses. But if firms can freely enter and exit the market, then in the long run, the amount of firms adjusts to drive the market back to the zero-profit equilibrium. Since firms can enter and exit more easily in the long run than the short run, the long-run supply curve is typically more elastic than the short-run supply curve. On a scale of 1-3, I would rate this chapter a difficulty rating of 2. It was a bit overwhelming when all of the terms are used and connected to each other.