Equilibrium in a perfectly competitive market results in the greatest amount of economic surplus, or total benefit to society, from the production of a good. Why, then, did Joseph Schumpeter argue that an economy may benefit more from firms that have
market power than from firms that are perfectly competitive?
What will be an ideal response?
Schumpeter did not deny that perfectly competitive firms produced the greatest amount of consumer surplus, but this result does not address which type of market structure is best for developing new products. Schumpeter pointed to the large costs of product development; how can small, perfectly competitive firms afford the monetary cost and the risk of failure that product development requires? Only large firms in monopoly or oligopoly industries can afford investments in research and development, and the inevitable failures that accompany research. According to Schumpeter, the higher prices firms with market power charge are less important than the benefits from new products these firms introduce to the market.
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Use the following given market-for-money diagrams to answer the next question.
The total demand for money is shown by
A. D1. B. D2. C. D3. D. S.
An increase in the number of consumers, all else held constant, will shift the
a. supply curve leftward. b. demand curve leftward. c. supply curve to the right. d. demand curve to the right.
Economic losses mean that firms will exit from a market in the short run.
Answer the following statement true (T) or false (F)
Which of the following is NOT a private cost?
A. the coffee pot that Jan dropped and broke this morning B. the pollution caused by a firm dumping its wastes into the river C. the health insurance costs a firm must pay for its employees D. the amount that a firm must pay for raw materials to make its product