Chapters 11, 16, 32, 33 Flashcards
Covering the basic topics of microeconomics Material is from the textbook; Ragan Microeconomics , Christopher T.S. Ragen
Imperfect competition
Between perfect competition and Monopolie
Theory of monopolistic competition
explains why there are many small firms but each with a degree of market power
Oligopoly
An industry with a small number of large firms that each with a degree of market power who actively compete with each other
Concentration ratio
the fraction of total market sales controlled by a specific number of the industry’s largest firms
Differentiated product
a group of products that are similar enough to be called the same product but dissimilar enough to be sold at different prices
Assumptions of monopolistic competition
firms have the same cost curves
firms sell a differentiated product
many firms in the industry
freedom of entry and exit
Assumptions of monopolistic competition
firms have the same cost curves
firms sell a differentiated product
many firms in the industry
freedom of entry and exit
what quantity do firms in monopolistic competition produce?
A quantity less that the minimum efficient point on the LRAC curve
(where MC = MR)
Oligopoly
an industry that has two or more firms where at least one produces a significant amount of the industry’s total output
Strategic behavior
Oligopolies make decisions that are based on the reactions of their rivals to their actions
Game theory
Based on the idea that oligopolies’ can either compete to maximise their own profits or cooperate to maximise joint profits
Nash equilibrium
when each player is doing the best that it can given the behavior of the opponent
Collusion
when firms agree to restrict output to raise prices
Overt: firms openly agree to do this
Covert: firms agree in secret
tacit: happens without any agreement
Why do consumers gain from Oligopoly competition?
The firms attempts to outdo one another results in better pricing, advertising, and innovation which usually benefits the consumer
Basic functions of government
Enforce property rights
- definitions of rights and obligations of institutions
The defense for free markets
formal defense: in free markets price would equal marginal cost and the economy would be allocatively efficient
Informal defense three main arguments
automatic coordination
pursuit of profits drives innovation
free markets permit a decentralization of market power
Why are market failures inevitable?
economies of scale - results in only a few firms being able to produce at low cost
firms sell differentiated products and therefore have some market power
firms can gain a temporary monopoly through innovation
Externalities
3rd party effects
Negative externality
a negative effect to a 3rd party (such as society) from production
The four types of goods
Private
Public
Common property resource
Club goods
rivalrous goods
goods that can only be possessed or consumed by a single user
excludable goods
goods that a consumer can be prevented from using
Asymmetric information
one party of a transaction can take advantage of special information
For what broader social goals might a government want to intervene in the market?
income distribution
- examples; child benefits, tax and transfer, employment insurance
Protecting others from harming others
The reasons for market failure and rationale for government intervention
Firms with market power
Externalities
Common property resources and Public goods
Asymmetric information
Open economy
engages in international trade
A closed economy
has no foreign trade
What are the gains from trade?
increased output form the specialization that comes with international trade
Absolute advantage
the difference of absolute cost of producing between counties
Comparative advantage
difference in opportunity cost of producing between different countries
What are the gains from specialization
when two countries differ, they can specialize in the products that it is best at making (comparative and absolute advantage) which increases efficiency and trade with product items that other countries can better produce
world output increases if countries specialize in producing the goods they have comparative advantage
Trade benefits for small countries
international trade allows for small countries to reap the benefits by trading with the goods that it has a production advantage in
Learning by doing
specialization increases efficiency of labour as workers get better at the tasks they do more often
- shifts the LRAC curve downward
The law of one price
when a product is traded throughout the entire world, the price differs only by the difference in price of the transportation of that product
Terms of trade
the ratio between costs of imports and price of exports
What is a Tariff?
A tax imposed on imported goods or services
- ( a method of restricting imports)
The case for protection
promoting diversification of production
protecting specific groups
Improving terms of trade
Effects of a tariff
Imposes costs on consumers
Benefits domestic producers
Generates income for the government
- the net effect however generates a deadweight loss in the economy
Dumping
when an exporter exports to another country at a price below the domestic price in that country
Countervailing duties
A countervailing duty is a tariff imposed by one
country to offset the effects of specific subsidies
provided by foreign governments
Trade diversion
concentrating trade within a specific group by reducing trade barriers within that group
Trade creation
reducing trade barriers within a group of countries to increase general trade without affecting the amount traded with countries outside the group
