econ final elzanga Flashcards
Depreciation:
a measure of the decline in value of an asset over time; USGAAP accountants always depreciate while economists consider a rise in value as revenue
Perfectly Competitive Market:
a market in which economic forces operate in an unimpeded fashion; An individual firm cannot affect the market price in this model
Assumption of Perfect Competition
Both buyers and sellers are price takers
The number of firms is large
There are no barriers to entry
Firms’ products are identical
There is complete information
Selling firms are profit-maximizing entrepreneurial firms
Barriers to Entry:
social, political, or economic impediments that prevent firms from entering a market
Marginal Revenue (MR):
the change in total revenue associated with a change in quantity; market price in this model
Marginal Cost (MC):
The change in total cost associated with a changed in quantity; firms supply curve
Firms maximize profits
MC = MR = P
Increase Production
If MR > MC
Decrease Production
If MR < MC
Monopolistic Competition:
a market structure in which there are many firms selling differentiated products and few barriers to entry
Characteristics of monopolistic competition
o Many sellers
o Differentiated products
o Multiple dimensions of competition
o Easy entry of new firms in the long run
o Ex: soap industry
Effect of Advertising
make firm more inelastic
Effect of Advertising
positively shift firm’s demand curve
Oligopoly:
a market structure in which there are only a few firms and firms explicitly take other firms’ likely response into account
Cartel:
a combination of firms that acts as if it were a single firm; shared monopoly
Cartel Model of Oligopoly:
model that assumes that oligopolies act as if they were monopolists that have assigned output quotas to individual member firms of the oligopoly so that total output is consistent with joint profit maximization; All firms follow uniform pricing policy that serves the collective interest
Implicit collusion:
multiple firms make the same pricing decisions even though they have not explicitly consulted with one another; important reason prices are sticky
Kinked Demand Curve:
Marginal revenue is discontinuous; A large change in marginal cost is required for firms to change their prices; Theory of sticky prices
Contestable Market Model:
a model of oligopoly in which barriers to entry and barriers to exit, not the structure of the market, determine a firm’s price and output decisions
Concentration Ratio:
the value of sales by the top firms of an industry stated as a percentage of total industry sales
Herfindahl Index:
an index of market concentration calculated by adding the squared value of the individual market shares of all the firms in the industry; Weights firms with larger market shares more heavily than concentration ratio; Commonly used in gov’t policy
