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ECON 101 > Chapter 6-9 > Flashcards

Chapter 6-9 Flashcards

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1
Q

4 major market structures

A
  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly
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2
Q

characteristics of perfect competition

A
  1. many buyers and sellers (neither have control over price)
  2. homogeneous product
  3. no significant barriers to entry and exit
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3
Q

why study the perfectly competitive market

A
  1. information about how markets operate (entry, exit, costs)
  2. can be applied to imperfect market structures
  3. point of comparison to evaluate real-world markets
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4
Q

individual price taker’s demand curve

A
  1. individual sellers won’t sell at higher price because buyers can buy from someone else
  2. won’t sell for less because they can sell all they want at current price
  3. horizontal (at market price) over entire range of output quantity
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5
Q

effect of change in market price on individual price taker’s demand curve

A

varies directly with market price

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6
Q

total revenue

A

price times quantity sold (TR = P x q)

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7
Q

average revenue

A

total revenue divided by quantity sold (AR = TR/q)

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8
Q

marginal revenue

A

change in total revenue from the sale of an additional output (MR= ΔTR/Δq)

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9
Q

profit-maximizing output rule

A
  1. a firm should always produce where MR=MC
  2. when MR>MC expand production to increase profits
  3. when MR
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10
Q

profit-maximizing output level (q*)

A
  1. where MR=MC
  2. if at q* price is greater than ATC –> economic profit
  3. if at q* price is less than ATC –> economic loss
  4. if at q* price is equal to ATC –> zero economic profits (normal)
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11
Q

individual firm’s short run supply curve

A

the portion of the MC curve that lies above the minimum of the AVC curve

  • shows the marginal cost of producing any given output
  • shows the equilibrium output that the firm will supply at various prices in the short run
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12
Q

short-run production decisions of an individual competitive firm

A

as market price rises, the output decisions of a competitive firm evolve from not producing at all (shutting down), to operating at an economic loss, to economically breaking even, to generating an economic profit

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13
Q

economic profits in the long run

A

encourage entry of new firms –> shift market supply curve to the right –> drive down prices and revenue

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14
Q

economic losses in the long run

A

signal resources to leave industry –> supply reduction –> higher prices and increased revenue

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15
Q

long run equilibrium for the individual firm

A

when there is no entry/exit into the industry, at zero economic profits

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16
Q

constant-cost industries

A

input prices (and cost curves) do not change as industry output changes (industry must be very small demander of resources in the market)

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17
Q

increasing-cost industry

A

cost curves of the individual firms rise as total output increases (typical)

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18
Q

decreasing-cost industry

A

cost curves decline as total output increases

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19
Q

perfect competition long-run equilibrium

A

achieves productive efficiency, allocative efficiency, and production allocated to reflect consumers’ wants, making perfect competition economically efficient

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20
Q

productive efficiency

A

production at least possible cost

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21
Q

allocative efficiency

A

where P = MC and production is allocated to reflect consumer preferences

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22
Q

total profit

A

total profit = TR - TC

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23
Q

price taker

A

takes the price that it is given by the intersection of the market demand and market supply curves (perfectly competitive firm)

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24
Q

short run market supply curve

A

the horizontal summation of the individual firms’ supply curves in the market

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25
Q

utility

A

a measure of the relative levels of satisfaction consumers get from the consumption of goods and services

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26
Q

util

A

one unit of satisfaction

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27
Q

total utility (TU)

A

total amount of satisfaction derived from the consumption of a certain number of units of a good or service

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28
Q

marginal utility (MU)

A

extra satisfaction generated by an additional unit of a good that is consumed in a particular time period

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29
Q

diminishing marginal utility

A

the concept that as an individual consumes more and more of a good, each successive unit generates less and less utility (or satisfaction)

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30
Q

consumer equilibrium

A

allocation of consumer income that balances the ratio of marginal utility to the price of the goods purchased

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31
Q

consumer surplus

A

the monetary difference between the price a consumer is willing and able to pay for an additional unit of a good and the price the consumer actually pays; for the entire market, it is the sum of all of the individual consumer surpluses for those consumers who have purchased the good

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32
Q

producer surplus

A

the difference between what a producer is paid for a good and the cost of producing that unit of the good; for the market, it is the sum of all the individual sellers’ producer surpluses—the area above the market supply curve and below the market price

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33
Q

total welfare gains

A

the sum of consumer and producer surplus

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34
Q

deadweight loss

A

net loss of total surplus that results from the misallocation of resources

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35
Q

connection between law of demand and law of diminishing marginal utility

A

A fall in a good’s price will raise its marginal utility–price ratio above that of other goods purchased. This relatively greater ratio will lead a rational consumer to purchase more of this good at the expense of other goods.

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36
Q

marginal utility formula

A

MU = ΔTU/ΔQ

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37
Q

explicit costs

A

the opportunity costs of production that require a monetary payment

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38
Q

implicit costs

A

the opportunity costs of production that do not require a monetary payment

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39
Q

profits

A

the difference between total revenue and total cost

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40
Q

accounting profits

A

total revenues minus total explicit costs

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41
Q

economic profits

A

total revenues minus explicit and implicit costs

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42
Q

sunk costs

A

costs that have been incurred and cannot be recovered

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43
Q

short run

A

a period too brief for some production inputs to be varied

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44
Q

long run

A

a period over which all production inputs are variable

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45
Q

production function

A

the relationship between the quantity of inputs and the quantity of outputs produced

46
Q

total product (TP)

A

the total output of a good produced by the firm

47
Q

marginal product (MP)

A

the change in total product resulting from a unit change in input

48
Q

diminishing marginal product

A

as a variable input increases, with other inputs fixed, a point will be reached where the additions to output will eventually decline

49
Q

fixed costs

A

costs that do not vary with the level of output in the short run

50
Q

total fixed cost (TFC)

A

the sum of the firm’s fixed costs

51
Q

variable costs

A

costs that vary with the level of output

52
Q

total variable cost (TVC)

A

the sum of the firm’s variable costs

53
Q

total cost (TC)

A

the sum of the firm’s total fixed costs and total variable costs

54
Q

average total cost (ATC)

A

a per-unit cost of operation; total cost divided by output

55
Q

average fixed cost (AFC)

A

a per-unit measure of fixed costs; fixed costs divided by output

56
Q

average variable cost (AVC)

A

a per-unit measure of variable costs; variable costs divided by output

57
Q

marginal cost (MC)

A

the change in total costs resulting from a one-unit change in output

58
Q

economies of scale

A

occur in an output range where LRATC falls as output increases

59
Q

constant returns to scale

A

occur in an output range where LRATC does not change as output varies

60
Q

diseconomies of scale

A

occur in an output range where LRATC rises as output expands

61
Q

minimum efficient scale

A

the output level where economies of scale are exhausted and constant returns to scale begin

62
Q

total production in the short run

A

Total output increases as variable inputs are increased. Marginal product initially rises but eventually declines as variable inputs are added. Finally, negative marginal product can occur, indicating a fall in total output

63
Q

relationship between marginal and average amounts

A

Adding a marginal amount affects the value of the average amount—the average will rise (fall) when the marginal amount is larger (smaller) than the initial average

64
Q

relationship between marginal product and marginal costs

A

An inverse relationship exists between marginal product and marginal cost—when marginal product increases, marginal cost must fall, and when marginal product falls, marginal cost must rise

65
Q

U-shaped average total cost curve

A

Average total cost declines with expanding output as average fixed costs decline, but then increases as output expands due to increasing marginal cost

66
Q

relationship between marginal cost and average (total/variable) cost

A

When marginal cost is less than (greater than) an average cost, the average cost must be falling (rising); when marginal cost is greater than (less than) an average cost, the average cost must be rising (falling)

67
Q

long-run average total cost curve

A

In the long run, firms can vary inputs that are fixed in the short run, such as plant size and equipment, in some cases, lowering average costs per unit. The long-run average total cost curve shows the lowest average total cost for producing each output in the long run

68
Q

causes of cost curve shift

A

Input prices, taxes, technology, and regulation can shift the cost curves.

69
Q

marginal product formula

A

MP = ΔTP/L

70
Q

total cost formula

A

TC = TVC + TFC

71
Q

average fixed cost formula

A

AFC = TFC/Q

72
Q

average variable cost formula

A

AVC = TVC/Q

73
Q

average total cost formula

A

ATC = TC/Q = AVC + AFC

74
Q

marginal cost formula

A

MC = ΔTC/ΔQ

75
Q

monopoly

A

a market with only one seller of a product that has no close substitute and there are natural and legal barriers to entry that prevent competition

76
Q

price maker

A

a monopolistic firm that sets the price of its product so as to maximize its profits

77
Q

natural monopoly

A

a firm that can produce at a lower cost than a number of smaller firms could

78
Q

marginal cost pricing

A

the decision to set production where the price of a good equals marginal cost

79
Q

average cost pricing

A

production where the price of a good equals average total cost

80
Q

price discrimination

A

the practice of charging different consumers different prices for the same good or service when the cost of providing that good or service is not different for different consumers

81
Q

sources of monopoly power

A

Sources of monopoly power include legal barriers, economies of scale, and control over important inputs.

82
Q

monopolist demand curve

A

The monopolist’s demand curve is downward sloping because it is the market demand curve. To produce and sell another unit of output, the firm must lower its price on all units. As a result, the marginal revenue curve lies below the demand curve.

83
Q

why is marginal revenue less than price in a monopoly

A

The monopolist’s marginal revenue will always be less than price because there is a downward-sloping demand curve. In order to sell more output, the monopolist must accept a lower price on all units sold. This means that the monopolist receives additional revenue from the new unit sold but receives less revenue on all of the units it was previously selling.

84
Q

relationship between elasticity of demand and total and marginal revenue

A

Along the elastic portion of the demand curve, a fall in price leads to an increase in total revenue, making marginal revenue positive. Along the inelastic portion of the demand curve, a fall in price leads to a fall in total revenue, making marginal revenue negative. Therefore, the monopolist will operate in the elastic portion of its demand curve.

85
Q

monopolist profit-maximizing output

A

where MR = MC (like perfect competition)

  • price is set by going up at that quantity to the demand curve
  • P > MR
  • P > MC
86
Q

monopoly profit or loss

A

Monopoly profits can be found by comparing price per unit and average total cost at Q*. If P>ATC, there are economic profits. If P=ATC, there are zero economic profits. If P

87
Q

does monopoly promote inefficiency

A
  • Monopoly results in smaller output and a higher price than would be the case under perfect competition.
  • monopolist produces at an output where P>MC, this means the value to society of the last unit produced is greater than its cost - not allocatively efficient
88
Q

does monopoly hinder innovation

A

Monopoly may lead to greater concentration of economic power and could hinder innovation.

89
Q

anti-combine laws

A

Anti-combine laws are designed to reduce the abuses of monopoly power and push production closer to the social optimum.

90
Q

government regulation

A

Privately owned monopolies may be allowed to operate, but under the regulation of a government agency.

91
Q

reason for price discrimination

A

Price discrimination occurs where differences in prices are not explained by differences in marginal cost - a result of the profit-maximization motive. If different groups have different demand curves for a good or service, a seller can make more money by charging these different buyers different prices

92
Q

price discrimination and higher profits

A

A monopolist that can perfectly price-discriminate will produce a greater amount of output and earn a greater amount of economic profit when compared to a monopolist that charges a single monopoly price.

93
Q

monopoly long term equilibrium

A

same as short term equilibrium, because barriers to entry allow them to keep profits, and negative profits would result in shut down

94
Q

allocative efficiency

A

when P=MC, marginal benefits of consumption, reflected by price, equal the marginal costs of production

95
Q

3 economic wastes of monopoly

A
  1. deadweight loss
  2. X-inefficiency
  3. rent seeking
96
Q

deadweight loss (harberger)

A

loss in allocative efficiency because monopolist produces less than the socially efficient level and charges higher than competitive price –> loss to society from foregone resources

97
Q

X-inefficiency (from the work of Harvey Leibenstein)

A

monopolists are wasteful because they have no competition to keep them cost efficient –> ATC may be higher than lowest possible costs

98
Q

rent seeking (from the work of Gordon Tullock)

A

monopolist’s profit box draws other firms to the industry –> monopolist spends part of profits trying to prevent other firms from entering + entrants spend resources trying to get part of profits

99
Q

monopoly and “creative destruction”

A

entry barriers can be circumvented by technological change - engine of progress

100
Q

price regulation on the monopolist

A
  1. first best solution

2. second best solution

101
Q

first best solution

A

deadweight loss equals zero because government forces monopoly to charge where MC = D (like perfectly competitive market)

102
Q

problems with first best solution

A
  1. regulator does not know marginal costs of monopolist

2. competitive price would be too low and monopolist would make negative profits

103
Q

second best solution

A

sometimes government may use “fair rate of return” price where P=ATC –> smaller deadweight loss

104
Q

problem with second best solution

A

discourages technological innovations which would lower the ATC

105
Q

3 types of price discrimination

A
  1. first degree
  2. second degree
  3. third degree
    (not mutually exclusive)
106
Q

first degree price discrimination

A

monopolist charges a different price for each unit of quantity - if done for each consumer, would capture all consumer surplus (not common, requires too much information)

107
Q

second degree price discrimination

A

decreasing block price (buy more costs less) or increasing block price (buy more costs more)

108
Q

third degree price discrimination

A

different prices for different groups of consumers with different demand elasticities

109
Q

necessary conditions for price discrimination

A
  1. firm must have control over price (not perfectly competitive)
  2. firm must be able to identify different groups of consumers cheaply and legally
  3. firms must be able to prevent arbitrage
110
Q

arbitrage

A

low price buyer sells the product to a high price buyer at a price below the discriminating firm’s price (more likely to occur with goods than services)

ECON 101 (3 decks)

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