MicroEconomics Unit 3

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm's output is $25. The cost of other variable inputs is $400,000 per day. Although you do not know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue. Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas: Total Variable Cost = (Number of Workers * Worker's Daily Wage) + Other Variable Costs Average Variable Cost = Total Variable Cost / Units of Output per Day Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day Worker Productivity = Units of Output per Day / Number of Workers Then, assume that total fixed cost equals $3,000,000, and recalculate the values of the four variables listed above. For both cases, calculate the firm's profit or loss. For both sets of calculations, compare the firm's output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000? For one of the cases, if the firm can operate at a loss in the short-run, how many employees need to be laid off in order for the company to break even? To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker. Given a lower number of employees now working at the company, what is the change in worker productivity? Is the change in worker too large, and the firm should shut down immediately? Or in your opinion, can the workers increase their productivity, assuming that the units of output per day remain fixed at 200,000 units, so that the firm operates at a breakeven state? Provide a two to four page report to management of the firm that discusses what should be done. Be sure to show your work to support the decision you outline in your report. NO WIKIPEDIA PLEASE ********************COURSE MATERIAL************************* THIS CONTENT BELOW MAY HELP DEVELOPE THE PAPER ----------------------------------------------------------------- Presentation: Market Imperfections and the Role of Government A number of assumptions underlie the logic of pure competition. 1) A large number of firms and household are interacting in each market. 2) Firms in a given market produce undifferentiated, or homogeneous, products. 3) New firms are free to enter industries and to compete for profits. The first two imply that firms have no control over input prices or output prices; the third implies that opportunities for positive profit are eliminated in the long run. In this unit, we will explore the implications of relaxing these assumptions - focusing on monopolies, oligopolies, and monopolistic competition. A market in which individual firms have some control over price is imperfectly competitive. Three forms of imperfect competition are monopoly, oligopoly, and monopolistic competition. A pure monopoly is an industry with a single firm that produces a product for which there are no close substitutes and in which there are significant barriers to entry. For a monopolist, an increase in output involves not just producing more and selling it but also reducing the price of its output to sell it. The marginal revenue is not equal to product price, as it is in competition. Instead, marginal revenue is lower than price because to raise output one unit and to be able to sell that one unit, the firm must lower the price it charges to all buyers. Compared with a competitively organized industry, a monopolist restricts output, charges higher prices, and earns positive profits. Because marginal revenue always lies below the demand curve for a monopoly, monopolists will always charge a price higher than marginal cost (the price that would be set by perfect competition). A monopolistically competitive industry has the following structural characteristics: 1) a large number of firms, 2) no barriers to entry, and 3) product differentiation. Relatively good substitutes for a monopolistic competitor's products are available. Monopolistic competitors try to achieve a degree of market power by differentiating their products. An oligopoly is an industry dominated by a few firms that, by virtue of their individual sizes, are large enough to influence market price. The behavior of a single oligopolistic firm depends on the reactions it expects of all the other firms in the industry. Industrial strategies usually are very complicated and difficult to generalize. Several models of oligopoly include: The Cournot model, which holds that a series of output-adjustment decisions in a duopoly leads to a final level of output between that which would prevail under perfect competition and that which would be set by a monopoly. The Kinked demand curve model which predicts that in oligopolistic industries price is likely to be more stable than costs. The Price-leadership model, in which one dominant form sets prices and all the smaller firms in the industry follow its pricing policy. And finally, Game theory, which analyzes oligopolistic behavior as a complex series of strategic moves and reactive countermoves among rival firms. Presentation Presentation: Antitrust Laws Antitrust Laws One of the foundations of business within the United States is the freedom to compete in the marketplace; however, certain laws have been created to ensure that the marketplace is free of unfair competition and unlawful monopolies. A monopoly exists when one company owns the entire market or nearly the entire market for a service or a product. There are some situations in which a company can defend against a claim of monopolization. These include cases in which the market is too small to have multiple competitors and cases in which the acquisition of another business was the result of insightful business practices and decisions. The mere fact that a monopoly exists does not make it unlawful—the way the monopoly is created impacts the legality and whether an antitrust action can be brought in court. The federal government is authorized to enforce the federal antitrust laws that have been created. These laws are enforced by the Federal Trade Commission and also the Antitrust Division of the Department of Justice. Antitrust lawsuits can be filed by a private person or the government. Depending on the law violated, damages can be in the form of civil damages (monetary relief), criminal sanctions, or equitable relief such as an injunction. The Sherman Antitrust Act was enacted in 1980. This was created to address anticompetitive actions and prohibit the restraint of trade and was applicable to actions that involved more than one party. It specifically addressed conspiracies to restrain trade. The agreement between the parties could be written or oral and even inferred from the actions of the parties. When determining whether an action has violated the Sherman Antitrust Act, the Court analyzes many factors. It determines whether the action is a per se violation, meaning it blatantly violated the act, or whether it violated the rule of reason standard in which case, the court prohibits only unreasonable restraint of trade. Under the rule of reason, the court weighs factors including the industry and the company's place in the industry to determine if a violation has occurred. Situations occur in which parties agree to conduct business in a way that will directly impact the marketplace. Some actions are illegal based on the Sherman Act. One such violation is a horizontal restraint of trade, which occurs when two or more parties who compete at the same level of distribution enter into an agreement to restrain trade. This can be in the form of price-fixing—a violation in which the parties involved dictate a minimum and maximum price for the marketplace. Also prohibited is a vertical restraint of trade that occurs when the agreement to restrain trade is between parties that are in different areas of the distribution chain. These cases are often be found to be a violation per se or a rule of reason violation of antitrust laws (depending upon the circumstances). Horizontal restraint of trade is generally seen as a per se violation. Sometimes, competing parties will enter into an agreement in which the parties designate certain aspects of the market to each of the parties in the agreement. This is market sharing under the Sherman Act and is seen as a per se violation because it creates a monopoly with that designated area of the market. In the agreement, competitors conspire to market elsewhere, leaving the companies to monopolize specific areas of the market. Ultimately, antitrust laws are enforced to protect the public from unfair competition in the marketplace. This can help keep prices reasonable and promote innovation and high-quality products in the marketplace. Activity Activity: Labor Markets A market structure is a way of describing how firms are organized in industries. There are four main market structures: monopoly oligopoly monopolistic competition pure competition Economists can categorize any firm as belonging into one of these four structures. You have been thinking about starting your own company. Currently, you are analyzing the local market to see what is in demand and how the local firms are behaving. You are interested in the following four fields. The following is the summary of your research findings. Identify to which market structure each of the following descriptions belongs. Question 1: To which market structure does this Cable Television (TV) Service belong? There is one company that offers cable TV service in the area. The prices for cable TV seem high. Satellite dish is notavailable in the area. monopoly oligopoly pure competition monopolistic competition The correct answer is A: monopoly. Question 2: To which market structure does this supermarket belong? You know that three famous chains compete in the area. The products these supermarkets sell are quite similar. When one supermarket lowers prices on certain goods, two other supermarkets are compelled to do the same thing. The output of certain goods sold by the supermarkets is limited. monopoly oligopoly pure competition monopolistic competition The correct answer is B: oligopoly. Question 3: To which market structure does agriculture belong? There are numerous farmers' markets. The products sold are quite similar. No individual seller can influence prices. monopoly oligopoly pure competition monopolistic competition The correct answer is C: pure competition. Question 4: To which market structure does this restaurant belong? There are many small restaurants in the area. Each restaurant has some control over its prices. The products offered are quite heterogeneous. monopoly oligopoly pure competition monopolistic competition The correct answer is D: monopolistic competition. In your undertaking, you are looking for easy access into the industry. Now look at the examples again. Question 5: Which of the following 2 industries would be very easy to enter? cable TV supermarket agriculture resturant The correct answers are C and D: agriculture and restaurant. The farmer's market is an example of pure competition. This market is very easy to enter. The restaurant is an example of monopolistic competition. This market has free entry and exit. You have decided to eliminate monopolistic and oligopolistic markets from your consideration. Now you need to choose between pure competition and monopolistic competition. They are both easy to enter, and they both allow multiple smaller firms on the market. Question 6: What is the main difference between pure competition and monopolistic competition? Hint: Have you thought about the differences in the products? Are the products offered by sellers the same or different? The correct answer is: The difference is in the product. In pure competition, the product is homogeneous (i.e., products offered by sellers are identical); in monopolistic competition, the product is heterogeneous (i.e., products offered by sellers are different). Finally, you decide to open a gift shop in a small shopping mall. In this small shopping mall, there are already several small gift shops. One shop sells handcrafted pottery dinnerware. Another shop sells handcrafted jewelry from Wales. There is also a small shop that sells glass goods imported from Poland. You look at the variety of products available through the other shops and make a decision to sell unique household decorations. Question 7: What is the name of this type of competition? natural competition feature competition nonprice competition variety competition The correct answer is C: nonprice competition. Suppose that you have your pricing at the same level for a long period of time. You begin to think about raising your prices. Your concern is if you raise your prices, then your competitors will do the same. Question 8: This type of thinking is typical of which type of market structure? competitive oligopoly competitive monopoly pure competition strong competition The correct answer is A: competitive oligopoly. Suppose you decide to compete with the surrounding competitors and carry the same items as them. You will adjust your prices to offer cutthroat competition. Question 9: What will the demand curve look like? straight line total curved line straight line with a kink zigzag line The correct answer is C: straight line with a kink Question 10: If you had decided to band together with the other stores to set prices and work together to keep out other shops (all of the companies acting as one company), what kind of competition is this? oligopoly price leadership cutthroat competition cartel The correct answer is D: cartel. References Market Structures. (2005). Retrieved Auguss 26, 2006 from the Bized.co.uk Web site: http://www(dot)bized(dot)co(dot)uk/educators/16-19/economics/firms/presentation/structure.ppt Slavin, Stephen L. (2008). Economics. (8th ed.) New York: McGraw-Hill/Irwin. Presentation Presentation: The Federal Government The Federal Government The Federal Government is the single largest influence on the U.S. economy. There are two main areas in which the government can impact the economy: fiscal policy and monetary policy. Through its spending and taxing policies, the government raises revenues and purchases vital goods and services for the country. When the government spends and taxes, this is known as fiscal policy. Monetary policy describes the actions of the central bank, known as the Federal Reserve. The central bank helps to regulate interest rates and the activities of all the commercial banks in the country. Fiscal Policy In a democracy, elected officials of the government create programs for the general welfare of the population. To pay for these programs, the government taxes individuals and firms. In this way, the government redistributes income from those it taxes to those who receive goods and services. Two significant Federal Government programs are Social Security and Medicare. Social Security provides for the needs of the elderly and disabled and is primarily funded through a tax on wages. Medicare is a Federal Government insurance program that covers the health care needs of the elderly. These two programs, in combination, have greatly reduced the level of poverty among elderly Americans. The government also spends significant resources on areas like military and agricultural subsidies. Groups of individuals and firms can join together to create a special interest and lobby the government for tax breaks or special spending. Every year when the federal budget is passed, careful choices must be made in allocating scarce resources to various government programs. Monetary Policy Unlike fiscal policy, monetary policy is set by unelected officials. A group of economists is appointed by the executive branch and confirmed by the Senate to serve on the Federal Reserve Board, also known as the Fed. The central bank of the United States is thus quasi-independent from political influence and does not favor one political agenda over another. The Federal Reserve has regular meetings to discuss the future direction of the economy. Various economic factors like inflation, unemployment, and consumer spending are considered at each meeting. The Fed must then arrive at a set of optimal policy decisions to guide the economy on a path of low inflation and positive economic growth. This is not an easy task because the economic factors are often contradictory and the future is not always clear. Coordination of Fiscal and Monetary Policy The Fed is somewhat independent of government operations, so the possibility exists that fiscal and monetary policies could be working at cross-purposes. Twice a year the chairman of the Fed gives testimony to both houses of Congress to sketch out future Fed policies. The Federal Reserve is more adept at making policy changes than Congress because it has several economic tools it can operationalize immediately. For example, the Fed was able to act quickly in September of 2001 to help stabilize the economy. Article Gross Domestic Product Question 1: What is GDP? Answer 1: From a macroperspective, the broadest measure of economic activity is gross domestic product (GDP). GDP represents all the goods and services that are produced within a country's borders. GDP is measured based on consumption, government spending (at all levels of government), investment, and exports minus imports. The formula for GDP is C + G + I + (X - M). In the United States, the vast majority of GDP is consumer spending, at approximately 66% of GDP. Also, the United States has run a trade deficit (importing more than it exports) since the 1970s, reducing GDP. Question 2: What are some of the key economic statistics that business executives need to monitor? Answer 2: Interest rates are significant because firms have to pay interest on the money they borrow. Lower interest rates mean less expense to businesses. The main interest rate that is monitored closely in the United States is the federal funds rate, an interest rate that is charged by a depository institution to another bank when that bank borrows money to meet reserve requirements (minimum cash deposit reserve levels required by law). Business executives also closely watch unemployment and inflation. Question 3: How do economic events affect businesses? Answer 3: Economic events either have a positive or negative impact on businesses. When an economy is expanding (indicated by rising incomes, low unemployment, and overall GDP growth), most businesses do well. However, economic activity can, and does, slow down. When this occurs, it is typically followed by firms cutting back on labor—thus, unemployment increases, income declines because there are fewer people employed, consumer spending slows or declines, and overall GDP grows slowly or declines. Two consecutive quarters of negative economic growth is defined as a recession. During a recession, most businesses see a slowing or reduction in revenues and profits. Question 4: What are the similarities and differences between perfect competition and monopolistic competition? Answer 4: Several similarities between perfect competition and monopolistic competition exist; both have many buyers and sellers and low entry barriers. The major difference between perfect competition and monopolistic competition is whether the product is homogenous or heterogeneous. This condition determines whether the companies in a market are price takers or price setters. In situations of perfect competition, there are many buyers and sellers because the industry has low entry barriers relative to other market structures. Low entry barriers may occur naturally because some industries simply do not require the financial and physical capital like other industries. Products are homogenous because buyers perceive all products sold are the same. Because of homogeneity, consumers make decisions solely based on price. All suppliers must take the price that consumers are willing to pay because there is no differentiation of product in the buyer's mind; hence, all suppliers are price takers. Wheat farming is a good example of perfect competition. Wheat farmers have to sell their wheat at the market price, entry and exit into wheat farming is relatively easy, buyers and sellers are numerous all over the world, and the product is perceived to be the same whether the wheat is from Texas or from South Dakota. Like perfect competition, monopolistic competition has many buyers and sellers because the industry has low entry barriers. Unlike perfect competition, products are slightly heterogeneous because buyers perceive slight differences in the products sold. Because of this slight heterogeneity, consumers make decisions based on price and product. This gives some pricing control to suppliers rather than relegating suppliers to price takers. Fast-food restaurants are a good example of monopolistic competition. It is relatively easy to start a fast-food restaurant by simply opening a restaurant or franchise, and there are many fast-food options and numerous fast-food consumers. They all offer fast, convenient food, but the food is slightly different (hamburgers, tacos, pizza, etc.). Prices vary from one chain to another but remain in the same range because of this slight differentiation. Question 5: What is an oligopoly, and what is a monopoly? Provide an example of each. Answer 5: In an oligopoly, there are few firms that control industry output because of the high barriers to entry. High entry barriers may exist naturally because achieving a good cost per unit may require large-scale operations or because the product or service being offered requires tremendous resources. Products are heterogeneous because buyers perceive differences regardless of whether differences exist in reality. Cold breakfast cereal is an example of an oligopoly market. A few firms control the industry output, and the cereals are perceived to be different. Prices are different for different types of cereal because of this differentiation. It is not easy to start a cereal manufacturing company because a great deal of resources are required as well as a global distribution network and expertise in the consumer breakfast market. This creates barriers to entry and creates pricing power for producers. In a monopoly, only one company controls the output and the price. High barriers may prevent other companies from entering the market and competing. In some cases, the barrier to entry is imposed by the government, as with utilities. Local governments may purchase utilities from a single company because it takes 100% of the market to achieve the lowest unit cost. Consumers of the product have only limited substitutes or options and must purchase the product at the price offered by producers. Question 6: What are the effects of a government being in debt? Answer 6: Governments generate debt when they sell bonds to finance spending. Bonds require interest payments, so the government is not only obligated to pay the principal that was borrowed but also the interest. As debt increases, an increasingly greater portion of government revenue goes to pay interest payments, resulting in fewer available funds for government programs. Significant economic debt means more risk to investors, and consequently, national currency value suffers. Question 7: How can a government stimulate an economy? Answer 7: The government can use fiscal policy to stimulate the economy. When the economy is soft or in a recession, the federal government can increase spending to stimulate the economy. Increased spending leads to more jobs, more income, and thus more economic output. Alternatively, the federal government can lower taxes, allowing tax payers to retain more income and spend more, thus boosting economic output. Question 8: What are the primary tools available to the Federal Reserve (the Fed)? Answer 8: The three primary tools are reserve requirements, open market operations, and the federal funds rate. Reserve requirements are the minimum cash reserves that banks are required to hold in their vaults to cover depositor transactions. As it sets the minimum reserve requirements, the Fed wields considerable power over how much money can be lent out in the economy. If the Fed wishes to enhance economic activity, it can lower reserve requirements. This allows banks to lend more money, which creates more economic activity, jobs, and output. Conversely, if the Fed wishes to slow growth to fight inflation, it raises reserve requirements. Open market operations are the buying and selling of government bonds in the financial markets. The Fed buys and sells government bonds to influence the money supply. Because cash held with the Fed from bond sales is not circulated in the economy, when the Fed sells bonds, it actually takes money out of the economy with the goal of tapering money demand and slowing inflation. On the other hand, if the economy is in need of a boost, the Fed can buy government bonds, thus increasing the money supply and enhancing economic output. The federal funds rate is perhaps the most visible policy tool the Fed uses. News reports stating that the Fed raised (or lowered) interest rates refer to the federal funds rate. The federal funds rate is the interest rate banks charge each other for short-term loans as the banks borrow from each other to meet reserve requirements. Because other interest rates are linked to the fed funds rate, as it changes, other interest rates change as well. When the economy is overheating and inflation is a problem, the Fed will raise interest rates in an effort to combat inflation. When the economy is in need of economic stimulus, the Fed will lower the fed funds rate in an effort to jump-start the economy. Question 9: How does inflation with unemployment change the approach taken by policy makers? Answer 9: Inflation with unemployment, or stagflation, is an unusual circumstance that occasionally occurs. For example, the United States experienced stagflation in the early 1970s. The problem is that changes in aggregate demand are not sufficient to resolve the issue. This is because increases in aggregate demand reduce unemployment but cause inflation, and decreases in aggregate demand reduce inflation but cause unemployment. Therefore, policy makers often must use multiple approaches. These include the typical monetary and fiscal policies plus extreme measures, such as price and wage controls or changes in exchange rate policies. For example, during the early 1970s, the United States imposed wage and price controls and allowed the dollar to freely float (i.e., it was moved off the gold standard) in an effort to eliminate stagflation. Question 10: Which policy instruments are used by policy makers to achieve the objectives of external and internal balance? Answer 10: Policy instruments include expenditure-changing policies, expenditure-switching policies, and direct controls. Expenditure-changing policies involve fiscal and monetary policies that affect the level of aggregate demand. Fiscal policies include changes in government spending and taxation. Monetary policies include the effect of changes in open market operations, reserve requirements, and the discount rate on the money supply. Expenditure-switching policies attempt to change the direction of demand by shifting it between domestic and foreign. For example, nations that have a freely floating exchange rate purchase other currencies or sell its own currency to affect demand. Finally, direct controls include government restrictions, such as wage and price controls, tariffs, quotas, and subsidies. The evidence suggests that changes in monetary policy are the most effective in affecting aggregate demand. Article Article:Competition, Oligopoly, Monopoly, GDP Market Economy A market is a mechanism for exchange between buyers and sellers of goods and services. In a market economy, the cost and availability of goods and services is determined by the laws of supply and demand: The law of supply specifies that producers will offer more of a product for sale as its price rises, and less as its price drops. The law of demand specifies that buyers will purchase more of a product as its price drops, and less of a product as its price increases. The laws of supply and demand tend to work against each other, so the result is a balance in which buyers are always in search of the greatest values, while companies try to supply buyers with the quantity and selection of goods that will earn then the greatest profits. Perfect Competition, An Oligopoly, And A Monopoly Two conditions are required for perfect competition to exist: All competing companies in an industry must be small. The number of competing companies must be large. Under these conditions, no single firm will be large enough to dominate the market and influence prices. Instead, prices will be determined by the laws of supply and demand. An oligopoly exists when there are only a handful of competitors in an industry (the automobile industry is one example of an oligopoly). Under these conditions, the prices of competitive products tend to be similar. The competitors tend to follow suit as one company raises or lowers prices. A monopoly exists when a single company dominates an industry. The company controls the only supply of a product or service, and enjoys complete control over production and prices. Laws such as the Sherman Antitrust Act (1890) and the Clayton Act (1914) were passed to forbid monopolies, and to regulate natural monopolies, such as local power and telephone companies. GDP The gross domestic product (GDP) refers to the total value of goods and services produced by a country within a given time period, usually one year. If the GDP increases from one year to the next, the country is experiencing economic growth. GDP is the most common method used to calculate national output. Real GDP is the GDP after it has been adjusted to reflect changes in the value of the country's currency, as well as price changes over the period in question. GDP per capita is calculated by dividing the GDP by the total population of a country. The result provides an indicator of the economic well-being of the average citizen of the country. Balance Of Trade A negative balance of trade (or trade deficit) means that a country imports more than it exports. More money has left than entered the country, so a trade deficit is the equivalent of borrowed money. Money that flows out of the country to pay off the deficit cannot be invested in productive enterprises, and is therefore unavailable to fuel economic growth. The national debt is the total amount of money a country owes all its creditors. Most governments sell bonds to finance their national debts. They must offer a competitive rate of return to be attractive, because these bonds compete with similar bonds in the marketplace. The more money a government must borrow to finance its debt, the less money is available for productive investments that would help drive the economy. Absolute Trade Advantages A country enjoys an absolute trade advantage when it can produce a product that is cheaper or of better quality than any of its competitors. Examples of countries that enjoy absolute trade advantages are Saudi Arabia (oil), Brazil (coffee), and Canada (timber). International and Multinational Companies An international firm conducts a large portion of its business in foreign countries, and may even have manufacturing facilities abroad. The bulk of the company's operations, however, remain in the domestic marketplace. A multinational firm does not consider itself as having domestic and international operations. Instead, planning and decision-making activities are geared towards international markets. A multinational company may have a presence in over 50 countries. The Nestle company (originally Swiss) is an example of a multinational company. International Trade Barriers A country can erect overt barriers to trade, including tariffs and quotas. Both affect the prices and quantities of foreign products than can be imported into a country. A country can also provide subsidies to local manufacturers that enable them to compete against cheaper foreign imports. For example, some European governments subsidize local farmers so they can compete against U.S. grain imports. Trade barriers can be covert as well. For example, a government may require that certain products sold in a country be assembled there. For example, many Toyota and Honda cars are assembled in American factories from imported components made in Japan. A country may also enact laws and regulations that make it more expensive to do business. For example, Wal-Mart had to purchase an existing retail chain in Germany instead of opening its own chain, because the German government stopped issuing new licenses to sell food products. Questions and Answers Question #1 What are characteristics of the typical business cycle? The business cycle looks a bit like a roller coaster, moving up and down (only the business cycle measures GDP as its ups and downs). The Peak is when the economy (GDP) is at its highest level. The economy then decreases, the Contraction (also called a Recession or a Slump). The economy then "hits bottom." This phase is called the Trough. Then the economy begins to improve – this is called Expansion or Boom. Question #2 What's the difference between market demand and aggregate demand? Aggregate demand is the total demand for all goods and services. Market demand is the demand for a particular product. The central difference between market demand and aggregate demand is that they represent different things. Market demand can be the price-quantity relationship for a hamburger, an apple, or a car. On the other hand, aggregate demand represents the demand for the total domestic output of final goods and service in the economy. Question #3 Does higher GDP mean higher social welfare? Why or why not? Some changes in social welfare are not measured by GDP. GDP seldom reflects losses or social ills and has nothing to say about how the output is distributed within society. For example, if an empty piece of land is developed and houses are built, GDP will increase but the effect on society may remain unchanged. However, some GDP expenditures are related to social welfare, including 60% of U.S. government expenditures, and private expenditures for health and life insurance, pensions, and sick and vacation pay from employers. Question #4 Why do we bother to construct real GDP if we already know nominal GDP? Nominal GDP measures the value in today's dollars of all final, domestic goods and services. The problem with nominal GDP is that it includes inflation (a price index). Thus, unless we calculated real GDP, that is GDP in yesterday's dollars, we would not know if the total economic volume (measured in quantities, not in dollars) had increased or decreased. Measuring real GDP allows us to know if the total output of a country is increasing or decreasing, without noise from price increases. For example, if a country's real and nominal GDP last year was $100 and its nominal GDP this year is $105, we might believe that the economy increased by 5%. However, if there was a 6% inflation rate, the amount that the GDP really changed was – 1%. Question #5 What could be some benefits associated with recessions in an economy? Recessions reduce the rate of inflation and increase a country's (and an industry's) efficiency by driving inefficient producers out of business. Recessions also decrease the demand for imports, which improves the trade balance. Question #6 When might inflation hurt lenders and benefit borrowers? Lenders can be hurt if a high actual inflation rate is unexpected. There is a cost to the lender for the money that it lends to the borrower. The anticipated rate of inflation is factored into the interest rate that is charged to the borrower. If inflation increases more than was expected, the real (after inflation return) to the lender decreases. On the other hand, the borrower will be paying back a fixed sum for the loan, yet it will represent a smaller percentage of the borrower's total income. For example, if a loan's payments are $100 a month and you now have an income of $1000 per month, you would be paying 10% of your total income on the loan. If inflation was 20%, your total income would increase to $1,200 but your payments remain fixed at $100. The net result is that although you still pay $100 a month, it is only 8% of your total income. Resource Links Oligopoly (http://www(dot)tutor2u(dot)net/economics/content/topics/monopoly/oligopoly_notes.htm) An explanation of oligopoly in terms of game theory. Monopolies, Oligopolies, and Antitrust Law (http://distance-ed(dot)bcc(dot)ctc(dot)edu/econ/Guidepages/Antitrust.html) Collection of links focused primarily on antitrust laws in relation to monopolies and oligopolies. Capitalism.org (http://www(dot)capitalism(dot)org/faq/monopolies.htm) Discussion on monopolies. Federal Trade Commission Bureau of Competition-Resource Guide to Business Competition (http://www(dot)ftc(dot)gov/bc/antitrust/index.shtm) From the Federal Trade Commission, a guide to antitrust laws, price discrimination, and monopolies. Economics Basics (http://www(dot)investopedia(dot)com/university/economics/?partner=answers) This article will introduce you to the fundamentals of economics and has additional links to information about elasticity, supply and demand, monopolies, oligopolies, competition, production possibility and more. Economics Basics: Monopolies, Oligopolies and Perfect Competition (http://www(dot)investopedia(dot)com/university/economics/economics6.asp) Forms of market structure are described. Oligopoly & Monopolistic Competition (http://members(dot)shaw(dot)ca/elementaleconomics/mic_5_3.htm) A concise read on competition and economic theory. ------------------------------------------------------------