Comment Cards 07

September

1. Unit elasticity of demand is confusing.

R: Unit elasticity occurs when the elasticity coefficient is equal to one. This means that if price rises by one percent, quantity demanded falls by one percent; if price falls by five percent, quantity demanded rises by 5 percent and so on. In these cases total revenue will remain the same after the price change. In other words, the change in price is just offset by the change in quantity demanded. For example, assume price changes from $7 to $9 and quantity demanded falls from 18 to 14. The elasticity coefficient is (4/16)/(2/8) = .25/.25 = 1. What has happened to total revenue? When price was $7 and quantity demanded was 18, total revenue was $7 x 18 = $126. After price has changed to $9 and quantity demand falls to 14, total revenue is $9 x 14 = $126. The 25 percent rise in price was just offset by the 25 percent fall in quantity demanded. 

2. Explain the economics behind the sub-prime mortgage scandal.

R: It's a long story. We can begin by understanding that the United States has incurred deficits in the trade sector (imports exceed exports), the government budget (spending exceeds tax revenues) and in the business and household sectors (spending exceeds income) for nearly 20 years. Regardless of this huge debt burden, the U.S. economy is the largest market in the world and the U.S. dollar has been the currency of choice to facilitate world trade, i.e. central banks in other countries hold large amounts of dollars because the dollar has traditionally exhibited a stable value (exchange rate with other currencies) and because their businesses sell many if not most of their exports in the American market. So, trillions of dollars are held outside the United States. That money must come back to us in some form. Since by definition we don't sell produced goods to the rest of the world at a level that would bring that much of our currency back to us, we have only one thing to attract those dollars -- our debt instruments. Up until now China, India, Pakistan and most other countries have been happy to buy our bonds and securities -- in essence loans to underwrite our debt. All this money sloshing around trying to find investment opportunities in the U.S. coupled with an absence of government regulation of the financial sector (the Bush administration in particular follows a strict laissez faire philosophy) has created an opening for some pretty questionable financial dealings. Banks all over the country were anxious to lend money to home buyers and immediately sell the mortgages on the secondary mortgages. Investment houses were just as anxious to buy the mortgages, package them into securities and sell the securities to eager buyers all over the world. Banks never undertook due diligence in checking the creditworthiness of borrowers and securities firms didn't particularly care as well since they were going to turn them into debt instruments and get rid of them in turn. When borrowers who took out adjustable rate mortgages began to default on their loans -- because their monthly housing payments became increasingly impossible to meet -- banks began to foreclose on houses. The packaged mortgage securities in this sub-prime market began to shake the bond market. Too many investment houses were caught holding this securitized debt that no one wanted to buy.  The Fed has acted to bail out the financial sector but the fundamental problems (unregulated securities and mortgage markets and the huge debt position of the U.S. economy) have yet to be addressed. 

3. How big a role does the philosophy of laissez faire play in contributing to social problems such as poverty and environmental degradation?

R: The answer is, a big role. The textbook goes into some depth about this. Free market ideology holds that resources will  be correctly directed toward producing exactly what consumers want only if the market is allowed to be self-regulated. If consumers want more ipods then the intense demand will bid up the price of ipods and capital resources will  flow toward the production of more ipods since profit maximization is the goal of capitalists. So, any interference (price controls, taxes, tariffs, government regulation) will disturb this ideal outcome of the market process.

The problem with this notion is that it's true only if all costs and benefits from production are internalized in the operations of the owner of capital. But if the purpose of production is to maximize profits then no capitalist will care to absorb costs (such as pollution, potential harm to workers on the job due to hazardous conditions, the harm to society from the promotion of over-consumption, the consequences of global warming -- a direct result of the burning of fossil fuels -- and so on) if she can avoid them. In fact the profit motive automatically requires the capitalist to pass off costs onto society.

4. Why would producers suffer if the quantity of sales increase at lower prices?

R: I am not sure of the context of this question. It came early in the month so I don't think we would have been talking about the elasticity of demand but I'll answer it as if we were.

If demand is price inelastic then a reduction in price will cause quantity demanded to rise but proportionately less than the fall in price. So, for example, price falls from $5 to $4 and quantity demanded rises from 10 to 11. Total revenue will fall from $50 to $44. Sales have increased at a lower price but the producer loses revenue.

5. Distinguish between the use of the terms scarcity, deficit and shortage.

R: I actually have not used the term deficit. That term would apply to a class in macroeconomics. But you do raise a good question about the difference between scarcity and shortage. A shortage refers to the condition of quantity demanded exceeding quantity supplied (price is set below the equilibrium), i.e., a shortage of commodities exists. A surplus would occur when Quantity supplied exceeds quantity demanded (price is set above the equilibrium). In either case, a free market will drive price toward the equilibrium.

Scarcity is an interesting term. A commodity or service is scarce if there is not enough of it. When we reach the point of peak oil (we've run out of oil reserves) then it can be said that a scarcity exists. But in another sense scarcity must exist for capitalists to accumulate greater profits and so they are interested in promoting scarcity. Advertising, sales promotion, the creation of built-in obsolescence (short product life) and the need to constantly upgrade existing products (cell phones, computers etc) are examples of this effort. Producers are constantly creating wants we never thought we had.

6. Explain price interference.

R: Any effort by government to change the equilibrium price. Rent control sets a maximum rent that landlords can charge renters. If that is below the equilibrium rent then it constitutes an interference with the level at which rent would naturally settle. A minimum wage, if it is above the equilibrium wage level, constitutes interference with the wage at which the market would settle.

7. Why does elasticity change along a linear demand curve?

R: Something we didn't discuss because it isn't central to an understanding of elasticity. This is a phenomenon that occurs because of the relative change in price (and quantity demanded) at high levels of price (or quantity demanded) compared to the relative change at low levels. An example is the best way to illustrate this.

The table of price and quantity demanded exhibits linearity (a straight-line function). As price falls by $1, consumers will always purchase one more unit. I have eliminated the middle values to shorten the length of the table. If you calculate the elasticity of demand at the high end of price (the upper left-hand end of the demand curve) you will get (1/1.5)/(1/9.5) = 6.4. If you calculate the elasticity coefficient at the low end of price (the lower right-hand end of the demand curve) you will get (1/9.5)/(1/2.5) = .26. On the same demand curve with a constant slope of 1 the elasticity coefficient changes from being elastic to being inelastic.

8. How would a declining world population affect the global market system?

R: The most affluent countries are those whose populations are either rising very slowly or stagnant. So, at first blush it would seem that producers can simply pile more commodities into each household and continue to accumulate profits. There is always something they can sell us.

The real challenge will occur when we reach peak oil (although Tom McConnell from the U. of Michigan, who gave a presentation at our Anti-War Teach-in last semester, claims that oil producers can continue to pump oil to nearly the end of the century) or when climate change dramatically affects our ability to produce food and produces massive species die-offs.

9. Does elasticity always depend on whether a good is a luxury or a necessity?

R: No, there are two other determinants -- 1. whether a commodity has many good substitutes (demand is price elastic) or few good substitutes (demand is price inelastic). 2. whether the price of a good is high relative to one's income (elastic demand) or relatively low compared to one's income (inelastic).

10. Explain income elasticity of demand.

R: Here the relationship is between two variables: percentage change in one's income and percentage change in quantity-demanded of specific commodities. Inferior goods are those we would buy less of as our income increases. In this case the income elasticity coefficient has a negative value (increases in income cause decreases in purchases of inferior goods). The degree to which a good is inferior would depend on the value of the coefficient -- the higher the elasticity coefficient (greater the numerator is over the denominator) the more consumers will run from this good as they become more wealthy. Normal goods are those we would buy more of as our income increases. In this case the income elasticity coefficient has a positive value (increases in income cause increases in purchases of normal goods). The higher the value of the coefficient the more the good exhibits the characteristic of a normal good (if the coefficient is very high, then the good can be said to be a luxury good).

These are just examples. You may take issue with them. It is clear that inferior goods are less expensive than normal goods. What is not clear is whether we can always say that a specific good or category of good is inferior or normal in the experience of an individual consumer. If you see Bill Gates at a McDonald's Restaurant or pushing a mower around his Bellevue, Washington house then you may question this categorization.

October

1. Do you think that media have an upper hand in manipulating people's "moral obligation" and their obligation to society? Does this media coverage affect the utility theory?

R: Media consolidation is a real concern. Few Americans realize that three corporations have majority ownership in the major networks, newspapers and radio stations in the country. The FCC is holding hearings now on a further erosion in the regulation of media ownership -- the chairman of the FCC, Kevin Martin, is pushing to repeal the rule prohibiting one company from owning both a local daily newspaper and a television station in the same market. That would further undermine the likelihood that communities would hear alternative views expressed in local media. In fact, the issue is being rushed to judgment right now (Nov. 9 hearing) for a December vote without proper public hearings (http://seattletimes.nwsource.com/html/localnews/2003991318_fcc03m.html).

So, yes, I think the media (note, the public airwaves are owned by us) is increasingly expressing the interests of a powerful few, which affects the way Americans will think and the way they will vote.

2. Muddiest point ~ calculating marginal cost.

R: Okay, there is both a one step method, which is straightforward and another method which relates labor productivity to marginal cost, i.e., demonstrating the relationship between marginal product and marginal cost -- this is a bit more complicated. Let's take the first one:

So, marginal cost is just the change in total cost when an additional unit is produced.  Now, let's connect marginal cost (and understand why it tends to rise as new  units are produced -- diminishing marginal returns) to marginal product.

Assume labor is the only variable input, fixed costs are $100 and an hour of labor costs $10. So, if the factory uses two hours of labor its total costs are $100 (fixed) + $20 (variable) = $120. As labor is added total costs rise; notice, however that marginal product falls off after four hours of labor -- it takes an additional four hours (for a total of eight) to produce an additional 10 units of total product (for a total of 30) -- that is a marginal product of 10/4 = 2.50. It took only two additional hours to push output up from 10 to 20 for a marginal product of 10/2 = 5. That's two dollars per unit (20/10=marginal cost). But since it takes an additional four hours to push total product from 20 to 30 and the workers are still paid $10 per hour, it costs $40 in added cost to raise output from 20 to 30 or a marginal cost of 40/10 = $4. The next ten units requires an additional 6 hours of labor or $60 in added cost for a marginal cost of 60/6 = $6. Why is marginal cost rising...because marginal product is falling -- it takes more labor hours to produce the same addition to output and labor hours cost $10 each regardless of how productive they are.

3. A bit unclear about average total cost.

R: Take the example above. We can calculate average total cost by dividing total cost by total product for each row. Notice that marginal cost equals average total cost at precisely the level of output where ATC is its lowest. When marginal cost rises above ATC it begins to pull up ATC -- just like the batting average example. If the next day at the plate you bat higher than your average you will pull your average up.

Here is a drawing (given my limited skills) of the ATC and MC curves that correspond to the tables above:

4. Muddiest point ~ difference between economic profits and normal profits.

R: Conventional economics contends that costs should not just include accounting costs (labor, raw materials, electricity et al) but should also include opportunity costs which are foregone income from alternative sources. The claim is that good decisions will be made only if these costs are considered. So, if a bakery owner earns say $75,000 after accounting costs and could earn $35,000 working for someone else then she has an economic profit of $75,000 - $35,000 = $40,000. She will stay in the business as long as her economic profit is above zero. At zero economic profit she is still making a normal profit of $35,000. Now, would she actually choose to close the bakery if her profits dropped below $35,000 (i.e., a negative economic profit)? Maybe not if she prefers to be self-employed.

By the way, normal profit can also be considered the next best return on the dollar value of the investment in the bakery. For example, if the bakery owner can earn 5% return on a safe income-earning asset then a 5% return is her normal profit. Anything above that is an economic profit.

5. Unclear about profit maximization under perfect competition and graphs of marginal revenue.

R: Profits are maximized under conditions of perfect competition at the output level where price is equal to marginal cost. As we know, price is constant at all levels of output for a firm in perfect competition (i.e., these firms are price takers; They can only sell at the price dictated by the market) while marginal cost rises after some level of output. Price is the addition to total revenue from selling one more unit and marginal cost is the addition to total cost necessary to produce one more unit. A producer would not sell a unit for less than the extra cost necessary to produce it.  So, in the following diagram, the producer will want to produce at 15 units of output -- the addition to total revenue (price) is just equal to the addition to total cost (marginal cost) for the last unit. The producer has maximized profit because he has produced every unit that added more to revenue than it cost to produce -- the last unit sold just returns revenue equal to its extra production cost so it doesn't raise profit but does add to the firms market share. See the graph below. All the output units under the aqua area will add to total profit since price is above marginal cost. All the output units under the yellow area add more to total cost than to total revenue and will reduce total profit. Total profit is maximized at 15 units where price is equal to marginal cost. Price is marginal revenue for a perfect competitor.

6. Muddiest point ~ tax per unit

R: A per unit tax is a fixed dollar amount charged by the government on each unit sold. If, for example, the government charges a $1 per unit tax the supply curve will shift up by $1. This causes equilibrium price to rise and equilibrium quantity to fall. The government realizes a tax revenue equal to the per unit tax times the equilibrium quantity. A per unit tax of $1 has been imposed on the product in the graph below. The seller's cost rises by $1 per unit sold because she has to collect the tax from the consumer for each unit she sells. So her supply curve (i.e., her marginal cost curve) has to rise by $1. This however will cause the new equilibrium point to be at a price of $3.00 and an output level of 10 units. The government collects $1 X 10 = $10 in tax revenue. The area A + B is a deadweight loss because it represents an amount previously realized as consumer surplus (A) and producer surplus (B) that now goes to no one -- the producer no longer sells 15 units. The deadweight loss is ($1 X 5) X 1/2 = $2.50. Since the remaining amount of lost producer and consumer surplus is realized in tax revenues by the government, it is not a net loss but a transfer.

7. Don't understand the graphs for perfect competition.

R: Okay, let's go back to question 2 above. If the market price is $6 then the best the firm can do is sell 40 units of output, realize $240 in total revenue ($6 X 40 units) at a total cost of $240. So, the firm just breaks even (zero economic profit). What if market price rises to $10. Again the firm will produce where price equals marginal cost (for the reasons cited above in the brilliantly drawn aqua and yellow graph) and sell 50 units of output realizing $10 x 50 = $500 in total revenue at a total cost of $340 and earning $500 - $340 = $160 in profits. Here the firm makes an economic profit. In fact, any price above $6 will earn the firm an economic profit -- we just happen to have the marginal cost for 50 units. The graph that follows shows the total revenue curve (which we assume to have a slope of $10 because we have fixed price at $10). At the point where the slope of total revenue is the same as the slope of total cost the two curves will be farthest apart and profits will be maximized. That happens at 50 units of output where marginal cost (slope of TC) is just equal to marginal revenue (slope of TR). In fact, I took your index card and checked the two slopes to make sure they were equal before I drew my somewhat crude graph. 

To clarify, total revenue is what the firm receives for selling a given number of products and total cost is what it costs to produce those products, so the difference is profit.

To clarify further, the graph assumes you can infinitely divide units of a product (1/2, 1/3, 1/10 etc) which allows us to draw a smooth total cost curve. In most cases, except for products measured and sold by volume or weight (sugar, milk, apples) this is not possible. So, our assumption doesn't hold for all products. The next best rule of profit maximization is to stop producing at the unit before the increase in total cost exceeds the increase in total revenue. 

Since price is always $10, the slope of total revenue is constant at $10.

8. Clarify consumer and producer surplus.

R: The demand curve represents what the consumer is willing and able to pay for a certain number of products (in other words, the consumer's marginal utility curve). In the following graph from question 6 we know that the consumer was willing to pay as much as $3 for the 10th unit but at the price of the original equilibrium position the consumer only had to pay $2.50, so he realized a consumer surplus of $.50 ($3.00 - $2.50). The producer on the other hand would have been willing to sell the 10th unit for $2.00 (its marginal cost to produce the 10th unit) but actually got $2.50 for it, so she realized a producer surplus of $.50 ($2.50 - $2.00). For each of the units up to the 15th both the consumer and the producer realized a surplus.

9. Not sure about long-run average cost.

R: In the long-run all inputs are variable. The firm can double plant size, for example. So, if the firm doubles all inputs (capital, labor, raw materials etc) and output more than doubles then average costs will fall -- increasing returns. The firm's costs double because it pays workers the same hourly wage and pays the same price for each new machine. If output more than doubles then per unit costs (average costs) have to fall. This is the example of economies of scale. It is consistent with Adam Smith's notion of the division of labor creating for a time a rise in output per worker as additional workers specialize in certain tasks and generate greater efficiency (as happened in our airplane assembly line). If you pay additional workers the same hourly wage but they add more to output than the previous workers then average costs have to fall. The difference is that in the long-run we would be adding tables to our airplane assembly process. So, why should average costs ever rise? Economists argue that at some point the bureaucratic costs of managing a large, multi-plant business will grow more rapidly than any productivity increases. At this point the business incurs rising average costs (diseconomies of scale or decreasing returns).

10. What are negative effects of specialization?

R: Workers begin doing menial tasks requiring very few cognitive skills. As a result their mental abilities atrophy and they are in jeopardy of being replaced by machines or anyone with a pulse. The work bores them to tears -- similar to the summer job I described at the can factory. They can't wait for the end of the shift. Frederick Winslow Taylor, the so-called father of scientific management was the most well-known of the efficiency experts during the beginning of the 20th century. He undertook time and motion studies to exactly describe each worker's task and how long it should take. This created a worker routine that couldn't be varied and was intended to force the worker to work at a pace dictated by the boss. In the end it led to workers being completely alienated from the work process. 

11. The difference between the short-run and the long-run has to do with the ability of the firm to change inputs. In the short-run it has some fixed inputs. An example would be a factory that has both labor and machines. The firm can increase labor at a moment's notice but say it takes at least a month to purchase and install new machines. So, the short-run is one month. Over any given month the firm is confined to the number of machines it has on hand. This is exactly like our airplane assembly demonstration. The table was the fixed input. In the long-run (over a month) the firm can increase all inputs. If the business is supplying hydroelectric power then the short-run may be as long as a decade -- the time it takes to build a new hydro-electric dam.

November

1. Rent control and ceiling caps were a bit confusing.

R: If a market is not subject to interference from government then the market will gravitate toward an equilibrium price where the demand and supply curve cross. Any deviation from that will be corrected because surpluses force prices down and shortages force prices up. The result is a market clearing position where quantity-demanded equals quantity-supplied. If government decides that, for example, the market-determined rent level is too high (too many homeless people), then they may set a ceiling rent that is below the equilibrium rent level. Conventional economists argue this will create a shortage. Apartment building owners may even abandon their apartments they say. In this case, price is no longer the rationing mechanism (market-determined price clears out all those who cannot pay the going rate, so it rations a short supply among all potential renters). Then it becomes a first-come, first-served form of rationing. This gives everyone a fair shot at an apartment.

2. Is there an underlying motive in the No Child Left Behind legislation to have parents move their children out of public schools and into private schools?

R: It isn't explicitly stated that way, but it does provide an incentive for parents to remove their children from "low-performing" schools and transfer their tax dollars to pay for the new school's tuition. This encourages a kind of education apartheid because those students left behind will be the very ones most vulnerable to an inadequate education (their parents are either less concerned about giving them the best education or are economically incapable of moving to another district). It can be a way of underwriting "middle-class flight" from the inner cities. The No Child Left Behind advocates argue that it will force poor-performing schools to shape up but it's hard to see how that's possible when the district's tax base is shrinking in the wake of  middle-class flight.

3. Why do sellers in an oligopoly have to constantly watch what other sellers are doing?

R: Because they each are capable of grabbing greater market share from their competitors. The actions of any single firm in a market of say three sellers will have a big impact on the others. If you have a market closer to perfect competition, then any one seller's action will almost go unnoticed because each is so small compared to the market as a whole. They are price takers. Oligopolists have control over their prices -- if they lower price from their competitors they can assume a much greater market share. This is why schemes to set prices to suppress competition is very tempting in oligopolistic markets.

4. What is a perfect market? We don't live in a perfect world.

R: Right, perfect markets are just a theoretical benchmark that does not exist in practice. But the more competitive a market, the more it resembles the characteristics of perfect competition.

5. Why is entry into oligopoly so difficult?

R: Oligopolists, because they are so few and so large, have name recognition and a significantly large investment in plant and equipment. As such, it is difficult for new-comers to compete. How hard would it be to enter the athletic shoe market with a new brand? Nike, Adidas and Reebok -- because of brand recognition --- have just about sewed up the entire market. How hard would it be for a competitor to enter the computer chip market when it costs almost two billion dollars to build a typical plant that achieves the economies of scale of an industry leader like Intel?

6. Why wouldn't a landlord want to lower the rent? If they can only afford rich people, they're going to have a lot of rooms left over. Won't they begin losing money?

R: You are assuming there is slack demand for housing. In cities like New York there is a shortage of housing. Additionally, the market for housing is controlled by a small number of property owners. So, monopoly practices would prevail, meaning that rent would tend to be set far above a level that would just cover costs and a normal profit. Moreover, you might be right if demand for housing were elastic, but it is relatively inelastic. Lowering the rent doesn't elicit a rush to lease apartments and raising the rent doesn't drive buyers away. People need a certain amount of housing regardless of price.

7. In what situations do we use imperfect rather than perfect competition?

R: Imperfect competition is when firms have some control over price because they have a certain degree of monopoly, however small. A corner bakery may have  control over the market in its immediate vicinity, if there are no other bakeries close by, or because it has a loyal clientele. As a consequence, it can set price above a level that would just cover its costs plus a normal profit. Perfect competition is, as I wrote above, just a theoretical benchmark. You would be hard pressed to find a market that fits all the requirements of perfect competition.

8. Still confused about the calculation of marginal return.

R: Marginal product (same thing) is the change in total product when one more variable input (say labor) is added. It's easiest to calculate when we assume a single variable input. In the table below labor is the only input. The only way to increase total product in the short-run is to add labor. We then assume that the increase in output (marginal product) that occurs is due to the additional labor.

Marginal product first rises then, with the addition to 15 labor hours, diminishing marginal returns sets in.

9. Still confused about relationship between marginal revenue, total revenue and price.

R: Marginal revenue is the addition to total revenue when one more unit of output is produced. If the market is perfectly competitive then price is constant to the firm It will always add to profit by increase output if the next unit of output adds more to total revenue (price) than it adds to cost (marginal cost). So, it maximizes profits when price is equal to marginal cost. Marginal revenue and price are the same thing in perfect competition (the price, marginal revenue and demand curve are all the same -- a straight line -- constant at every level of output). For an imperfect competitor, demand is downsloping because firms can adjust price. In that case, marginal revenue is everywhere below price and firms maximize profit at the point where marginal revenue is equal to marginal cost.

The tables below might make it clearer. Assume price is constant at $4 in the first table (perfectly competitive firm) and price and quantity are given in the second table (imperfect competition).

Perfect Competition (Notice, since price is fixed it is always equal to marginal revenue.)

Imperfect Competition (Notice, marginal revenue is always less than price.)

10. How do you control monopoly?

R: The government sues them for fixing prices, engaging in predatory pricing practices (lowering price to drive out a competitor. They may lose money for a while but they have more cash on hand than a new entrant, so they can outlast them), buying or mergin with competitors to eliminate rivals and so forth. There are many laws against monopoly practices but it requires a vigorous enforcement by the U.S. Justice Department. The current Justice Department never met a merger it didn't like, so there have been few lawsuits initiated in the Bush administration against corporations for monopoly practices. Upon taking office, the administration announced its unwillingness to continue the Microsoft case that was initiated in the Clinton administration. Fortunately, states can also sue under the laws and they continued the case -- one after the other, Microsoft settled with the states but really didn't have to stop any of its practices. They just paid fines. 

11. Why do perfect competitors price their products lower than that of imperfect competitors.

R: Everything else the same (ceteris paribus), a perfect competitor is faced with a lot of rivals selling an identical product. Competitive pressure causes them to set price at a level where they just realize a normal profit. But if the industry had only a few firms or just one, they could set prices much higher than what would just yield a normal profit. Why? Because they have few if any rivals.

12. If monopolies sell at such high prices why don't consumers buy inferior products at lower prices?

R: First, a monopoly wouldn't be a monopoly if it had competitors selling the same product. There are no perfect monopolies. Even Microsoft has rival operating systems (Oracle) but they are of little consequence. If you buy a PC, you buy Microsoft's products. Consumers could buy a personal computer without a Windows operating system but they would find out quickly that very few software programs would run very efficiently on it. Microsoft is not a natural monopoly. It gained its dominant position by innovating faster than anyone else and then protecting its monopoly position through exclusive contracts with PC manufacturers -- if the computer manufacturer would agree to exclusively use Windows O.S. on its computers, Microsoft would give it away. They then made money on the software products they designed to only run on their operating system. Since they have refused to release the programming code and have gained the dominant marketing position in operating systems, they now require computer manufacturers to pay them for Windows and can simply rake in the profits. Secondly, there are outlets that sell inferior goods at low prices, but even that end of the market is dominated by a few big sellers. Wal-Mart is a near monopoly in the low-end retail product market. Entire companies in third world nations sell their products through exclusive contracts with Wal-Mart.

13. Why isn't marginal cost a part of average total cost?

R: M.C. is just the change in total cost when another unit of output is added. So, if you added the individual marginal costs from the first unit to the last you would have total cost. If you then divided that number by the level of output, you would have average total cost. In that way you can arrive at average total cost by starting with marginal cost, but it's clearly easier to just divide total cost by output to get A.T.C.