Economics Chapter 9-11 Flashcards
Monopoly
one firm produces all of the output in a market
Barriers to entry
The legal, technological, or market forces that discourage or prevent potential competitors from entering a market.
Natural monopoly
where the barriers to entry are something other than
legal prohibition.
Legal monopoly
laws prohibit (or severely limit) competition. The government creates barriers to entry by prohibiting or limiting
competition.
Natural Monopolies can arise from
in industries where the marginal cost of adding an additional customer is very
low, once the fixed costs of the overall system are in place.
in smaller local markets for products that are difficult to transport.
when a company has control of a scarce physical resource.
Patent
gives the inventor the exclusive legal right to make, use, or sell the
invention for a limited time.
Trademark
an identifying symbol or name for a particular good.
Copyright
a form of legal protection to prevent copying, for commercial
purposes, original works of authorship, including books and music.
Intellectual property
the body of law including patents, trademarks,
copyrights, and trade secret law that protect the right of inventors to
produce and sell their inventions.
Implies ownership over an idea, concept, or image, not a physical piece of
property.
Deregulation
removing government controls over setting prices and
quantities in certain industries.
Predatory pricing
a firm uses the threat of sharp price cuts to
discourage competition. (can be violation of antitrust laws)
A monopolist can charge any price for its product, but the _____
for the firm’s product constrains the price.
demand
Because the monopolist is the only firm in the market, its demand
curve is the same as the
market demand curve.
Perfect competition vs Monopoly graphs
a perfectly competitive firm’s demand curve is flat.
A monopolist’s demand curve is the same as the market demand curve, which for most goods is downward-sloping.
Total costs rise as
output increases.
The highest profit will occur at the quantity where total revenue is
the farthest above total cost.
Marginal profit
profit of one more unit of output, computed as marginal
revenue minus marginal cost.
The profit-maximizing choice for the monopoly will be to produce at the quantity where
MR = MC.
Allocative efficiency
producing the optimal quantity of some
output; the quantity where the marginal benefit to society of one
more unit just equals the marginal cost.
Imperfectly competitive
firms and organizations that fall between
the extremes of monopoly and perfect competition.
Monopolistic competition
many firms competing to sell similar but
differentiated products.
Oligopoly
when a few large firms have all or most of the sales in an
industry.
Differentiated product
a product that consumers perceive as
distinctive in some way.
Perfect competition vs. Monopoly
PC: Perfectly elastic, It can sell all the output it wishes at the prevailing market price.
M: Demand curve is the market demand, It can sell more output only by decreasing the price it charges.
The demand curve faced by a monopolistically competitive
firm falls in between.
The monopolistically competitive firm decides on its
profit-maximizing quantity and price in much the same way as
a monopolist
Oligopoly (2)
when a small number of large firms have all or most of
the sales in an industry.
Collusion
when firms act together to reduce output and keep prices
high.
Cartel
a group of firms that have a formal agreement to collude to
produce the monopoly output and sell at the monopoly price.
Game theory
a branch of mathematics that analyzes situations in
which players must make decisions and then receive payoffs based on
what other players decide to do.
Prisoner’s dilemma
a scenario in which the gains from cooperation
are larger than the rewards from pursuing self-interest.
Look at graphs about prisoner dilemma
okay
Duopoly
an oligopoly with only two firms.
Kinked demand curve
a perceived demand curve that arises when
competing oligopoly firms commit to match price cuts, but not price
increases
Merger
when two formerly separate firms combine to become a
single firm.
Acquisition
when one firm purchases another.
Antitrust laws
laws that give government the power to block certain
mergers, and even in some cases to break up large firms into smaller
ones.
(Four-Firm) Concentration ratio
an earlier tool which measures
what share of the total sales in the industry are accounted for by the
largest firms, typically the top four to eight firms.
Market share
each firm’s proportion of total sales in that market.
The Herfindahl-Hirshman Index (HHI)
approach to measuring
market concentration by adding the square of the market share of
each firm in the industry.
Under U.S. antitrust laws, monopoly itself is not illegal, but
U.S. antitrust laws include rules against some restrictive
practices.
Restrictive practices
practices that do not involve outright
agreements to raise prices or to reduce the quantity produced, but
that might have the effect of reducing competition. (ex. tying sales, bundling)
Tying sales
a situation where a customer is allowed to buy one product
only if the customer also buys another product.
Bundling
a situation in which multiple products are sold as one.
Cost-plus regulation
when regulators permit a regulated firm to
cover its costs and to make a normal level of profit.
Price cap regulation
when the regulator sets a price that a firm
cannot exceed over the next few years.
Law in 1980
Sherman Antitrust Act of 1890
