EREC Final Exam Flashcards
Economies of Scale
simulation in which long-run average cost declines as the firm increases its level of output
Possible Causes of Economies of Scale
- Specialization of resources
- More efficient use of equipment
- Reduced unit costs of inputs
- Opportunities for the use of by-products
- Growth of auxiliary facilities
Pure Competition
Many buyers/sellers; no “market power”; MR = P = MC = AC
Negatives of Pure Competition
- EOS cost curves for larger firms are lower
- Consumers desire a variety
- Due to patents, size, etc, entry into industries is often limited
- Advertising can cause perceived conduct differences
Imperfect competition
Prevails in an industry when individual sellers face their own non-horizontal demand curves, and thereby have some control over price
Monopoly
- One firm industry
- Single seller
- No good substitutes
- High barriers to entry
- legal /regulatory
- economic/financial
- Absolute cost advantage
- Spatial
Social costs of monopoly
- Limited options for consumers – reduced competition
- Allocative inefficiency – “under production”
- Barriers to entry may foster inefficiency
- Encourages unproductive “rent-seeking” activities
Oligopoly
a market in which most sales are made by few firms, each large enough to effect the market price by its own actions
- Differentiated products: cars, etc.
- Homogeneous products: steel, etc.
Oligopoly Pricing
- Price decreases by one firm tend to be followed by other firms
- Price increases by one firm are NOT matched by other firms
- Tendency is for STABLE, INFLEXIBLE prices to exist over time
Imperfect Competitions are
monopoly
oligopoly
monopolistic competition
Pure/Perfect Competition are
Just pure competition
Pure and Monopolistic Competition Similarities
- Zero long-run economic profit
- Low barriers to entry
- Responsive to consumer desires
Pure and Monopolistic Compeittion Differences
- The equilibrium is not at min. LRAC
- Price > MR
- Effects of advertising
Four types of market structure
- Pure competition
- Imperfect competition
- Monopolistic competition
- Oligopoly
- Monopoly
Consequences of Imperfect Competition
- Misallocation of resources
- Suboptimal production levels
- Deadweight loss – Welfare losses to society that needn’t occur
How do we measure concentration?
Four-firm concentration ratio: % of sales by the four largest firms
= (X1+ X2 + X3 + X4) / total sales by industry
Merger types
Horizontal – similar firms
Vertical – “linked” firms
Conglomerate – unrelated firms
Sherman Antitrust Act (1890)
- “Every person who shall monopolize or attempt to monopolize… any part of the trade or commerce among the several states… shall be deemed guilty of a felony
- Led to the 1911 breakup of American Tobacco Co. and Standard Oil
Clayton Act (1914)
Outlaws typing contracts: bans interlocking directorates;
bans mergers via acquiring common stock, primarily only if these practices lessen competition
FTC (1914)
Prohibits “unfair methods of competition”
Size offense
Related to structure…illegal if they provide “unreasonable” restraints to trade
Conduct Offenses
- Retail price “maintenance”
- Predatory pricing – selling goods for less than the production cost
- Tying contracts
- Price discrimination
Predatory pricing
cutting prices in order to drive competitors from the industry (illegal)
Factor markets
markets in which businesses demand factors of production – as opposed to consumer goods - from household suppliers in order to produce goods and services for final demand
- The factor is the intermediate goods
- Ex. ink for a pen
Derived demand
The demand for a factor of production
Increase in a derived demand leads to:
- Substitution away from the input by producers
- Substitutions away from the (now) more expensive final product by consumers
Marginal revenue product
the additional revenue a producer earns from increased sales when using an additional unit of input
Maximum profits
occur where the marginal revenue product of each input used is equal to the cost of that unit of input
MPP
change in TPP from adding one more unit of input (factor)
MRP equation
MPP*MR
VMP equation
MPP*(output) price
If pure competition (what is the =)
MRP = VMP
Shifts in factors demand are caused by
- Change in demand for the final product
- (what would change MRP=MP*P) - Change in productivity of the resource
- Change in the price of a substitute resource
Least Cost Rule and Equation
Producing a certain level of output at the least cost
MRPk/Pk = MRPL/PL
In general for equations
MRP1/P1 = MRP2/P2 = MRP3/P3 ……
In general
- An increase in resource prices leads to
- substitution in production
- Substitution in Consumption - The price elasticity of a resource usually increases with time
- Shifts in derived demand caused by
- Change in demand for a product
- Change in productivity of resource
- Change in price of substitute - Production costs are minimized when:
- MRP1/P1 = MRP2/P2 = MRP3/P3….. = MRPn/Pn - Long-run equilibrium in a factor market
- S = D
- Resource owners must be earning a market rate of return
The Interest Rate factors
- Risk premium
- Inflationary premium
- Pure(/or real) interest
Inflation
a sustained rate of increase in the general price level
Inflation Rate
% rate of increase of the general price level over a specified period of time
Present value
current worth of future income after it is discounted back to the present by an appropriate cost of capital-the “opportunity cost” of capital
Nominal r
real interest rate + inflation
Four-firm concentration ratio:
% of sales by the four largest firms
= (X1+ X2 + X3 + X4) / total sales by industry
Morrill Land Grant Act of 1862 (and 1890)
Created
- U.S. department of agriculture
- Land grant universities
Created schools
Hatch Act (1887)
Agricultural Experiment Stations
- Experiments
Smither Lever Act 1914
Cooperative extension
Outreach
How do land grants different from other universities?
- Clientele - being farmers, rural communities
- Outreach - extension element
- Funding - federal v. state, private
Why is Justin Morrill important?
Created a program that set aside federal lands in order to establish public institutions of higher education in every state (more colleges with more equal opportunities)
