ECON EXAM 2 Flashcards
what are the 4 industries?
- perfect competition - no barriers to entry, lots of firms, VERY VERY competitive
- monopoly - 1 firm controls everything
- monopolistic competition - lil bit of comp, lil bit of monopoly, products between firms are a lil different [each co has it’s own “mini” monopoly]
- oligopoly - small # of firms, lots of barriers of industry (Ex. airlines)
what characteristics define perfect competition?
- lots of firms
- products are identical across firms
- no barriers to entry (any 1 can start a firm, no restrictions)
perfect competition: how do we define “concentrations’ of firms? (2)
concentration ratio: percent of sales accounted for by 4 largest firms (the largest meaning who has most sales)
herfindahl-hirschel index (HHI): sum of squared market shares of top 50 firms (if more than 50) or of all firms (if less than 50)
HHI index: what are its limits?
if HHI is over 2500 - NO se permite, US anti-trust laws to prevent monopolies
BELOW 1500 - considered a “non-concentrated” market (Ex. ice cream)
perfect competition: what are the effects of perfect substitutes?
- firms become “price takers” they have to keep price at the same level of their competitors, or else consumers won’t buy it (their personal demand curve is perfectly elastic, consumers demand curve still is downward sloping)
how do firms in perfect competition max profit?
- choose a q to max
- increase Q to increase TR (total revenue) but increase TC (total cost)
- MR - change in TR / change in Quant
- MC - change in TC / change in Quant
- MAX profit where MR = MC
what is the profit maximizing level of output?
the place where MR = MC (or the closest point)
[ex. where you’re benefitting the most]
what is the formula for profit?
- Total Profit = TR - TC
Total Profit = Q (TR/Q - TC/Q)
- find the ATC At athe profit max level of output, calculate rectangle area to find total profit [must have demand/fixed cost curve and MC curve]
perfect competition: what is marginal revenue?
- the change in total revenue that results from a one-unit increase in the quantity sold.
- in perfect competition, the firm’s marginal revenue equals the market price.
perfect competition: where is a firm’s shutdown point?
- at a price below Average Variable Cost; i.e. where marg costs are greater than marg revenue
- at min AVC
price controls: what is a price ceiling?
- max price that can be legally charged for a good
ex. utilities, gas, rent control - needs to be BELOW Equil. to be effective
price controls: what is a price floor?
- min price that can be legally charged for a good
ex. minimum wage, cigs and alc, ag price supports - must be ABOVE equilibrium to be effective
price controls: price ceiling - what occurs when ceiling is ABOVE equilibrium?
- NO EFFECT; rent price is at Equilibrium
price controls: price ceiling - what occurs when ceiling is BELOW equilibrium?
- creates a SHORTAGE (D becomes greater than S)
- creates DeadWeight Loss: area between NEW supply and Old Demand; region where MB (D) is greater than MC (S)
DWL: decrease in total surplus as a result of inefficiency
price controls: price ceiling - how are shortages resolved? (6)
- circumvention (black markets, ppl overpaying, bribing landlords)
- preference systems (who would be the best candidate? by credit score, income –> discrimination)
- first come first serve
- has an opp cost: the time u spend waiting, searching for an (ex.) appt could be used working, earning money etc.
- lottery
- contest
- violence
