Chapter 10-12 Flashcards
Market Power
the ability of a firm to raise and maintain price above the level that would prevail under competition (restricting output in order to increase price)
Monopoly
the exclusive possession or control of the supply of or trade of a good or service
Oligopoly
when the industry is dominated by a few firms
Economic Cost
the economic cost of producing a good is the opportunity cost of the firm’s production
Fixed Cost
costs that don’t change as output increases
Variable Cost
costs that change as output increases
Marginal Cost
the cost to produce one more unit
Total Cost
TC = VC + FC for a certain output produced
Factors of Production
Land
Labor
Capital
Entrepreneurship
Explicit Costs
a direct payment made to others in the course of operating a business
Implicit Costs
the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns
Normal Profits
zero profits
Abnormal Profits
positive profits
Losses
negative profits
Corporate Social Responsibility (CSR)
when the business includes the public’s interest in its decision making
- workforce
- consumers
- local community
- environment
Assumptions of Perfect Competition
- industry is made of a lot of firms
- firms have zero market power
- all firms are small
- products are homogeneous
- no barriers to entry
- everyone has perfect knowledge
- perfectly elastic demand curve
- long run all profits fall to zero
Assumptions of an Imperfect Market
When there is
- competition for market share
- differentiated products
- small number of suppliers (relevant to industry as a whole
- barriers to entry exist
- abnormal profits are possible in the long run
Stakeholders
any group affected by an industry
Non Price Competition
changes in ones business to attempt to gain an edge on competitors (non price involved)
Economies of Scale
the cost advantages that enterprises obtain due to their scale of operation
Satisficing
when an economic agent aims to perform satisfactorily rather than to a maximum level, in order to pursue other goals in life
Growth Maximization
companies set their target for growth in the short run instead of profit in hopes of becoming a more dominant figure in the market in the long run
Profit Maximizing Level of Output
producing where MC = MR
Revenue Maximizing Level of Ouptput
producing at a rate when MR = 0
Productively Efficient Level of Output
producing at a rate where MC = AC
- resources are not being wasted
Allocatively Efficient Level of Output
producing at a rate where MC = AR
- when suppliers produce at the optimal amount for consumers
- socially optimal
Assumptions of Monopolistic Competition
- industry made pf fairly large number of firms
- goods are differentiated
- each firm is relatively small
- each firm has a little bit of market power
- perfect information
- no barriers to entry
- elastic demand
- normal profits in the long run
Assumptions for Monopolies
- when they are the only firm producing a good
- barriers to entry exist
- abnormal profits in the long run
- not socially optimal
- no close substitutes of products
- very high market power, can control price or output
- profit maximizing level of output
Long Run
period of time in which all factors of production are variable (all planning takes place in the long run)
Short Run
period of time in which at least one factor of production is a fixed factor (all production takes place in the short run)
Anti Competitive Behaviour
business or government practices that prevent or reduce competition in a market
Specialization - EOS
having managers specialize into different areas of expertise
Division of Labor - EOS
breaking down a production process into small easy tasks to increase efficiency
Bulk Buying - EOS
negotiating discounts to buy large amounts of resources for cheaper prices
Financial Economies - EOS
large firms are able to raise capital easier
Transport Economies - EOS
large firms making bulk orders get charged less for transport or they may even create their own transport fleet
Large Machines - EOS
by owning large machinery, firms can save more money over time
Promotional Advertising - EOS
when advertisement is successful promotion cost per good falls
Natural Monopoly
when there are only enough economies of scale to support one firm
Legal Barriers
when a firm is given a legal right to be the only producer in an industry (the legal right to be a monopoly)
Barriers to Entry
factors that can prevent or impede newcomers into a market or industry sector
Brand Loyalty
customers who would choose a firm’s product of another cheaper alternative
Assumptions of an Oligopoly
- few firms dominate a majority of the market share
- barriers to entry usually exist
- goods may be homogeneous
- there is interdependance
- price is very rigid
- abnormal profits possible in the long run
- not socially optimal
Collusion
when firms in an oligopoly collude to set higher prices
Formal Collusion (Cartel)
when firms openly agree on a price they will charge (OPEC)
Tacit Collusion
when firms in an oligopoly charge the same prices without any collusion
Examples of Non-Price Competition
- brand name
- packaging
- special features
- advertising
- sales promotion
- personal selling
- publicity
- sponsorship deals
- special distribution features
