Exam 2 Flashcards
Characteristics of Perfect Competition
Large number of firms in the market.
Undifferentiated product
Ease of entry into market or non barriers to entry.
Complete information to all market participants.
No control over price.
Characteristics of Monopolistic Competition
Large number of firms in the market. Differentiated product Few barriers to entry into market. Relatively good information available to market participants. Some control over price.
Characteristics of Oligopoly
Small number of firms in the market.
Undifferentiated or differentiated product
Many barriers to entry into the market.
Information likely to be protected by patents, copyrights, and trade secrets.
Some control over price, but limited by interdependent behavior.
Characteristics of Monoply
Single firm in the market.
Unique differentiated products with no close substitutes.
Many barriers to entry, often including legal restrictions.
Information likely to be protected by patents, copyrights, and trade secrets.
Substantial control over price.
A characteristic of a perfectly competitive market in which the firm cannot influence the price of its product, but can sell any amount of its output at the price established by the market.
Price-Taker
The assumed goal of firms, which is to develop strategies to earn the largest amount of profit possible.
Profit Maximization
How to accomplish profit maximization.
Focus on Revenues
Focus on Costs
Focus on Both
Profit =
TR - TC
OR
(P - AC) x Q
Profit-Maximizing Rule
Produce at the level of output where MR = MC
MR =
Change in TR / Change in Q
MC =
Change in TC / Change in Q
TR =
P x Q
TC =
AC x Q
If P > AC.
Positive Profit
If P < AC.
Negative Profit
If P = AC.
0 Profit
When P is between AVC and AC for a perfectly competitive firm.
Negative Economic Profit (Minimizing Losses)
Covering All Variable Cost
Continue Producing
When P equals minimum AVC in a perfectly competitive firm.
Shutdown Point
Covering all Variable Cost, No Fixed Cost
The P, which equals a firm’s minimum AVC, below which it is more profitable for the perfectly competitive firm to stop than to continue to produce.
Shutdown Point for the Perfectly Competitive Firm
A period of time in which the existing firms in the industry cannot change their scale of operation because at least one input is fixed for each firm.
Firms also cannot enter or exit the industry during this time.
Short Run
Achieving lower unit costs of production by adopting a larger scale of production, represented by the downward sloping portion of a long-run average cost curve.
Economies of Scale
Incurring higher unit costs of production by adopting a larger scale of production, represented by the upward sloping portion of a long-run average cost curve.
Diseconomies of Scale
A measure of how many firms produce the total output of an industry.
The more the industry is, the fewer the firms operating in that industry.
Industry Concentration
Occurs when TR = TC.
Known as normal profit position.
A firm’s TR covers all production costs, both explicit and implicit.
P = AC.
Breakeven
Occurs when TC > TR.
Loss
Occurs in the short-run when TR > TC.
Economic Profit
Where P < AVC.
Shutdown Point
When P > AVC but P < AC.
Minimizing Losses
The portion of a firm’s MC curve that lies above the minimum AVC.
Supply Curve of Firm in Short-Run
The ability of a firm to influence the prices of its products and develop other competitive strategies that enable it to earn large profits over longer periods of time.
Market Power
A market structure characterized by a single firm producing a product with no close substitutes.
Monopoly
A firm in imperfect competition that faces a downward sloping demand curve and must set the profit-maximizing price to charge for its product.
Price-Setter
The structural, legal, or regulatory characteristics of a firm and its market that keep other firms from producing the same or similar products at the same cost.
Barriers to Entry
Barriers to entry that help firms maintain market power and earn positive economic profits.
Economies of Scale Barriers Created by Government Input Barriers Brand Loyalties Consumer Lock-In and Switching Costs Network Externalities
A form of market power for a firm in which consumers become locked into purchasing certain types or brands of products because they would incur substantial costs if they switched to other products.
Lock-In and Switching Costs
A barrier to entry that exists because the value of a product to consumers depends on the number of consumers using the product.
Network Externalities
A measure of market power that focuses on the difference between a firm’s product price and its marginal cost of production.
0 for perfect competition and increases as market power increases.
Lerner Index
Lerner Index =
(P - MC) / P
A measure of market power that focuses on the share of the market held by the X number of largest firms, where X typically equals four, six, or eight.
Concentration Index
A measure of market power that is defined as the same of the squares of the market share of each firm in an industry.
Herfindahl-Hirschman Index (HHI)
A market structure characterized by a large number of small firms that have some market power from producing differentiated products.
This market power can be competed away over time.
Monopolistic Competition
Legislation, beginning with the Sherman Act of 1890, that attempts to limit the market power of firms and to regulate how firms use their market power to compete with each other.
Antitrust Laws
A market structure characterized by competition among a small number of large firms that have market power, but that must take their rivals’ actions into account when developing their own competitive strategies.
Oligopoly
Models of interdependent oligopoly behavior that assume that firms pursue profit-maximizing strategies based on the assumptions about rivals’ behavior and the impact of this behavior on the given firm’s strategies.
Noncooperative Oligopoly Models
Models of interdependent oligopoly behavior that assume that firms explicitly or implicitly cooperate with each other to achieve outcomes that benefit all the firms.
Cooperative Oligopoly Models
An oligopoly model based on two demand curves that assumes that other firms will not mach a firm’s price increases, but will match its price decreases.
Kinked Demand Curve Model
Short-run goal of firms with market power to gain market share and increase profits over future periods.
Occurs where MR = 0.
Price will be lower than profit-maximizing price.
Revenue Maximization
Goals of business managers.
Maximum Profit
Maximum Sales
Maximum Sales Growth
Maximum Market Share
