End of Micro Chapters Flashcards
Characteristics of an oligopoly
There are a few dominant firms
There are some barriers to entry
The product can either be homogenous or differentiated
Typically in an oligopoly
Firms can achieve long-run economic profits
P > MC, therefore the firm is not allocatively efficient
Unique features of an oligopoly
Firms are interdependent
There is competition, just among few firms
Each firm has significant market power
Firms are concerned with each others’ prices, advertising, and cost structure
Collusion
An agreement about quantities to produce or prices to charge
If oligopolies collude then they resemble a monopoly, known as a cartel
If oligopolies compete then they resemble perfect competition
Game theory
The study of how people behave in strategic situations
Dominant strategy
A strategy that is best for a player in a game regardless of the strategies chosen by other players
Assuming no collusion, players will follow their dominant strategy
Payoff
Amount of utility gained by participants
Matrix
A series of rows and columns. Combinations of these rows will produce different sums or products
Dominant strategy cont
You will not always have a dominant strategy
Similarities to perfect competition
There are many firms
No significant barriers to entry, there is ease of entry or exit
Therefore, firms can have short run profits or losses, but will not sustain them in the long run
Differences from PC
Products are differentiated Substitutes with unique characteristics Excess capacity ATC does not equal MC at Q where MC = MR P > MC (deadweight loss exists)
Excess capacity
Monopolistically competitive firms produce on the downward sloping part of the ATC curve
ATC does not equal mc at q where mc = mr
Unique features
Demand can be very elastic due to a large number of competitors trying to create close substitutes
Firms are price-searchers
Firms almost always advertise
Monopolistic competition in the long run
If firms are making profits (P > ATC):
New firms enter market, shifting the moco’s demand left
If firms are incurring losses (P < ATC):
Firms exit market, shifting the moco’s demand right
Monopolistically competitive firm in the long run equilibrium
The change in the market shifts the firm’s demand curve (the market is not shown)
The ATC curve is tangent to the demand curve at the profit maximizing price
At q where mc = mr, p = ATC
The firm has excess capacity
Characteristics of PC labor markets
The market consists of many firms and many substitutable workers
Firms are wage takers
There are no barriers to entry/exit
Firms are demanders; households are suppliers
We will mostly assume that firms produce goods in PC product markets
Marginal product of labor
The increase in production (output) when one unit of labor is added
Marginal revenue product of labor (MRP)
MRP = MPL (marginal product of labor) x P (price of the good)
The firm’s demand curve and the market demand for laborers
The market’s demand for labor is equal to all firms in the market’s demand for labor
The firm hires workers at a wage that does not exceed their marginal revenue product of labor
Factors that shift the labor demand curve
If the curve comes from changes in MP x P
- P: anything that changes the price of the product will shift the demand curve (ex. shift in the product market)
- MP: anything that changes the marginal product of labor will shift the demand curve (ex. technology, supply of other factors of production)
Derived demand
Demand for labor is derived from demand for the product it is used to produce
This is the P part of MP x P
PC labor market: supply
The labor supply curve reflects the trade off between work and leisure
The higher the wage, the greater the opportunity cost of leisure
Straight up diagonal line
Equilibrium in PC labor markets
The equilibrium wage adjusts to balance the supply and demand of labor
The wage equals the marginal revenue product of labor
Where supply and demand cross
Factors that shift the labor supply curve
Changes in tastes (willingness to work)
Changes in opportunity (substitute jobs)
Changes in the amount of workers (immigration/emigration)
Marginal factor cost (MFC)
The cost of each additional factor employed by a firm. With labor, it’s:
(Change in total factor cost of laborers) / (change in laborers)
This equals wage in the PC industry
The wage in a PC firm
The equilibrium wage was in the PC labor market sets the wage for the PC firm
Firms are wage takers
The equilibrium wage = MFC = supply for the firm
Supply and demand for a firm in a PC labor market
Demand is equal to MRP
You maximize profit/minimize costs where MFC = MRP
Hire workers until MFC = MRP
Monopsony
A firm that is the only buyer in the market
The graph of a monopsony
PC firm: S = MFC
Monopsony: S < MFC
Monopsonies also profit maximize at MFC = MRP
MFC deviates from supply
Monopsony vs PC labor market
A monopsony, when compared to a PC labor market:
- wage is lower
- quantity of workers hired is lower
Minimum wage in a PC labor market
Minimum wage acts as a binding price floor in PC labor markets
Gap between demand and supply is unemployment
Average product
Total output / total variables input (laborers)
AP vs MP
The MP curve eventually decreases because of DMR (diminishing marginal returns)
The marginal product curve intersects the average product curve at its maximum
Economic rent
The positive difference between the actual payment made for a factor of production (such as land, labor, or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity
When factors of production are paid more based on perceived value from an owner/proprietor/businessman
Monopsony graph
Wage lower quantity lower
Supply, MFC deviates above, demand
Externality
The uncompensated impact of one person's or firm's actions on a bystander Positive externality (known as external benefit, ex. education) Negative externality (known as external cost, ex. pollution)
Marginal private cost
The cost of producing the good to private producers
Supply with no externalities
Marginal private benefit
Demand without externalities
Marginal social cost (msc)
The cost to society of producing one additional unit of a good
MSC = marginal private cost (supply curve) + externality
Marginal social benefit (MSB)
The utility of all consumers when one receives a good
MSB = marginal private benefit (demand curve) + externality
Market with a negative externality
Costs to society are higher MSC > MPC MSC > MSB EQ Q is too high Can be corrected with a tax on producers Deadweight loss
Market with a positive externality
Society is missing out on benefits MPB < MSB MSC < MSB EQ Q is too low Can be corrected with a subsidy for consumers Deadweight loss
Deadweight loss on the graph of an externality
Negative externality can’t attack demand
Positive externality—subsidize so can produce to meet demand, D = greater
DWL exists in the presence of the externality. Taxation/subsidy removes DWL because producing at socially optimal
excludable
people can be prevented from obtaining a good
rival
only one person can consume a good at a time
private good
goods that are excludable and rival
common resource
a good that is not excludable, but is rival
quasi-public good/natural monopoly
a good that is non-rival but excludable
public good
non-rival and non-excludable
marginal cost of providing one more of a public good is zero
marginal benefit of consuming public goods is usually greater than the marginal cost due to positive externalities created by the consumption of the goods
therefore, government doesn’t mind subsidizing firms to produce these goods
free rider
someone who benefits from a good and does not pay for it
