Week 7 Review

On a tangent, we saw that the existence of the corporation as a legal entity enabled greater
economic activity and growth. The primary befit is the ability for people to pool their money
and finance a larger enterprise than any one of them can afford. A second thing what
corporations provide is limited liability: investors can have their holdings fall to zero, but the
value cant go negative. For example, stockholders can not be sued for the actions of a company,
however negligent. (This is most definitely a double-edged sword.) Corporations can, with the
approval of their boards or directors, issue new shares, or buy back and retire old shares. Stock
buy-backs theorectically are equivalent to dividend payments so far as the shareholders are
concerned, except that the income is in the form of capital gain rather than regular income. They
have become more popular in recent years due both to the tax code taxing capital gains at a lower
rate and because execuatives often are rewarded based on share price rather than market
capitalization (= share price * number of shares) e

Perfect Competition requires 4 things:

1) Many small players in the market. This includes both buyers and sellers. Small means
not dominating a significant piece of the market, while there is no hard definition, consider it to
mean <10% of the market.

2) Free Entry and Exit. Its free (or at least very cheap) to get in and get out of the market. A
weaker version is that you have to put up $ to get involved, but if you ever get out you can get
your $ back.

3) Perfect Information. The internet brought this much closer to reality.

4) No Product Differentiation. All products are considered equivalent, with none better than
any other. Such products are also described as commodities.

A perfectly competitive market among producers leads to a low price, high quantity, and no-to-
very-low profits.

A Monopoly happens when there is a single player in the market. The monopoly can determine
the profit-maximizing price based on Marginal Revnue (MR, which = TR / Q). When MR >
MC the company should GO ( = reduce the price to that level), and MR < MC = Stop.
MR = Marginal Revenue = (Total Revenue) / (Quantity), starting with the highest prices and
working your way down. When MR > MC (Marginal Cost), its worth cutting the price to sell
more. (There were other equations, but they were all old.)

Changing the Fixed Costs affects a monopolys profits, and can drive a monopoly out of business
if it is impossible to make a profit, but otherwise have no effect. Changing the Marginal Costs or
moving the Demand Curve will affect the profits.

Monopolies are obtained in various ways.

- A private entity, such as the owner of a venue, can grant a monopoly (or exclusive) to a
vendor on their property.

- A government can grant a monopoly, either by passing a law, or through the patent/copyright
system, which grant a temporary (or not-so-temporary in the case of copyright) monopoly to the
creator of a new product. Patents provide the incentive to spend the time and effort to develop
new products, while at the same time ensuring that, in the long run, we all benefit from these
new products being available cheaply.

- Rent-seeking behavior involves companies trying to get monopoly right/profits, such as

Disney lobbying to change copyright laws.