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Econ 101 > Econ 101: Chapter 14 > Flashcards

Econ 101: Chapter 14 Flashcards

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1
Q

Market structure / industrial organization

A

the competitive environment in which you’re doing business

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2
Q

Market power

A

the extent to which a seller can charge a higher price without losing many sales to competing businesses.

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3
Q

The higher your market power…

A

the higher the price you can charge.

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4
Q

Perfect competition

A

where all businesses sell an identical good, and there are many small buyers and sellers.

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5
Q

Those in a perfectly competitive market…

A

hold no market power.

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6
Q

Monopoly

A

when there is only one seller in the market.

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7
Q

Monopolists hold…

A

a lot of market power; they can raise the price without losing customers to their competitors.

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8
Q

Oligopoly

A

a market with only a handful of large sellers.

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9
Q

An oligopoly has..

A

market power, but not as much as a monopoly

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10
Q

Monopolistic competition

A

a market with many small businesses competing, each selling differentiated products.

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11
Q

Product differentiation

A

efforts by sellers to make their products differ from their competitors.

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12
Q

You hold more market power when..

A

you have fewer competitors, and when your product is more unique.

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13
Q

Imperfect competition

A

when you face at least some competitors and/or you sell products that differ at least a little from your competitors.

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14
Q

Insight 1 into imperfect competition

A

more competitors leads to less market power.

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15
Q

Insight 2 into imperfect competition

A

market power allows you to pursue independent pricing strategies.

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16
Q

Insight 3 into imperfect competition

A

successful product differentiation gives you more market power.

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17
Q

Insight 4 into imperfect competition

A

imperfect competition among buyers gives them bargaining power.

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18
Q

Insight 5 into imperfect competition

A

you best choice depends on the actions that other businesses make (interdependence principle).

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19
Q

when you have market power…

A

you face a trade off between selling a larger quantity of items vs. making more money on each item you sell.

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20
Q

Firm demand curve

A

illustrates how the quantity that buyers demand from an individual firm or business varies as it changes the price it charges.

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21
Q

Perfect competition - firm demand curve

A

flat (horizontal) firm demand curve

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22
Q

Monopoly - firm demand curve

A

monopolist’s firm demand curve = market demand curve

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23
Q

Imperfect competition - firm demand curve

A

Downward sloping
- Steep = inelastic = more market power
- flatter = elastic = less market power

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24
Q

Ways to discover your firm’s demand curve:

A

Experiment with different prices…
- with different groups of customers.
- at different locations
- over time

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25
Q

Marginal revenue

A

the additional total revenue you get from selling one more unit.

26
Q

Marginal revenue reflects…

A

the output effect − discount effect

27
Q

Output effect

A

An extra unit of output will boost revenue by an amount equal to the price of the extra item sold, P.

28
Q

Discount effect

A

to sell one extra unit, you must lower your price on all previous units sold. (∆PxQ)

29
Q

Marginal revenue curve lies below the firm demand curve because…

A

of the discount effect.

30
Q

the distance between the marginal revenue curve and the firm demand curve is…

A

the amount of the discount effect.

31
Q

Rational Rule for Sellers

A

sell one more item if the marginal revenue is greater than (or equal to) marginal cost.

32
Q

Follow the Rational Rule for Sellers to…

A

maximize profit

33
Q

The quantity you should sell is where…

A

marginal revenue curve and marginal cost curve intersect.

34
Q

The price you should charge is…

A

the price on the firm demand curve, above the marginal revenue curve.

35
Q

Patent

A

gives you the right to be the only seller of the good you invent for a period of time

36
Q

Patents effectively make companies…

A

monopolists –> market power is used to charge high prices.

37
Q

In a perfectly competitive market, what is the quantity and price?

A

Where the firm demand curve and marginal cost curve intersect.

38
Q

(1) Market power leads to…

A

higher prices

39
Q

(2) Market power leads to…

A

an inefficiently smaller quantity

40
Q

at the market power outcome…

A

the marginal benefit of more of the product is higher than the marginal cost.

41
Q

Underproduction problem

A

businesses with market power supply less than the efficient quantity

42
Q

The discount effect leads managers to…

A

supply less.

43
Q

(3) Market power yields…

A

larger economic profits.

44
Q

(4) Businesses with market power can…

A

survive even with inefficiently high costs.

45
Q

Market power creates a…

A

market failure (underproduction – less is produced than is in society’s best interest)

46
Q

Competition policy

A

laws and regulations designed to ensure that markets remain competitive.

47
Q

Competition policy is also known as…

A

anti trust policy

48
Q

Collusion

A

an agreement to limit competition –> creates market power

49
Q

Mergers

A

can create cost savings that benefit society, but also yields market power that harms society.

50
Q

Monopoly vs. monopolizing

A

being a monopoly is legal.

Monopolizing a market is illegal.

51
Q

Monopolizing a market includes…

A

excluding competitors or preventing new competitors from entering.

52
Q

Predatory pricing

A

charging a price so low to force you out of business, with the goal of raising prices later.

53
Q

Price ceilings are…

A

implemented by government to limit the extent to which monopolies exploit their market power.

54
Q

Set the price ceiling equal to…

A

marginal cost –> solves the underproduction problem –> businesses with market power will produce the perfectly competitive quantity.

55
Q

In perfectly competitive markets, price ceilings

A

reduce economic surplus

56
Q

In imperfectly competitive markets, price ceilings

A

raise economic surplus

57
Q

Natural monopoly

A

a market in which it is cheapest for a single business to service the market.

58
Q

Natural monoplies occur when…

A

marginal costs continuously decrease as you expand your output.

59
Q

Governments can prevent natural monopolies from exploiting market power through…

A

pricing ceiling – setting their price equal to the marginal cost.

However, price would only cover marginal cost of last item produced.

60
Q

(Natural monopoly) Governments end up..

A

providing these services directly, and pay for any losses out of its tax revenue.

Econ 101 (16 decks)

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