2023 Final Cumulative Flashcards
Product Markets are?
where finished goods and services are bought and sold?
Factor Markets are?
where factors of production(land, labor, capital) are bought and sold?
(If you go to work for example, your employee is purchasing your services.)
The Law of Demand states…
claims there is an inverse relationship between price and quantity demanded ḈṖ
If Price ↑, then Qo(quantity demanded) ↓
If Price ↓, then Qo ↑
The Law of Supply states…
states there is a direct relationship between price and quantity supplied(cetpar)Market Supply are…
If P ↑, then Qs ↑
If P ↓, then Qs ↓
What is Equilibrium Price?
P*-When quantity demanded = Quantity supplied
What is Ceteris Paribus?
assumption of “other things remaining equal” is called?
What is Market Surplus?
at a given price, the amount by which Qs exceeds Qd
-occurs when the price is too high to clear the market
What is a Market Shortage?
at a given price, the amount by which Qd exceeds Qs
-occurs if price is too low to clear the market
Substitute goods
goods that can be replace for another
Example: The price of beef going up will increase the demand for chicken
Complementary Good
other goods prices lowering can have effect on demand of another good
Example: the price of peanut butter lowering will increase the demand for jelly
Market Mechanism
aka the invisible hand, adjusts based on sales & prices=Price signal
Under what condition does DEMAND for a product exist?
a demand exists only if someone is willing and able to pay for the good
What are the five determinants of Market Demand?
- Tastes and preferences
- Income
- Other Goods (Substitute goods and Complimentary goods)
- Expectations of Future (prices/tastes/incom)
- Number of buyers
What are the six determinants of Market Supply?
- Technology
- Factor costs
- Other goods{profitability of Prod.)-if producing other goods provide you more money, there is little incentive
- Government Intervention-a. subsidies b. taxes
- Expectations-of future prices
- Number of sellers - too much competition
Within a competitive product market, how is the equilibrium price of a product determined?
by trial and error and a “compromise” between buyers and sellers
When a shortage is present, how will the behavior of market participants change to eliminate the shortage?
Price gets “bid up” as buyers compete for good until it reaches the equilibrium
When a surplus is present, how will the behavior of market participants change to eliminate the surplus?
Price gets “bid down” as producers compete for sales and customers until it reaches the equilibrium
What causes a change in the equilibrium price of a product?
the equilibrium price will change whenever the supply or demand curve shifts which happens if a determinant of demand changes
What does Price Elasticity of Demand tell us?
Tells us the size of the consumer response to a price change.
What is Total Revenue?
The price of a product multiplied by the quantity sold in a given time period.
Formula: price × quantity sol.
What does it mean for a product to have “Elastic Demand”?
there is a large quantity response when the price changes. Meaning consumers buy A LOT MORE when the price falls, and A LOT LESS when the price rices.
If a product has “Elastic Demand”, what will the product’s demand curve look like?
Demand curve looks “flat”, looks like easy to climb.
What does it mean for a product to have “Inelastic Demand”?
there is a small quantity response to a price change. Meaning consumers only buy a little less when the price rises and a little more when it falls.
If a product has “Inelastic Demand”, what will the product’s demand curve look like?
Demand curve looks very “steep” and hard to climb.
What does it mean for a product to have “Perfectly Elastic Demand”?
It means E=infinity and ?consumers would not buy anything if there was a price change.=?
If a product has “Perfectly Elastic Demand”, what will the product’s demand curve look like?
Perfectly Horizontal. ——–
What does it mean for a product to have “Perfectly Inelastic Demand”?
It means E=0 and ?consumers would pay anything no matter the cost and continue buying the product?
If a product has “Perfectly Inelastic Demand”, what will the product’s demand curve look like?
Perfectly Vertical. I
What are the FOUR determinants of Price Elasticity of Demand?
- # of available substitutes: If many substitutes, it is elastic, it few inelastic.
- % of income spent on the product: If large % Elastic, if small % inelastic
- “Type” of product: Meaning if luxury, elastic. If necessity, inelastic.
- Length of adjustment time to price change: if short, inelastic, if long, elastic.
What is price elasticity of demand?
The response of consumers to a change in price is measure by this formula:
%▲Qd / %▲P
% change in quantity demanded ÷ % change in price
If E>1= Elastic if E
According to Economists, what is the goal of a business owner?
Goal to maximize Total Profit or minimize total loss.
Suppose that product demand is INELASTIC. If the firm raises the price of this product, will the firm’s Total Revenue increase or decrease? Explain why.
It will increase total revenue since it will be a very small loss in Qd but buyers will pay higher prices.
Suppose that product demand is INELASTIC. If the firm lowers the price of this product, will the firm’s Total Revenue increase or decrease? Explain why.
It will decrease total revenue since it will be a very small increase in Qd but buyers will pay lower prices.
Suppose that product demand is ELASTIC. If the firm raises the price of this product, will the firm’s Total Revenue increase or decrease? Explain why.
It will decrease total revenue since it will be a very large decrease in Qd that will not be made up by higher prices
Suppose that product demand is ELASTIC. If the firm lowers the price of this product, will the firm’s Total Revenue increase or decrease? Explain why.
It will increase total revenue since it will be a very large increase in Qd that will more than make up for lower prices
What is the definition of Factors of Production?
Resource inputs used to produce goods and services
What are the Four Basic Factors of Production?
Land, Labor, Capital, Entrepreneurship are?
What is Marginal Physical Product(MPP)?
The change in total output from adding one more unit of input(labor).
In formula: MPP = Change in total output ÷ Change in input quantity,
What does the law of diminishing returns say?
The marginal physical product will keep diminishing even as total output is going up as more labor input is added in a given production setting (same land and capital crowded by more workers).
What is profit?
The difference between total revenue and total cost.
Formula: Total Revenue - Total Cost
What is total cost?
Includes the market value of ALL resources used in its production including Fixed Costs and Variable Costs.
Formula: Total Cost = Fixed Costs+Variable Costs
What is Average Total Cost(ATC)?
The Total cost divided by the quantity produced in a given time period. It measures the cost to produce the “typical unit” of output.
In formula: ATC = Total cost ÷ Total Output
or ATC = AFC + AVC (if we have those)
The shape of a ATC line is a parabola.
What is Average Variable Costs(AVC)?
Total Variable cost ÷ Quantity produced (in a given time period)
While AVC drops up to a certain amount of output, is begins to rise quickly due to diminishing returns in production process.
What is Economies of Scale?
Reductions in minimum average costs that come about through increases in the size(scale) of plant and equipment.
What is efficiency? What is technical efficiency?
Getting maximum output of a good from the resources used in production.
(A production function represents technical efficiency, that is, the most output attainable from any given level of factor inputs)
What is Average Fixed Costs(AFC)?
Total Fixed cost ÷ Quantity produced (in a given time period)
AFC line keeps going down as more output is produced because the fixed cost is spread over more output.
What information does the Production Function provide to the owner of a business?
Tells us just how much output we can produce with varying amounts of factor inputs(Labor and Capital)
For a given firm, does maximum profit usually coincide with maximum output? Why or why not?
No. Maximum output could yield losses if the cost is greater than the revenue for example if the demand is not high enough or additional units cost too much,
Explain how economists draw the distinction between the SHORT RUN and the LONG RUN.
In the short run some productivity resources cannot be changed. In the long run all inputs can be changed. Therefore all costs are variable costs. There are no fixed costs.
What is meant by the term Fixed Cost? Can you identify several examples of things that are typically Fixed Costs to a business owner?
Costs of production that don’t change when the rate of output is altered such as for example rent, utilities, equipment fees.
- There is no way to avoid fixed costs in the short run.
What is meant by the term Variable Cost? Can you identify several examples of things that are typically Variable Costs to a business owner?
Costs that change with the level of output produced. If we don’t need to produce much we can lower working hours, cut labor force, buy less material etc. and vice versa.
Why is the minimum point on the ATC curve important?
it is the minimum average total cost. It represents least-cost production, minimizing the amount of resources like land, labor, and capital.
What are Explicit Costs?
Payments made for the use of a resource. They are the Accounting costs. Create a paper trail. To get explicit costs, add up all of the costs together.
What are Implicit Costs? Name the implicit costs of starting a firm.
The value of resources used, even when no direct payment was made.
a. Use of personal savings
b, Use of personal property
c. Labor services payments from another job given up
Extra: Leisure hours that are given up
Explain the difference between an Explicit Cost and an Implicit Cost.
In Explicit Costs payments are made. Implicit Costs don’t require direct payment such as using your own property.
What are the Economic Measure of Success with Economic Profit.
Above-Normal Economic profit: when TR > Econ. Cost, meaning above 0 economic profit.
Normal Economic Profit: when TR = Econ. Cost. Meaning 0 economic profit.
Economic Loss: When TR
What is Market Structure?
The number and “relative size” of the firms in a market.
Relative size:How much(%) does 1 firm produce compared to others.
What is Market Power?
The ability to alter the market price of a good or service.
What is the Production Decision?
How much output to produce in the SHORT-RUN.
What is Marginal Cost(MC)?
The inscrease/change in total costs associated with producing one more unit of output.
Diminishing returns in production cause marginal costs to increase as the rate of output is expanded. The shape of it looks like the Nike logo.
What is Marginal Revenue(MR)?
The change in total revenue that results from a one-unit increase in the quantity sold.
For perfectly competitive firms, price equals marginal revenue.
What is the Shutdown Point?
When the price equals AVC the price is not covering average variable costs. The shutdown decision is a short-run response.
What is the Investment Decision?
The long run decision to build, buy, or lease plants and equipment; to enter or exit an industry.
Includes the long rules for entry-exit:
if P > ATC -Enter or expand since high profit
if p = ATC - maintain
If p less than ATC - Exit or cut back
What are Barriers to Entry?
Obstacles such as patents, licenses, capital that make it difficult or impossible for would-be producers to enter a particular market.
Explain how the profit motive can be a “good thing” for society.
the profit motive encourages businesses to produce the goods and services consumers desire, at prices they’re willing to pay.
What are the four things a business owner must do in order to earn economic profit?
- see opportunities that others have missed
- discover new products
- find new and better methods of production
- take above-average risks.
For Perfect Competition, explain the difference in shape between the Market Demand Curve for wheat and the demand curve for the wheat grown by one individual farmer operating in the wheat market.
the market demand curve like usual is downward-sloping, an individual or single sellers demand curve in a PC is horizontal because its share of the market is so small that changes in its output don’t disturb market equilibrium.
What is Perfect Competition? /Perfectly competitive Market
A market in which no buyer or seller has market power. Has:
- Large number of firms
- the products of the different firms are (nearly) identical
- Low entry barriers
- MR = p
- Zero economic profit
- Perfect information
For a Perfectly Competitive business owner, the price he charges customers for a unit of his product will always be exactly equal to the Marginal Revenue derived from the sale of that unit to a customer. Stated differently, P = MR will always hold true for a Perfectly Competitive Firm. Explain why this is the case.
because in a PC the price of a product is constant, so we know how much revenue the next unit will bring, that’s why price equals marginal revenue in a PC.
What is the Profit Maximization Rule?
To maximize profits continue producing output to the point until where MR=MC.
This also means, never produce a unit that costs more to produce then the price it’s being sold.
Suppose a Perfectly Competitive business owner is currently producing a level of output such that Price exceeds Marginal Cost (P > MC). Explain why the business owner will have the incentive to expand his output.
if p > MC an extra unit brings in more revenue than it costs to produce, it is adding to total profit.
Suppose a Perfectly Competitive business owner is currently producing a level of output such that Marginal Cost exceeds Price (MC > P). Explain why the business owner will have the incentive to reduce his output.
if MC > p, we’re spending more to produce that extra unit than we’re getting back: total profits will decline if we produce more.
Under what conditions will a PC business owner choose to operate at a loss?
As long as price is above AVC, the losses from continuing production are less than fixed costs losses.
-Meaning, we might be losing 1,000 but if we close we still have to pay 1.500 in fixed costs.
What drives (or motivates) the entry and exit decisions of firms in a PC Market?
The profit motive drives these entry and exit decisions. When there is a profit to be made, many will enter the market. this however will shift the supply curve to the right and drain profits thus some will exit shifting it back to the left where there is profit, and on and on.
In the long run, how will a PC Market adjust to the presence of above-normal economic profit and economic losses?
As long as an economic profit is available, it will continue to attract new entrants. In the long run entry and exit cease, and zero economic profit (that is, normal profit) prevails.
What is the driving force behind price reductions and product quality improvements?
competition, if only one firm sells there is no incentive for it.
What is a Natural Monopoly?
An industry in which one firm can achieve economies of scale over the entire range of market supply.
What is a Contestable Market?
An imperfectly competitive industry subject to competition finding a way to enter the market when prices get high.
What is antitrust?
Government intervention laws to alter market structure or prevent abuse of market power.
What are the Basic Characteristics of Monopoly.
- A single large firm that produces all of the market output and thus has large market power.
- unique, inelastic product
- high entry barriers
- Prices don’t move down market demand curve
- Price exceeds marginal cost at all times
- There is no profit squeeze and thus no pressure to reduce costs or improve quality
Explain why Marginal Revenue is not equal to Price (MR ≠ P) for a Monopoly firm.
In a monopoly, the demand curve is downward sloping and is separate from the MR curve which is always below the demand curve
What is the ultimate constraint on the Monopoly firm’s exercise of market power?
the the market demand curve is its constraint and its price elasticity, if it’s inelastic it will not be much of a constraint.
In order for a FIRM to maintain above-normal economic profit over extended periods of time, what must this FIRM be able to do?
- continually update technology
- improve their products
- reduce costs.
Why is a monopoly firm well-positioned to undertake valuable research and development?
due to low pressure of competition and high profits.
Explain how society can benefit from Monopoly when economies of scale characterize the industry.
If such economies of scale exist can
- produce goods at a lower unit (average) cost than a small firm
- attain greater efficiency (higher productivity)
- can reduce used resources
What is Product Differentiation?
Features that make one product appear different from competing products in the same market.
-Example: Wendy’s burgers are square as opposed to McDonald’s round patties.
What is Predatory Pricing?
Temporary price reductions designed to alter market shares or drive out competition.
What is an Oligopoly?
A market in which a few firms produce all or most of the market supply of a particular good or service.
What is Game Theory?
The study of decision making in situations where strategic interaction (moves and countermoves) occurs between rivals.
What is Price Fixing?
Explicit agreements among producers regarding the price(s) at which a good is to be sold.
What is Market Failure?
An imperfection in the market mechanism that prevents optimal outcomes.
What is Concentration Ratio?
The proportion of total industry output produced by the largest firms (usually the four largest) which is a measure of market power.
What is Price Leadership?
An oligopolistic pricing pattern that allows one firm to establish the (market) price for all firms in the industry.
What is Market Share?
The percentage of total market output produced by a single firm.
What is Cartel?
A group of firms with an explicit, formal agreement to fix prices and output shares in a particular market.
What are the four determinants of market power?
- Number of producers.
- Size of each firm.
- Barriers to entry.
- Availability of substitute goods.
What is Herfindahl-Hirschman Index (HHI)?
Measure of industry concentration that accounts for number of firms and size of each.
Formula: HHI = (shareoffirm1)^2 + (shareoffirm2)^2 + …
What value must the Concentration Ratio take on in order for Economists to consider the industry an Oligopoly?
an industry with a concentration ratio above 60 percent is considered an oligopoly.
Example:AT&T, Verizon, Sprint
WHY will increased sales at the prevailing market price by one Oligopoly firm will be noticed by the other Oligopoly firms.
consumers are willing to buy only a certain ammount at a stable price. thus increases in the market share of one oligopolist necessarily reduce the shares of the remaining oligopolists
What two things can an Oligopoly firm do to retaliate against another Oligopoly firm that is attempting to increase its own sales at the prevailing market price?
- Stepping up their own marketing efforts.
2. Cutting prices on their computers.
WHY will an attempt by one Oligopoly firm to increase its sales at reduced prices will lead to a general reduction in the market price.
Because other Oligopolies will have to respond with price cuts of their own to keep up.
Why do Oligopoly firms avoid price competition and instead pursue non-price competition?
price competition leads to the reduction of market prices which leads to reduced profits
Under what conditions will the demand curve for Oligopoly products be “kinked”?
If an oligopoly reduces price and other oligopolies match it.
What must an Oligopoly firm consider when formulating its own price and output strategies?
each oligopolist has to consider the potential responses of rivals when formulating price or output strategies.
Explain how the price and output decision is made in the Oligopoly market structure.
an oligopoly will want to behave like a monopoly and try to maximize industry profits choosing a rate of output where marginal revenue equals marginal cost, and it would charge whatever price consumers were willing and able to pay
To avoid self-destructive behavior, Oligopoly firms must coordinate their behavior so that what two conditions are satisfied?
- Industry output and price are maintained at profit-maximizing levels.
- Each oligopoly firm is content with its market share.
Explain how patents can create a barrier to entry in Oligopoly markets.
Potential competitors can’t set up shop until they either develop an alternative method for producing a product or receive permission from the patent holder to use the patented process.
Explain how distribution control can create a barrier to entry in Oligopoly markets.
If a firm can persuade retail outlets not to peddle anyone else’s competitive wares, it will increase its market power since it will prevent others from selling their products in some places.
Explain how government regulation can create a barrier to entry in Oligopoly markets.
- Patents
- international trade regulation
- Government regulation including domestic limit
Explain how non-price competition (advertising) can create a barrier to entry in Oligopoly markets.
Advertising not only strengthens brand loyalty but also makes it expensive for new producers to enter the market
Explain how network economies can create a barrier to entry in Oligopoly markets.
If many people are in a network people will want to be in that making it harder for newer firms.
Example: Apple apps, which has a large base so many developers choose it.
Explain how the US Justice Department uses the HHI to evaluate proposed mergers between companies.
the Justice Department decided it would draw the line at 1,800. Any merger that creates an HHI value over 1,800 will be challenged by the Justice Department.
What is Monopolistic Competition?
A market in which many firms produce similar goods or services but each maintains some independent control of its own price.
In Monopolistically Competitive Markets, what value is the Concentration Ratio likely to take on?
the COMBINED market share of the top four firms will typically be in the range of 20 to 40 percent. Hence low concentration ratios are common in monopolistic competition.
In Oligopoly Markets, what value is the Concentration Ratio likely to take on?
concentration ratios of 70 to 100 percent are common in oligopolies.
Why are Monopolistically Competitive firms able to make independent production decisions?
modest changes in the output or price of any single firm will have no perceptible influence on the sales of any other firm.
Describe the barriers to entry that are observed in a Monopolistically Competitive market.
each firm has a monopoly only on its brand image trying to differentiate similar products
How is a product’s price elasticity of demand affected by brand loyalty?
makes the demand curve facing the firm less price-elastic and low cross-price elasticity of demand
How do economists measure brand loyalty? What do firms have to do in order to maintain brand loyalty?
One measure of brand loyalty is consumers’ tendency to repurchase the same brand. To maintain such brand loyalty, monopolistically competitive firms must often expand services or product offerings
What two things happen when new firms enter a Monopolistically Competitive industry?
- The industry cost curves shift to the right, pushing down price
- The demand curves facing individual firms shift to the left
Can a Monopolistically Competitive firm earn long-run economic profit? Explain why or why not!
entry-induced leftward shifts of the demand curve facing the firm will ultimately eliminate economic profits.
How does the level of efficiency achieved by Monopolistically Competitive industries compare to the level of efficiency achieved by Perfectly Competitive industries?
monopolistic competition tends to be less efficient in the long run than a perfectly competitive industry.
What is meant by the term “excess capacity”? Explain how excess capacity emerges in a Monopolistically Competitive industry.
the building of more and more firms producing the same product. This implies that the same level of industry output could be produced at lower cost with fewer firms.
In a perfectly competitive industry, how do firms compete?
In truly (perfectly) competitive industries, firms compete on the basis of price. Competitive firms win by achieving greater efficiency and offering their products at the lowest possible price.
In a monopolistically competitive industry (or any industry that can be characterized as imperfectly competitive), how do firms compete?
Imperfectly competitive firms engage in nonprice competition. The most prominent form of nonprice competition is advertising.
Compare the number of firms in each of the 4 market types.
PC: Large # of small firms
Monopoly:One firm
Oligopoly: A small # of firms(avg. 4)
MC: A large # of firms
Compare the size of the firms in each of the 4 market types.
PC: small firms
Monopoly: large firms
Oligopoly: large firms
MC: small firms
Provide 2 examples of real-world firms in each of the 4 market types.
PC: Tshirt shops, Wheat farmers
Monopoly: Single bookstore in campus, utility service
Oligopoly: Cell phone providers, Video game consoles
MC: Hotels/Motels, restaurants
Compare the type of products produced by each of the 4 market types.
PC: identical products
Monopoly: Unique product
Oligopoly: differentiated products
MC: differentiated products
Compare the degree of market power by firms in each of the 4 market types.
PC: No market power
Monopoly: large degree of power
Oligopoly: large degree of power
MC: small degree of power
Compare the shape of the demand curve in each of the 4 market types.
PC: Horizontal and perfectly elastic
Monopoly: Downward sloping and elastic
Oligopoly: 1. Downward sloping and ??? 2. downward sloping and kinked
MC: Downward sloping and elastic
Compare the relationship between Marginal revenue and price in each of the 4 market types.
PC: MR=P
Monopoly/Oligopoly/MC: MR<p></p>
Compare the most likely short-run outcomes in each of the 4 market types.
PC: all outcomes equally likely
Monopoly: above normal economic profit
Oligopoly: above normal economic profit
MC: all outcomes equally likely
Compare the entry-exit conditions for each of the 4 market types.
PC: Low entry-exit barriers
Monopoly: High barriers
Oligopoly: high barriers
MC: low barriers
Compare the most likely long-run outcomes in each of the 4 market types.
PC: normal economic profit
Monopoly: above normal economic profit
Oligopoly: above normal economic profit
MC: normal economic profit
What is Marginal Cost Pricing?
The offer (supply) of goods at prices equal to their marginal cost. ???
