eco105 9-10 Flashcards
Marginal Revenue
Additional revenue from more sales or from selling one more unit
The simple rule for smart business decisions
choose when marginal revenues are greater than marginal costs
Fixed costs ____ affect smart choices
don’t
Marginal revenue equals
the price of output, and both are constant as the quantity produced increases
Marginal revenue depends on
market structure → how competitive your industry is and whether your business is a price taker or price maker
Marginal revenue can also be defined in two ways
Change in total revenue
Revenue from selling one more unit
One price rule
Most products and services have one price, not a different price for each customer because competitive economic forces tend to equalize prices
In perfect competition, what effects does producing more have on the market
no effect on the market because as a small producer, the increase in supply does not affect market supply or market price
What creates pricing power
Barriers to entry, brand loyalty or advertising
For price makers, the marginal revenue curve is
different from the demand curve because marginal revenue is less than price
For price takers, the marginal revenue curve is
the demand curve
Diminishing returns
as output increases, decreasing productivity increases marginal costs
When increases in output lead to lower (diminishing) productivity
marginal costs increase
Most businesses that are not operating near capacity have
constant marginal costs as they increase output, looks like a horizontal line
Recipe for Profits
estimate marginal revenues and marginal costs and then set the highest price that allows you to sell the highest quantity for which marginal revenue is greater than marginal cost
Fixed costs
costs that do not change with the quantity of output produced
Price discrimination
charging customers different prices for the same product or service, increases a business’s total profits
Price discrimination breaks the one-price rule, and is possible only when a business can:
Prevent low-price buyers from reselling to high-price buyers and
Control resentment among high-price buyers
How do businesses control resentment among the high-price buyers?
Discount: businesses describe the higher price as the “regular” price, and the lower price as the “discounted” price
Discriminate by Elasticity
set a lower price for the customers who have elastic demands, and a higher price for the customers with inelastic demands
Recipe for Price Discrimination
- Prevent resale of the product or service
- Charge a lower price to the elastic demand group (lower willingness to pay)
- Charge a higher price to the inelastic demand group (higher willingness to pay)
- Control resentment among higher price buyers
Why is perfect competition efficient
the price in the market is equal to the minimum of the long-run average cost curve.
In other words, goods are being produced and sold at the lowest possible average cost
Price-making power is inefficient
- Must lower price to sell more
- marginal revenue is less than price due to one-price rule
- monopolist is producing less and charging a higher price, inefficient for the economy as a whole
- Deadweight loss present, signaling an inefficient market outcome
- Price-making power allows businesses to restrict output and raise prices to maximize their profits, but creates deadweight loss
Natural monopoly
economies of scale allow only a single seller to achieve lowest average total cost
ECONOMIES OF SCALE
when more units of a good or service can be produced on a larger scale with (on average) fewer input costs
As a business’s scale of production increases, average total costs decrease with increasing quantities
Market Failure
when markets produce outcomes that are inefficient or inequitable
Crown corporations
publicly owned businesses in Canada
Created by the federal/provincial governments, which own 100% of the corporation’s assets
Regulated Private Monopoly
allow a single private business, but have the government regulate it, like banks
Rate of return legislation
sets a price allowing the regulated monopoly to just cover average total costs, including normal profits (principle)
Rate of return legislation
sets a price allowing the regulated monopoly to just cover average total costs, including normal profits (principle)
Game theory
a mathematical tool for understanding how players make decisions, taking into account what they expect rivals to do
Prisoner’s dilemma
a game with two players who must each make a strategic choice, where results depend on the other player’s choice
Nash equilibrium
outcome of a game in which each player makes her own best choice given the choice of the other
Smart choices – game theory
confess if you don’t trust the other, or deny if you can trust the other
Collusion
conspiracy to cheat or deceive others
Cartel
association of suppliers formed to maintain high prices and restrict competition
OPEC
Organization of Petroleum Exporting Countries, best-known international cartel, acted like a single monopoly
The Competition Act
maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, anti-combine law
Criminal offenses
include price fixing, bid rigging, and false or misleading advertisement → penalties include prison sentences and fines
Civil offenses
less serious, include mergers abusing a business’s dominant market position, and other actions that lessen competition → penalties are fines and legal prohibitions of mergers and anti-competitive business practices
Caveat emptor
let the buyer beware
3 major forms of government regulation in Canada
- Federal and provincial government departments regulate certain industries or roles
- Governments appoint independent agencies and boards (commissions) to regulate another type of industry
- Governments give professional associations the authority to regulate themselves
Public-interest view
government regulation eliminates waste, achieves efficiency, and promotes the public interest
Capture view
government regulation benefits the regulated businesses, not the public interest
Government Failure
when regulations fail to serve public interest
