I have recently been showing my AP and IB Econ classes the following New Yorker interview with Columbia Professor Tim Wu, the man who coined the phrase “net neutrality”. Wu shares his views on the “cycles” of competition in the communications industry, from radio, telephone and television in the 20th century to the internet and the “mobile web” today.

I find it a useful video for starting discussions about the pros and cons of perfectly competitive markets (represented by the “chaotic” period of any new communications technology) and imperfectly, more monopolistic industries (represented by the period later in the cycle of any communications technology when market power becomes concentrated among a few large firms).

Watch the video and pause it along the way to discuss some of the questions below.

Currents: Tim Wu on Communication, Chaos, and Control : The New Yorker

Discussion Questions:

1. Why are new communications industries often characterized by “chaos” in their early years? How did the internet industry reflect the perfectly competitive characteristics in its early days, or even 10 years ago?
2. How are consumers affected as communications industries go from “chaos” to control under big companies like Apple and Google?
3. How does the behavior of firms like Google and Apple demonstrate the concept of non-price competition?
4. Would the technology industry be more efficient if it were more competitive?
5. Can you envision a world in which all of our online activities are done through one company, i.e. the “Googlenet” or the “Facebooknet” instead of the “Internet”? Would that world be better or worse than what we have now? Why?
6. How is the communications industry today similar to the telephone industry 30 years ago? How is it different?
7. Tim Wu suggest that in the future there will be no internet. Discuss as a class what you envision as a possible successor to the internet.
8. If you had a time machine and could travel back to 1970, how would you try to explain to someone on the stree how we communicate with one another in 2011. How would you have tried to explain the internet and smart phones? Do you think someone from 1970 would believe your descriptions of products like Skype, like Google, like a phone you could watch movies on, like video chat, like “Google goggles”, etc…?
9. If someone from 40 years in the future arrived in 2011 and tried to explain to you how humans are communicating in 2050, do you think you would believe them?
10. Economist Joseph Schumpeter referred to capitalism as a system driven by a system of “creative destruction”. How does the history of the communications industry demonstrate the concept of “creative destruction”?

Imperfect competition in the News: After watching the video and discussion the questions with your class, go to Welker’s Wikinomics Universe and follow the link to the “Econ News” tab.  Browse the headlines from the various news feeds and look for articles that you think may be about non-price competition between firms in a monopolistically competitive or an oligopolistic market.

When you’ve found one good article, open your Diigo toolbar and add highlights to the lines in the article that you think demonstrate non-price competition between the firms described. Add one or two sticky notes using the Diigo toolbar, and when you’ve added your own thoughts, bookmark the article. Be sure to share it to your class’s group before bookmarking it so your classmates can view your highlights and sticky notes online.

If there is time left in class, log into your Diigo account and visit our class group. Read some of the highlights from your classmates’ articles and discuss with the people around you the various types of non-price competition described.

Related posts:

1. Non-price competition in the market for… WIKIS!! Wetpaint makes a move to gain market share
2. Does Apple stand a chance?
3. Competition and rising costs force Southwestern farmers to consider alternatives

Efficiency means more than just producing in the least cost manner. To be efficient a market must also allocate the right amount of resources towards the production of the good or service it provides. Allocative efficiency occurs when land, labor and capital are allocated towards the production of goods and services in combinations that are socially optimal. In other words, the right amount of output of various products is being produced given the demands of consumers in the economy and the costs faced by firms.

Because of firms’ profit maximizing behavior, perfectly competitive markets allocate resources efficiently, neither over nor under-producing the goods consumers demand.

Allocative Efficiency: P=MC

Under the conditions of perfect competition, a market will be allocatively efficient as long as the firms in that market produce at the P=MC level of output. Price is a signal from buyers to sellers, and the price seen by firms signals the marginal benefit of consumers in the market. If the price consumers pay for a product is greater than the marginal cost to firms of producing it, then the message being sent to producers is that more output is demanded. In the pursuit of profits, more resources will be allocated towards the production of the product until the marginal cost and the price are equal. At the P=MC point firms maximize their profits and resources are said to be efficiently allocated.

Graph: Profit maximizing behavior leads to allocative efficiency

Assume that the firm on the right represents the typical firm in a perfectly competitive market. When firms produce at Q1 level of output, resources are under-allocated towards this good, since the price consumers are willing to pay (Pe, determined by market supply and demand) is greater than firms’ marginal cost of production. Notice that when individual firms produce Q1 units, the market supply of Qs is less than the market demand of Qd; there is a shortage in the industry as long as firms produce only Q1 units.

However, firms are unlikely to produce at this socially undesirable level for long because in their pursuit of profits they will increase their output to the quantity at which marginal cost equals the price. When they increase their output to Qf, firms maximize their profits and as a result the shortage in the market that existed when firms produced at Q1 is eliminated, improving social welfare and maximizing the total amount of consumer and producer surplus (the combined areas of the pink and green triangles in the industry graph).

Because of the profit maximizing behavior of self-interested business managers in the competitive market above, resources are more efficiently allocated than they would be otherwise. The price determined by supply and demand in the market signals the benefit society derives from this good, and as long as the price is greater than the marginal cost, the message sent from buyers to seller is “WE WANT MORE!” On the other hand, if at a given level of output marginal cost exceeds the price, resources are over-allocated towards the good. The message sent in such a market is that consumers value the product less than it costs firms to produce, so firms will reduce their output to maximize profits, correcting the over-allocation of resources and restoring a socially optimal level of output.

Allocative efficiency is achieved in a perfectly competitive market precisely because firms will always wish to maximize their profits by producing the quantity of goods at which their marginal cost equals the price.

The article Farmers May Switch Crops Due to Labor Shortage discusses some the effects of rising costs on a perfectly competitive market. Read the extract below and answer the questions that follow.

Farmers may change their crops due to the shortage of immigrant labor. Of all crops, fresh fruits and vegetables are the most labor intensive. Lettuce, strawberries and broccoli all have to be picked by hand. In Arizona, farmers are passing on chili peppers to plant corn, which is harvested by machine.

After 37 years, Ed Curry is not planting green chili anymore because corn can be harvested by machines; green chili can’t.

Curry explains, “It would take about 250 people to pick this year’s chili crop. With immigration tightened up the way it is, well, number one, we just can’t get the labor.”

About seven years ago, Ed Curry was busted for using illegal labor. Today his workers are legal. They go back and forth from Mexico each day, making seven to $8 an hour. Most are in their 50s and 60s. One man is 72 years old. Younger workers can’t get visas or don’t want the jobs. So as his workers age and his workforce dwindles, Ed Curry says he’s thinking about moving some of his operation to Mexico.

“We’re down to survival. Am I going to stay in this or not? And if I’m going to stay in it, I’ve got to do it where there’s plenty of labor and we can be competitive.”

That’s one farmer’s plight. The Western Growers Association based in California represents 3,000 farmers across the region. Its president, Tom Nassif, says farmers need Congress to pass legislation that will allow more workers in, something he says it should have done already.

Nassif says his association polled a dozen members and found more than 40,000 acres had moved to Mexico in the last year or so.

Exercise:

1. Assuming the market for chili peppers is perfectly competitive, illustrate the effects of the shortage of immigrant workers on the short-run production costs and profits of chili farmers in the American Southwest.
2. Based on your answer to #1, explain how the chili market will evolve in the long-run in response to the shortage of immigrant workers. How will the market for corn and other capital-intensive agricultural commodities be affected?
3. Assume the US chili pepper market reaches a new long-run equilibrium following the shortage of immigrant labor. Now demand for chili peppers increases. Use a diagram to illustrate how the profit maximizing behavior of chili pepper farmers assures that there will not be a shortage of chili peppers following the increase in consumers’ demand.

Discussion Questions: In their pursuit of economic profits, firms in a competitive market will, through their collective pursuit of self-interest, inadvertently achieve an allocation of society’s scarce resources that is socially optimal.

1. Discuss the view that allocative efficiency as defined in this chapter is a socially desirable outcome.
2. Is it accurate to say that goodness can be achieved through greediness in a market economic system?

Related posts:

1. Exports, good – Imports, ALSO GOOD!

YouTube – Econ Concepts in 60 Seconds: The Law of Diminishing Marginal Returns

Mr. Clifford, an AP Economics teacher from San Diego, demonstrates the law of diminishing returns by deriving a total product and marginal product curve using production data from a student’s lawn mowing business.

Econ Concepts in 60 Seconds: The Law of Diminishing Marginal Returns The video above is most useful to Econ students because it enforces the Law of Diminishing Returns. The more important application of this basic economic concept, however, is the short-run per-unit cost curve, Marginal Cost, Average Variable Cost and Average Total Cost. Mr. Clifford offers his quick explanation of the relationships between a firm’s short-run costs in the following video.

Econ Concepts in 60 Seconds: Per Unit Costs Curves

Discussion Questions:

1. Mr. Clifford derives a Marginal Product Curve in the first video and a Marginal Cost Curve in the second video. What is the relationship between the marginal product of a firm’s variable resource and the firm’s marginal cost of production? How are the shapes of both these curves determined by the law of diminishing marginal returns?
2. Why does a firm care about its costs of production? Which of the four per-unit cost curves in the second video would a firm be most concerned with when determining whether or not it is earning profits or losses?
3. What can cause a firm’s cost curves to shift up or down? How would a shift of the cost curves affect a firm’s profits?
4. What is the primary economic goal of firms, and how can understanding their short-run costs of production help them achieve this goal?

Related posts:

1. Lesson Plan – Testing the Law of Diminishing Marginal Returns in a Paper Chain Factory
2. Review Lesson: Econ concepts in 60 seconds – Perfect Competition
3. Lesson Plan: Costs of Production Presentation for Y1 IB Economics

YouTube - ACDCLeadership’s Channel

More econ review videos from my new favorite YouTube channel, Jacob Clifford’s Econ Concepts in 60 Seconds.

To review for the upcoming test, you will join a small group and watch one of the four videos on the Perfect Competition. After watching and discussing one video with your group, you will be re-assigned to another group with students who watched a different video. You will then lead a short discussion on your original video with your new group.

With your first group – 15 minutes: As your group watches its assigned video, have your notes open in front of you and draw the graphs Mr. Clifford draws along with him. Pause the video where necessary to have time to draw graphs. Take notes while watching the video so you can teach it to another group. With your group, prepare a short discussion of the video’s main points, including:

• What rule or lesson about Perfect Competition does the video focus on?
• What did you already know that this video reminded you of or reinforced your understanding of?
• What did this video introduce that was new to you?
• How were graphs used to teach the concepts?

With your second group – 20 minutes: For the second part of this assignment, there should be four new groups, each including one member of the four original groups.

• Each group member should lead a 2-3 minute discussion of the video he or she watched in the first group.
• Go over each of the discussion points from above.
• Answer any questions your new group members have about video you watched.

Group 1 - The Profit Maximization Rule – MR=MC:

Click here to view the embedded video.

Group 2 - Perfect Competition in the short-run:

Click here to view the embedded video.

Group 3 - Perfect Competition in the long-run:

Click here to view the embedded video.

Group 4 - The Shut-Down Rule in Perfect Competition:

Click here to view the embedded video.

Related posts:

1. Diminishing returns and the short-run costs of production – “Econ Concepts in 60 Seconds”
2. SAS Economists Podcast #10: Perfect competition and comparative advantage in… the World of Warcraft!
3. New tools for the Econ teacher and student: Social bookmarking Site, iPhone App and YouTube Review Videos

NPR : Farmers May Switch Crops Due to Labor Shortage

Pure competition forces firms to produce their output in the most efficient manner. Productive efficiency is achieved when producers achieve their minimum average total cost. Any increase in costs may lead to economic losses for a firm, and if costs increase too much a firm may be forced to shut down.

The scenario above is basically a textbook explanation of the reality faced by farmers in the American Southwest this very day. Hundreds of fruit and vegetable farmers are facing higher variable costs as tougher border security and immigration laws has led to a shortage of cheap labor, which the farmers depend on in the labor-intensive fruit and vegetable industry.

Listen to the podcast above, then study the graphs that accompany this article.

Rising costs for in a perfectly-competitive (PC) industry: Click on the thumbnails of the graphs to see the full-sized versions

Discussion Questions:

1. What changes have occurred in the American fruit and vegetable industry?
2. What are the possible outcomes for Southwest farmers?
3. How might technology help save these growers from having to shut down their operations?
4. What other alternatives do they have to shutting down in the long run?

Related posts:

1. Creative Destruction: Google, Apple, Facebook and the future of competition in the market for our minds…
2. Dominican Republic struggles to find its “comparative advantage” as it faces new competition from Asia
3. Review Lesson: Econ concepts in 60 seconds – Perfect Competition

by Alice Su and Jessica Ng

Is it true what they say about the DVD market in China? Can you really buy fake DVDs on the streets for ONE DOLLAR? Come on, that’s a bit extreme, isn’t it? In fact, it’s not just under bridges and in dark alleys where you can buy pirated DVDs in Shanghai, but in respectable shops all over the city that on the outside and in look just like a legitimate DVD shop in the states or Europe.

This podcast will explore the economic characteristics of the market for fake DVDs in Shanghai and determine what it would take for the makers of real DVDs to be able to compete with the well established market for fakes.

Click here to view the embedded video.

Related posts:

1. SAS Economists Podcast #3: Competition in the Baked Goods Market at SAS
2. SAS Economists Podcast #6: The oligopolistic nature of the video game console market
3. SAS Economists Podcast #1: Demand for Eurest cafeteria food at SAS