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| Source | D. Ohmans |
| Date | 01/09/09/15:27 |
| D. Friedman Hidden Order Chapter 16 - Efficiency
by Martha Kriske Reguarding Friedman Chapter 16: Efficiency of competitive markets involve three variables: the allocation of goods, how output is produced, and the quantity produced. Efficient firms sell goods to all consumers at a set price therefor the greatest number of those goods are allocated to those who value those paricular goods the most. In equalibrium firms produce products at minimum average cost referring to how the product is produced derived from a total cost curve for each level of output. The third variable in economic efficiency refers to the quantity of goods produced. From the consumer's stand point Price = Marginal Value; thus the value is equal to the price a consumer is willing to pay for one more unit, and from the producer's point of view Cost = Marginal Cost; thus the price is equal to the cost of producing more product. Therefor, an increase in quantity means an increase in production cost more than the consumer is willing to pay for. Friedman says competitive firms are already operating efficiently since the output is sold at a set price at which the consumers buy the amount produced, satisfying allocation and quantity. Also firms produce their goods at the minimum average cost. Friedman then discusses monopolies. Monopolies are similar to the competitive market in allocation, selling it's goods at a set price, as well as producing it's product at the lowest possible cost. It differs however in quantity. Monopolies maximize profit by pricing at a rate higher than marginal cost resulting in a lost consumer surplus since some consumers do not value the product at the increased price. A monopoly is efficient if they provide their goods to anyone who values the product at a worth of at least production cost and they produce only if at a quantity that consumer surplus plus profit is positive and not at a loss. Single-priced monopolies are inefficient since the quantities produced are too low. Regulated and government run monopolies are also inefficient due to cost production problems. Price discriminating monopolies satisfy the above mentioned conditions for efficiency in monopolies, but only for perfect price discrimination. Even though the competitive market is more efficient a natural monopoly wins out. If a natural monopoly is broken up into smaller firms average cost goes up. When one of the firms increase output average cost goes down, this firm expands buying out the other firms and back to the monopoly, a natural monopoly. Friedman has alot of good information but since I have very little business backgroung it takes me longer to read (and re-read). I enjoyed it just the same. Have a good weekend see you Wed. night. |
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