TAILIEUCHUNG - Microeconomics for MBAs 12

Microeconomics for MBAs 12. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 4 Government Controls How Management Incentives Are Affected 4 Unearned Profits Many proponents of price controls view the supply curve for a controlled good as essentially vertical. They believe that a price rise will not affect the quantity produced. Consumers will get nothing more in the way of goods but producers will reap a windfall profit. Instead of an incentive to produce more profit is seen as an economic rent an exploitative surplus received by companies fortunate enough to be in the market at the right time. Administered Prices A technical argument for price controls is most often advanced by economists and public officials. Many economists maintain that a significant segment of the business and industrial community the larger firms that control a sizable portion of industry sales no longer responds to the forces of supply and demand. Firms in highly concentrated industries like steel automobiles computers and tobacco can override market forces by manipulating their output so as to set price levels. Furthermore they can manage the demand for their products through advertising campaigns. With market forces ineffective control must come from the government. Price controls are the only way to avoid the production inefficiencies and inequitable distribution of income that result from concentration of industry. As John Kenneth Galbraith a leading advocate of price controls has put it Controls are made necessary because planning has replaced the market system. That is to say that the firm and the union have assumed the decisive power in setting prices and wages. This means that the decision no longer lies with the market and thus with the public. 1 Monopoly Power Later in the course we will see how a monopolist can be expected to restrict output in order to push up its price in order to earn greater profits. The case for price controls under monopoly conditions is for many advocates of controls a matter of fairness. The controls give back to consumers

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