2.11 MARKET FAILURE-MARKET POWER

Question 1

Summary of Perfect Competition

Answer 1

Many small firms, Identical products, perfect comp., low barriers to entry, and no market power.

Question 2

Summary of Monopoly

Answer 2

One large firm, unique products, no competition, high barriers to entry, dominant market power.

Question 3

Summary of Monopolistic Competition

Answer 3

Many small firms, differentiated products, strong competition, and low barriers to entry.

Question 4

Summary of Oligopoly

Answer 4

A few large firms, have identical or differentiated products, limited competition, high barriers to entry, and limited market power.

Question 5

Barriers to Entry

Answer 5

Refers to the degree of difficulty involved with firms entering or exiting a market.

Question 6

Revenue

Answer 6

Total Revenue=Price*Quantity
Marginal Revenue=The change in revenue of an additional quantity
MR=Delta TR/Delta Q
AR=TR/Q

Question 7

Cost

Answer 7

Total Cost=Cost*Quantity
Marginal Cost=The cost of producing one additional unit
MC=Delta TC/Delta Q
AC=TC/Q

Question 8

Types of Barriers

Answer 8

Economies of Scale
Innovative Technology
Geography or Ownership of Raw Materials
Government Created Barriers

Question 9

Economies of Scale

Answer 9

The larger a firm gets the more efficient it is, and it can lower its cost, making it more profitable.

Question 10

Short-Run

Answer 10

A period when at least one factor of production is fixed.

Question 11

Long-Run

Answer 11

A period when all factors of production are variable.

Question 12

The Law of Diminishing Marginal Returns

Answer 12

In the short run, when at least one capital resource is fixed, the addition of inputs will initially increase marginal returns but will eventually diminish marginally.

Question 13

Profit Maximization

Answer 13

The profit-maximizing rule is used by EVERY firm to determine the quantity the firm should produce to maximize profits.
REMEMBER!!! MR=MC

Question 14

Concentration Ratio

Answer 14

Tells if an industry is an Oligopoly, Monopoly, or Monopolistic Competition.

Question 15

Perfect Competition Diagram

Answer 15

Two diagrams are put together side-by-side when drawing a firm that participates in Perfect Competition.

Question 16

Perfect Competition Diagram

Answer 16

Since no firm has control over the price, MR is equal to the Price. Firms must take the price from the market - Price Takers. (MR=D=AR=P)

Question 17

Short-Run Profits/Loss

Answer 17

When firms make abnormal profits or losses in the short run, other firms react by either leaving or entering the market. Perf. Comp. has low barriers=easy join or leaving.

Question 18

Adjustment to Long-Run

Answer 18

As firms join, the equilibrium price in the market decreases, and quantity increases. As firms are Price Takers, they adjust to the new price until eventually, everyone in the market makes normal economic profit.

Question 19

In Perfect Competition…

Answer 19

Firms can only make abnormal profits or losses in the short run.
All firms will make Normal Profits in the long run.

Question 20

Economies of Scale Sources

Answer 20

Typically, firms start small with limited expertise. Monopolists can charge a lower price than newcomers.

Question 21

Natural Monopoly Sources

Answer 21

Only enough revenue and economies of scale to support one firm.

Question 22

Legal Barriers Sources

Answer 22

Patents, Copyright, Licenses, etc.

Question 23

Branding Sources

Answer 23

Customers may be loyal to a certain firm due to marketing. Kleenex, Band-Aid, etc.

Question 24

Anti-Competitive Behavior Sources

Answer 24

A monopolist can charge lower costs due to economies of scale. Therefore, they can lower their price to suffocate upcoming competitors.

Question 25

Monopoly

Answer 25

Monopolies can make abnormal profits in the short and long run.

Question 26

Monopoly Key Components

Answer 26

One diagram, a singular firm IS the market.
Cost curves are the same (AC, MC)
The profit Maximizing rule still worked to find the quantity. (MR=MC)
MR does not equal D = AR = P

Question 27

Natural Monopoly

Answer 27

A monopoly that can produce enough output to cover the entire needs of a market while still experiencing economies of scale. Its average costs will be lower than those of two or more firms in the market

Question 28

Natural Monopoly

Answer 28

When economies of scale make it impractical for multiple firms to participate, a natural monopoly is preferable.

Question 29

Natural Monopoly

Answer 29

Natural Monopolies MUST use economies of scale; therefore, their AC and MC curves look different.

Question 30

Advertising and Branding

Answer 30

Because products are so similar, firms must attempt to differentiate their products with marketing. Obtaining loyal customers leads to higher market power and the ability to raise prices.

Question 31

Graphing Monopolistic Competition

Answer 31

Differentiation means MR is not equal to demand, but more firms offer substitutes which = MR and Demand more elastic. Abnormal profits and losses only in the short run. Normal profit in the long run

Question 32

Graphing Monopolistic Competition

Answer 32

Low barriers of entry mean profit will attract other firms to enter and steal demand. The demand curve will shift accordingly. In the long-run equilibrium, there will always be normal profit.

Question 33

Interdependence

Answer 33

The dependence of two or more people or things on each other.

Question 34

Interdependence

Answer 34

In an oligopoly, each firm has a significant share of market power and can therefore influence the market. Therefore, each firm must monitor other firms closely.

Question 35

Interdependence

Answer 35

Oligopolies have an incentive to collude. If collude, they become a monopoly. Simultaneously, firms may also desire to compete with one another to gain higher market shares.

Question 36

Dominant Strategy

Answer 36

There is one choice you should always make, regardless of your opponent’s decision.

Question 37

Non-Dominant Strategy

Answer 37

Your best choice is dependent upon your opponent’s decision

Question 38

Nash Equilibrium

Answer 38

When firms choose the optimal outcome with no incentive to change.

Question 39

Non-Price Competition

Answer 39

Since firms in oligopolies prefer to avoid engaging in a price war, must find alternative ways to gain market power and compete in alternative ways.

Question 40

Government Intervention to Market Dominance

Answer 40

Governments may intervene to attempt to solve market power dominance by the use of:
1. Legislation
2. Nationalization
3. Regulation