How to get an A in this class
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.

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