Economics Chap 8-10

Question 1

Imperfect competition

Answer 1

Refers to those market structures that fall between perfect competition and pure monopoly

Question 2

Monopolistic Competition

Answer 2

One type of imperfect competition
1)Many firms selling products that are similar but not identical
2)Markets that have some features of the competition and monopoly

Question 3

Characteristics of Monopolistic competition

Answer 3

Many sellers
Product differentiation
Downward sloping firm
Free entry & exit

Question 4

Short-run economies encourage:

Answer 4

New firms to enter the market
1)This increases the no. of products offered
2)This reduces demand faced by firms already in the market
3)Incumbent firms demand curves shift to the left
4)Demand for incumbent firms products fall and their profits decline
5)Demand curve is downward sloping in imperfect competition
6)Demand curve is horizontal in perfect competition

Question 5

3 degrees of price discrimination

Answer 5

First degree-People’s elasticity of demand(buyers willingness to buy)
Second degree(bulk-buying)
Third degree(the most common form)-set different prices based on clients demographic

Question 6

Controversies over competition policy

Answer 6

Resale price maintenance
Predatory pricing
Tying

Question 7

Resale price maintenance

Answer 7

Occurs when suppliers (like wholesalers)require retailers to charge a specific amount

Question 7

Competitive advantage

Answer 7

The advantages a firm can gain over another which are both distinctive and defensible

Question 8

Predatory pricing

Answer 8

Occurs when a large firms begins to cut the price of its product(s) with the intent of driving its competitor(s) out of the market

Question 8

Tying

Answer 8

Occurs when a firm offers two(or more) of its products together at a single price,rather than separately

Question 8

Critics of advertising argue that:

Answer 8

1)Firms advertise in order to manipulate peoples tastes
2)It impedes competition by implying that products are more different than they really are

Question 9

Externalities of entry include

Answer 9

The product-variety externality
introduction of a new product,entry of a new firm conveys a positive externality on consumers
The business-stealing externality
Entry of a new competitor,entry of a new firm imposes a negative externality on existing firms

Question 10

Defenders argue that advertising:

Answer 10

1)Provides information to consumers
2)Increases competition by offering a greater variety of products and prices
3)The willingness of a firm to spend on advertising can be a signal to consumers about the quality of the product being offered

Question 10

Oligopoly

Answer 10

Only a few sellers ,each selling a similar or identical product to the others

Question 10

Concentration ratio

Answer 10

Measures the proportion of the total market share of a particular no. of firms

Question 11

Market segment

Answer 11

Is the breaking down of customers into groups with similar buying habits/characteristics

Question 12

Brand proliferation

Answer 12

A strategy designed to deter entry to a market by producing a no. of products within a product line as different brands

Question 13

New potential entrants force barriers to entry including

Answer 13

1)Higher unit costs because they don’t have the same economies of scale as existing large oligopolies
2)High setup costs including the need for heavy advertising
3)Existence of patents
4)Brand proliferation makes it harder for a new entrant to build market share

Question 14

Factors favoring collusion

Answer 14

Few firms
Open with each other
Similar production
Similar products
Dominant firm

Question 15

Assumptions about rivals behavior

Answer 15

Rivals produce fixed quantity
Firms chose best output for remainder of the market
Firms are competing with quantity not price

Question 16

Kinked demand curve

Answer 16

Helps us to see the reaction of other firms industry when a particular firm make a decision to change the price

Question 17

Excludability

Answer 17

Refers to the property of a good whereby a person can be prevented from using it

Question 18

Rivalry

Answer 18

Refers to the property of a good whereby one person’s use diminishes other people’s use

Question 19

Types of goods:

Answer 19

1)Private goods(Excludable,rival)
2)Public goods(neither excludable,nor rival)
3)Common resources(rival but not excludable)
4)Club goods(excludable,not rival)

Question 20

A free rider

Answer 20

A person who receives the benefit of a good but avoids paying for it

Question 21

Solving the free rider problem

Answer 21

The gov can decide to provide the public good if the total benefits exceed the costs
The gov can make everyone better off by providing the public good and paying for it with tax revenue

Question 22

Public goods includes:

Answer 22

1)National defence
2)Basic research-Technological knowledge which can be patented
3)Fighting poverty
4)Cost-benefit analysis-refers to a study that compares the costs and benefits to society of providing a public good(used to estimate the total costs and benefits of the project to society as a whole)-difficult due to the absence absence of prices needed to estimate social benefits and resource costs

Question 23

Contingent valuation

Answer 23

Can be used attempting to put monetary value on a good by getting respondants to state a preference and a willingness to pay

Question 24

Common Resources gives rise to a new problem:

Answer 24

Tragedy commons-story that illustrates why common resources get used more than is desirable from the standpoint of society as a whole

Question 25

How the government deals with this:

Answer 25

Gov may reduce usage through regulation/taxes
May turn common resources into a private good

Question 26

Merit goods

Answer 26

Arise because consumers may have imperfect information about the benefits of these goods and are not able to value them appropriately as a result

Question 27

Merit goods have two benefits

Answer 27

Private benefits of educations
Social benefits include better stock of human capital

Question 28

De-merit goods

Answer 28

Consumption of these goods generate both private and social costs which are not taken into account by the decision-make